High drama as film tax relief flops

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High drama as film tax relief flops
ByFiona Fernie

The pressure exerted by HM Revenue & Customs (HMRC) on those who participated in film schemes continues unabated.

Although investors were offered a settlement opportunity in 2016, many did not see it as an attractive option and decided to continue to fight their corner through the tribunal system. It is likely that many of them are now regretting that decision.

In recent years, (starting well before the opportunity to settle was offered) many of the film partnerships have had their day in court and in every instance have lost their case (or at least a large part of it).

Film partnerships: a brief recap

Film partnerships were originally introduced by the government in 1997 to help finance the UK film industry.

Generally an LLP was established and investors became partners. The partnership then obtained the rights to films and leased them back to the production company to produce the film, with the agreement that this would provide income to the partnership.

Key points

  • Film partnerships were introduced to help the film industry
  • Many investors are unaware they could be liable for tax
  • Many individuals have been issued with notices demanding full payment of the tax HMRC believes is due within 90 days of the issue of the notice

Investment was by way of capital contribution from investors together with the introduction of loan funding taken out by the investors. Loans were usually between 80 per cent and 90 per cent of the total investment. They were repaid on behalf of the investors out of the revenue received by the partnership, creating a partnership loss that could be offset against investors’ tax liabilities.

There were two problems with these arrangements: first, many investors were completely unaware that they would be taxable on the partnership income – a liability which could be much greater than the actual income they received; and second, the structuring of the schemes attracted unwelcome attention when it appeared that its purpose was to attract tax relief for investors rather than helping to finance and promote a film.

HMRC’s view 

Several film partnerships have been through various court hearings hoping to obtain a judgment that allowed the investors to gain the tax relief that they were advised arose from the transaction - but none has been entirely successful. The technical arguments debated in court have varied slightly, but have followed some general themes.

First, the loss relief claimed was dependent on the film partnership carrying on a trade and if it did, whether the trade was undertaken on a commercial basis. In some instances the courts have found that the partnership was not carrying on a trade and that therefore the loss relief under the film acquisition relief provisions could not be claimed.