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Final act for film partnerships

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11th Nov 2011
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A first tier tribunal decision that two film partnerships were not undertaken on a commercial basis and therefore not entitled to sideways loss relief suggests that the curtain is falling on a once popular tax avoidance strategy.

The declining popularity of film partnerships is playing out in a series of tax tribunals, one involving celebrities and wealthy individuals including Sir Alex Ferguson who have used them as vehicles to offset tax losses.

Smith & Williamson highlighted the most recent decision on appeals by two separate partnerships - Samarkand Film Partnership No 3 and Proteus Film Partnership No 1 - against HMRC’s treatment of their claimed losses. One of the films involved was ‘The Queen’, for which Helen Mirren received a Best Actress Oscar.

At the same time, Sir Alex and a group of disgruntled investors are pursuing a related partnership agent, Future Films, over other schemes and is currently pending a decision.

Both partnerships used the film services of the agent Future Capital Partners. The film  negatives bought and leased were ‘The Queen’ (£8.2m) and ‘Irena Palm’ (£3.0m ) in the case of Samarkand,  and ‘Oliver Twist’ (£46.97m) in the case of Proteus.

The tribunal judge described some of the business practices of the partnerships as “sloppy” and queried Samarkand’s title rights to ‘The Queen’, but questions about the partnerships’ underlying commerciality played a more significant part in the final decision to reject their appeals.

The tribunal found that the film partnerships were not trading activities, and as such the partnership businesses were not undertaken on a commercial basis and the partners were not entitled to a sideways loss relief. While the accounting results of the film projects showed a profit, the tribunal considered the net present value of the arrangements to be insufficient to demonstrate a commercial activity was undertaken.

In recent years, the provisions allowing sideways loss relief for film partnerships have been tightened up, and HMRC has ramped up its investigations into film partnership loss claims.

In the view of several AccountingWEB members who responded to an to an Any Answers post on the subject, film partnerships are hardly worth bothering with any more.

George Attazder pointed out that the legislation and guidance applicable to this case, which covers 2005/06 and 2006/07, would have been in s130-144 ITTOIA 2005 and BIM56000 et seq. But the rules changed significantly with effect from 1 January 2007 after this legislation was replaced in the 2006 Finance Act.

“The FA 2006 provisions have since been repealed by CTA 2009, which provides replacement legislation for corporation tax purposes, but I can't see that there's replacement legislation for income tax purposes,” Attazder said.

In a related tribunal case, Sir Alex Ferguson and a number of investors including Sven-Goran Eriksson are awaiting a ruling after investing in a Future Films scheme to buy the rights to distribute two Disney films. According to the Evening Standard, the investors stand to lose £117m in promised tax benefits if the appeal fails.

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