Ingenious wins Pyrrhic victory against HMRC

Ingenious wins Pyrrhic victory against HMRC

Ingenious Film Partners has won a victory in its long-running battle with HM Revenue and Customs which could leave many of its investors “significantly out of pocket”.

The Tax Tribunal has ruled the Ingenious Media Film partnerships, which were designed to reduce investors’ tax liability, were in fact trading with a view to a profit.

This crucial question meant the partnerships have escaped being labelled as tax avoidance.

But the tribunal has effectively reduced the amount of money the investors can claim back through tax, a move which a tax expert has said could leave some making a loss.

The tribunal concluded the partnerships were trading with a view to profit if production costs were restricted to 35 per cent for Inside Track films and 30 per cent for Ingenious Film Partners films.

Investors in one of these structures would have put in either 35 per cent or 30 per cent respectively of their own cash, with a view to getting back 40 per cent of the claim, which could equate to £32.

The investor was therefore meant to get most if not all of their cash contribution back through a tax claim.

But Michael Avient, partner at UHY Hacker Young, said the tribunal’s decision effectively reduces the “return” through the tax claim to either £14 or £12 so if the investor was looking for the tax claim to cover their investment they would not achieve this.

He said: “Although in respect of two of the structures the taxpayers in part won this is likely to be of little comfort to those who invested.

“After interest on the tax now due it is likely that many investors will be very significantly out of pocket.

“In its aim of mitigating the commercial risk in respect of the cash investment through the repayment of tax the structures, it has to a great extent failed. HMRC and the Treasury are likely to be very content with the decision.”

Neil Forster, chief executive of Ingenious, said he and his company are still considering whether to challenge the decision.

He said: “The broad impact of these adjustments would be to reduce the trading losses allocated to you and therefore your ability to offset those losses against your tax liability in the relevant financial year - although not to zero, which is what HMRC argued before the Tribunal.

“The precise impact of these changes on your tax liability will take some time to process given the volume of adjustments required on a film by film, year by year basis.

“This will also necessitate further discussion with HMRC, as directed by the Tribunal, which will inevitably take some time.”

Jennie Granger, director general of enforcement and compliance at HMRC, responded: “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 big bills for interest and legal costs.”