Investment in British film or a tax avoidance scheme?

HM Customs and Revenue (HMRC) has published a list of more than 1000 schemes that it believes are deliberately designed to avoid tax.

As soon as it receives new legal powers, expected to be introduced this week, HMRC will be demanding the disputed tax as "accelerated payments" – that is an upfront payment in respect of disputed tax without prior determination of the Court. HMRC has two years from Royal Assent to the Finance Bill to issue accelerated payment notices. In total, it is thought around 33,000 people will receive tax demands for billions of pounds from HMRC over the next two years. They will be given 90 days to pay, unless they dispute the notice as invalid and they will only get the money back if a Court eventually decides in their favour.

HMRC said it was only giving a list of numbers on the list - known as Scheme Reference Numbers (SRNs) – the number must be included in a tax return so it is possible to identify if you are likely to be asked to make an accelerated payment. Most of the schemes given recent publicity, including schemes investing in the film and music industries, involve investors putting money into business ventures that make losses. Those losses can be offset against income, so reducing liability for tax. Such schemes remain legal. 

One of the schemes on the list is Ingenious Film Partners 2. According to its promoters, this was a scheme that encouraged people to invest in British film. According to HMRC, it was designed to generate inappropriate amounts of tax relief for its investors. The company that runs Ingenious Film Partners 2, is reported to have argued: "HMRC has failed to distinguish between commercial businesses and tax avoidance schemes and have, without proper consideration, deemed all film arrangements to be tax schemes". As a minimum, investors in Ingenious Film Partners 2 were required to invest £36,000. If they put in that much, Ingenious would then loan them a further £64,000 to invest, taking their stake up to £100,000. That would be used to buy shares in film productions which, in their first year, created, roughly, a £90,000 loss. Top-rate taxpayers who invested in the scheme could choose to write off that loss against their taxes. So in return for putting in £36,000 in cash, they would get about the same amount in tax relief very fast - and end up owning a £100,000 stake in a group of films. So long as the films made enough to service the debt, the scheme’s structure would allow people to make a long-term investment without locking up their cash. The legality of the scheme is listed to be considered by a tax tribunal in November.

Ingenious is well-known in British media. It really does support films, including X-Men: The Last Stand, Garfield: A Tale of Two Kitties and Sunshine. Ingenious has also, through other vehicles, invested in Avatar, the Best Exotic Marigold Hotel, Girl with a Pearl Earring, Vera Drake, Shaun of the Dead, Hot Fuzz and Hotel Rwanda. It is argued on behalf of the scheme that it’s structure means that investors do pay tax on any income they receive from the films. Ingenious says it's schemes have generated a £1bn of such income.  Ingenious said: "There has been a major change of position by the government driven by a rather crude attempt to generate cash for the Exchequer in a wholly unfair and unjust manner."

This does sounds a lot like HMRC changing the law retrospectively. It is likely to be challenged and there is likely to be an increase in disputes and litigation with HMRC over this.

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Senior Associate, Dispute Resolution and Litigation, Cambridge office

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