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Ingenious film scheme losses partially restored


Heather Self and Fiona Fernie explain why the Court of Appeal has restored some of the losses in the Ingenious Games LLP case, and what may happen next.

24th Aug 2021
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After their loss in the Upper Tribunal (UT), discussed in our previous article on the Ingenious case in August 2019, the taxpayers sought leave to appeal to the Court of Appeal. Permission was granted, but only on limited grounds, so although the appeal was successful, the taxpayers have only succeeded in establishing a relatively small percentage of the losses claimed. 

Why losses arose

Although this has been widely referred to as a “film scheme” case, it does not rely on special rules relating to tax relief for films, but deals with the fundamental question of whether an activity is a trade, and if so whether it is being carried on with a view to profit. 

Investors typically subscribed 30% of the funds to an LLP, with a further 70% being provided by a corporate member. The LLP claimed that it used 100% of the funds to carry on a trade of making films.

Because most films are unprofitable (although a few make significant profits) the value of each film was written down to 20% of its original cost for accounting purposes. The taxpayers claimed that this produced a loss which could be offset against other income. In order for the loss to be available, the loss had to be a trading loss, and the LLP had to be carrying on a trade with a view to profit.

These seemingly simple questions required hearings of several weeks in the first tier tribunal (FTT), the upper tier (UT) and now the Court of Appeal, with evidence running to an incredible 1m pages.

How much loss was allowed

The FTT held that the LLP was trading with a view to profit, but only to the extent of the 30% invested by the LLP members. On this basis, 30% of the losses would have been available. However, they also decided that most of the costs incurred were capital rather than revenue, so that only about 4% of the losses claimed were allowed.

The UT went further, and held that the LLP was not trading at all, so no losses were available. This also led to some significant practical difficulties, as an LLP which is not trading is not regarded as transparent for tax purposes, so is treated as a company rather than a partnership.

Court of Appeal

The taxpayers were given leave to challenge the UT decision, but only in relation to the key questions of whether the LLP was trading, and if so, whether that trade was being carried on with a view to profit. They were not entitled to challenge the “capital v revenue” decision, and despite strenuous efforts they were not permitted to revisit the factual evidence which had been given to the FTT.

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Replies (6)

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By Paul Crowley
24th Aug 2021 14:20

Cut to 4%
Still way too generous given that the type of trader that engages in this activity just for fiscal purposes is in a position to be able to pay their taxes.

Thanks (0)
By Justin Bryant
24th Aug 2021 16:10

Interesting re the 30%/4% thing (talk about kicking yourself!). Interesting also that the CoA did not give too ringing an endorsement of the FTT's fact finding. See:

Perhaps that's coz para 161 here is not exactly on all fours with para 80 re composite transaction analysis:

I note the same judge was found to have got IR35 contract analysis wrong here recently (by finding there was a term in a contract despite there being no evidence whatsoever to support that finding):

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By petestar1969
25th Aug 2021 09:50

Yet still there are gits peddling these type of schemes and fools still getting involved in them......

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By Donald MacKenzie
25th Aug 2021 11:02

If a "business" relies on global write downs to create a "Loss" why does the court allow that to count as a "trading loss"?
We are not allowed to claim tax relief on a general provision (write down) of debts. It should not be acceptable to claim relief for such a general write down of asset values.
The contrived film loss schemes should lose the reliefs available to actual loss making businesses.

Thanks (2)
Replying to Donald MacKenzie:
paddle steamer
25th Aug 2021 17:48

Stocks tend to be valued at the lower of cost and NRV, it is a stock valuation issue not a general write down, no doubt applied film by film, asset by asset.

I do not challenge the right to write down stock, you are going to get some corporate scandals if you do not permit write downs (In an earlier life I worked in fashion, once you get to end of season it certainly is not impossible that NRV is below cost and a write down is appropriate.)

I more challenge the original cost price "paid" which patently was not at an arms length market value.

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Replying to DJKL:
By Donald MacKenzie
26th Aug 2021 11:40

The article said all the films were written down to 20% of cost. This is not a stock valuation asset by asset but IS a general write down.

I assume profitable films sold on out of the schemes as the point is to allow scheme participants to claim losses.

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