A film investment scheme by Ingenious Media was trading with a “view to a profit”, and therefore was not a tax avoidance scheme, a tax tribunal has ruled. But the amount of tax relief its investors can claim has been capped.
Ingenious Media won a partial legal victory in its lengthy dispute with HMRC, although experts believe that many investors in the film schemes will lose money.
The first-tier tax tribunal (Ingenious Games LLP, Inside Track Productions Ltd, Ingenious Film Partners 2 LLP v HM Revenue and Customs, TC05270), ruled that the Ingenious Media Film partnerships, were trading with a “view to a profit” and were therefore not tax avoidance schemes as HMRC had claimed.
But the tribunal restricted the amount of tax relief investors could claim from investments in films including Avatar and Life of Pi. Investors claimed more in tax relief than they had invested, according to HMRC.
Investors in one of the film schemes would have had to invest either 35% or 30% of their own cash. The aim was to get back 40% of the claim, which could equate to £32, Michael Avient, partner at UHY Hacker Young chartered accountants, wrote in a blog.
The investor hoped to get most, if not all, of their cash contribution back through a tax claim.
But the tribunal’s decision has in effect reduced the “return” from tax relief to either £14 or £12. “If the investor was looking for the tax claim to cover their cash investment in the structure he or she has “clearly not achieved this aim,” Avient said.
It’s likely that many investors will be “very significantly out of pocket”, he said.
Smith & Williamson said that the 342-page ruling, which both sides hailed as a victory, appeared to be mixed.
Ingenious said in a statement that it was considering challenging the tribunal’s ruling company. Parts of the ruling were based on “arbitrary and subjective interpretations and are unreasonable,” it said.
“The broad impact of the adjustments made by the tribunal is to reduce the trading losses allocated to investors and therefore reduce their ability to offset those losses against their tax liabilities in the relevant financial years,” Ingenious said. “The precise impacts will take some time to process … This process will also necessitate further discussion with HMRC.”
Jennie Granger, director general of enforcement and compliance at HMRC, said: “These were some of the biggest films of all time, and the schemes involved people claiming far more in tax than they invested in the first place. We always say that if something is too good to be true then it probably is. And in this case the long legal battle will mean that investors face even bigger bills for interest and legal costs.”
Last year, Ingenious Media lost its legal appeal that HMRC had breached its duty of confidentiality and acted unlawfully by discussing the investment company’s controversial film investment schemes with journalists.
The Court of Appeal case [C1/2013/3302] focused on a meeting in 2012 between Dave Hartnett, the then permanent secretary for tax at HMRC, and two journalists from the Times newspaper.
The meeting, which Hartnett and the journalists agreed was “off the record” was to brief the journalists about tax avoidance. During the meeting, the film schemes of Ingenious and its chief executive Patrick McKenna were also discussed.
The journalists used some of the information in a story for the Times. McKenna and Ingenious took legal action, claiming that HMRC had breached confidentiality.
In 2013, the High Court rejected Ingenious’s claim on the basis it was off the record, and that had Hartnett “proper and lawful reasons” for disclosing the information.
Ingenious said that it was “amazed by the apparent ruling by the Court of Appeal that HMRC may disregard their own protocols regarding disclosure of individual taxpayer information to the media.
A spokesman for Ingenious also said that it disputes HMRC’s claim that investors claimed more tax relief that the money they invested. “It is also incorrect as Jennie Granger says in her quote, that investors will face bills for the legal costs on the tribunal.”
Over the past four years HMRC has challenged and shut various film tax schemes which it says have abused rules on tax relief for film partnerships or for fraudulently claimed film tax credits and VAT.
*18 August 2016 - This story was amended to add reaction from an Ingenious spokesperson (see second-to-last paragraph)
About Nick Huber
I’m a specialist business journalist and have a particular interest in tax and technology.