Ingenious film scheme losses partially restoredby
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.
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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Heather is tax partner at Blick Rothenberg. She has over 30 years’ experience, most recently as a partner at Pinsent Masons and prior to that as the head of tax at a FTSE 100 company, an anti-avoidance adviser at HMRC and a partner at a Big 4 accounting firm.
Fiona Fernie is a partner in Blick Rothenberg's Tax Dispute Resolution Team,...