The Upper Tax Tribunal has dismissed a hedge fund manager’s appeal against an FTT ruling that his trading of film rights was an attempt to avoid tax payments.
Patrick Degorce, chief investment officer at Theleme Partners, will now have to repay around £8m after the UTT concurred with the FTT’s findings that the purchase and sale of film rights through a scheme known as Goldcrest constituted no trade, and therefore the tax losses which arose from the structure were not available for sideways loss relief.
Dismissing the appeal in a judgment released last week Mr Justice Hildyard said Degorce was: “advised that the likelihood was that he would suffer a significant loss in his first accounting period which would, it was expected, entitle him to claim relief against the tax due on his income for the 2006-07 tax year, which was forecast to be about £19m”.
The scheme was marketed by Goldcrest Pictures, an established film production company whose work includes Chariots of Fire, The Killing Fields and Gandhi.
Investors acquired distribution rights to two films – Tropic Thunder and The Love Guru – from a Goldcrest company based in the British Virgin Islands, then immediately sold them back at a loss, claiming sideways relief on the loss against other income.
Unfortunately for the scheme’s members, HMRC disallowed their claims on the basis that their activities did not amount to trading.
Degorce lost his original case at a First Tier Tax tribunal in 2013, with the tribunal supporting HMRC’s assessment that the scheme was not a genuine commercial activity but an attempt to offset profits from his hedge fund.
Degorce then went on to lead a further appeal to the Upper Tax Tribunal (UTT), which was heard in November 2014, with his counsel arguing that some of the FTT’s findings of fact were irrational. However, although the UTT did accept some of the criticisms directed at the original judgment, in its recently published decision the tribunal upheld the FTT’s decision and dismissed the appeal.
The judge concluded that, as in the Ensign Tankers film investment scheme, there was real expenditure on the rights, and there was artificial expenditure, effected by means of what were essentially self-cancelling transactions. The result, again as in Ensign Tankers, is that relief is available (or would be available if the other requirements were met) for the real expenditure, but not for the amount by which the real expenditure has been artificially inflated.
He went on to state that the FTT's finding could only be overturned on appeal in 'exceptional circumstances', making the chances of similar appeals succeeding in future very remote.
Michael Avient, personal tax partner at UHY Hacker Young, told the Financial Times that the ruling was a wake-up call to investors whose schemes rely on trading losses. “It doesn’t bode well for a lot of structures out there. People need to be thinking realistically and need to make provision for paying the [disputed] tax.”