UK tribunal grants partial relief to Ingenious film investors

Monday, 08 August 2016

The First-tier Tax Tribunal's eagerly awaited decision in the Ingenious film partnerships case has left both parties, Ingenious and HM Revenue & Customs, claiming a victory.

Members of the Ingenious investment scheme put money into one of three limited liability partnerships – Inside Track Productions, Ingenious Film Partners 2 and Ingenious Games – the first two of which produced movies while the third developed associated computer games. The investors attempted to write off the annual losses against their other income, using the sideways relief deliberately introduced by the then government to encourage investment in the UK film industry.

At first HM Revenue & Customs did not challenge the claims, but later changed its mind and decided that film production partnership schemes constituted tax avoidance schemes. It has since issued accelerated payment notices (APNs) to the scheme members, many of whom are retired professional footballers and musical performers.

HMRC claims that the partnerships were not genuinely trading for profit (even though they made several successful films) and thus the losses were not available for sideways relief. This argument has succeeded against several other film partnership schemes such as Eclipse and Goldcrest, but failed in the Ingenious case.

In its decision, the tribunal found that all three Ingenious partnerships were indeed trading to make a profit, meaning that the members were entitled to claim loss relief. However, it also accepted HMRC's subsidiary argument that the scheme's structure of 'paper loans' meant that the partners did not really fund all the production costs as they had claimed. Instead it ruled that Inside Track funded only 35 per cent of its productions, while Ingenious Film Partners 2 and Ingenious Games only paid 30 per cent of the costs of each film or game (Ingenious Games LLP & others v HMRC, UKFTT 521 TC).

Film investors are entitled to only partial loss relief, while the games investors would be denied all loss relief. The investors will thus not achieve their goal of covering their cash investment in the structure by a tax write-off, said Michael Avient at UHY Hacker Young. They will also have to pay interest on the unpaid tax, as well as some legal fees – although Ingenious claims to have funded the litigation against HMRC.

Although the judgment was released on 2 August, it resulted from a 48-day hearing ending in December 2015 and runs to 342 pages. The complexity of the arguments are daunting, and Ingenious is now likely to appeal to the Upper Tribunal, challenging the basis on which the Tribunal restricted loss relief to investors, which it called 'arbitrary and subjective'.

'The Tribunal has with the benefit of hindsight made a completely uncommercial judgment about film profitability', said Ingenious special advisor Martin Smith. 'Given our track record as producers of some of the world’s biggest films, and some of the UK's most acclaimed films, we will want to put the record straight.'

HMRC's Director-general of Enforcement and Compliance, Jennie Granger, said the schemes 'involved people claiming far more in tax than they invested in the first place' – a claim denied by Ingenious' Chief Executive Neil Forster. He is quoted in the BBC saying: 'HMRC appears to be deliberately confusing the Ingenious case with other proven tax avoidance schemes and making assertions which are factually wrong. The Ingenious investors received no more tax relief than the cash they invested.'

The outcome of this case 'does not appear to be an outright victory for either HMRC or Ingenious', commented Dawn Register TEP of BDO. 'Instead both sides are likely to be considering onward appeals and the final decision may in fact still be years away, though this decision could prove to be the basis of a settlement.'

  • In the same press release, HMRC also claims to have won the case against the Icebreaker tax avoidance scheme 'following a victory in the First Tier Tribunal in 2014'.


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