Film scheme investors fail in £1.3m Vanguard share loss relief claim

Two investors in a film production company have lost their claims for some £1.3m of share loss relief after lengthy analysis at a First Tier Tribunal (FTT), in a further success for HMRC against tax avoidance schemes where there is no clear evidence of a trade being carried out

John Hardy was seeking to claim share loss relief for £1,153,717 for the 2008/09 tax year and Richard Moxon £137,564 for the 2008/09 tax year. [John Hardy, Richard Moxon and Her Majesty’s Commissioners for Revenue and Customs, 2017 UKFTT 754 TC06165].

Both entered into a tax avoidance film scheme known as the Vanguard scheme, marketed by various Matrix entities, which sought to generate income tax share loss relief against general income under ITA 2007, s. 131.

Hardy and Moxon bought shares in a company (PartnerCo), partly financed with their own money and partly with substantial limited recourse loans which created a large acquisition cost for the shares. The PartnerCos contributed these funds to a partnership which carried out various transactions in film rights and the individuals then sold their shares in the PartnerCos at a loss.

The main question in the appeal was whether the partnership was trading in intellectual property rights in films, although a total of ten issues were considered by the tribunal in some considerable detail.


The transactions involved the individuals depositing a sum with Alliance and Leicester who made substantial loans to the individuals. These funds were used to subscribe for shares in the PartnerCos which in turn contributed the funds to the partnership. The partnership acquired three films from film producers (Lakeshore Entertainment group and Lionsgate).

However, no money actually moved (other than the individual’s initial deposit which was disbursed in fees) because the film producers acquired the loans from Alliance and Leicester so effectively paid themselves for the films.

At the same time, a distribution agreement was entered into between the partnership and the film producers that the film producers would distribute the films and pay the partnership a ‘defined proceeds’ fee (film income less certain costs). Cross options were also entered into giving the partnership a put option to sell the films back if ‘defined proceeds’ fell below a certain amount and giving the film producers a call option to buy the films back if ‘defined proceeds’ were above a certain level.

Following the release of the films, Matrix and the film producers (through different but connected entities) offered to buy the individual’s shares in the PartnerCos for a price equal to the partnerships put option price. The offers were accepted and the shares were sold at a loss. On the same day, the partnership exercised the put option and sold the films back to the producers.

Again, however, no money actually moved because the film producers loaned (to the share purchase entities) the share purchase monies which were used to repay the loans to the individuals, and the put option proceeds (receivable by the partnership) used to discharge the share purchaser’s loans.  At the end, the balances remaining on the original loans to the individuals (by Alliance and Leicester but transferred to the film producers) were written off.

Tribunal arguments

HMRC argued that the partnerships were not trading because firstly they had deliberately sought to make a loss, and/or secondly, even if they did intend to make a profit, the structure of the transactions was more akin to an investment than a trade.

The tribunal looked at a number of specific issues, including whether the partnership (Vanguard 1 Partnership) was carrying on a trade during the periods in which Hardy and Moxon held shares in the PartnerCo such that the conditions in s137 of the Income Tax Act 2007 (ITA2007) were satisfied for the period required under s134.

It also considered whether, if the partnership was carrying on a trade during either such period, such trade was conducted on a commercial basis and with a view to the realisation of profits within the meaning of s189 of ITA2007; whether the PartnerCos satisfied the control and independence requirements in s.139 ITA2007 on the date and for the period required under s134; and whether the appellants’ disposals of their shares in the PartnerCos were bargains at arm’s length for purposes of s131(3) of the ITA2007.

The judge concluded: ‘The activity was not about buying or selling films nor was it about trading in film rights. Rather a package of rights was bought. Stripping the transactions to their essentials, a template set of agreements were applied to a film whereby the purchaser obtained the right if certain conditions were met to an uncertain income stream depending on the amount.

‘There were a small number of transactions with uncertain and low likelihood of reward, indifference to making profit on the part of the partnership. The partnership was not involved in any significant activity in selecting films and there was no opportunity for subsequent activities e.g. through promotion of income components or reduction of costs to maximise defined proceeds value and so as to turn a profit.

‘The partnership was very much a passive participant.’

Looking at the whole picture, the judge rule that the partnership was not carrying on a trade, and that even if that view was wrong, he nevertheless found that the trading requirement in s137 was not satisfied. He also found that the arrangements did not meet the ‘with a view to the realisation of profits’ tests, and that one of their main objects was obtaining a tax advantage.

On this basis, the appeal was dismissed.

Commenting on the case, Chris Williams, Mazars private client technical officer, said:  ‘The trading arrangements were found effectively to have been pre-packaged and did not conform with the sort of arrangements an ordinarily competent businessman would use.

’For example the royalty arrangements were contrived so that once a film had earned enough box-office takings to cover its costs, the share of takings the partnership would thereafter receive was restricted to the point where virtually no profits would be earned.

‘Importantly in a case where the facts are key, the judge was not convinced by the evidence of the promoters who held themselves out to be experienced experts in film production, yet who also agreed to arrangements that seemed plainly uncommercial.’

Sarah Arnold, a CCH tax writer said: ‘In all, the tribunal considered ten issues which were essentially nine reasons why the scheme did not work and one procedural defence why HMRC were not entitled to challenge claims (which failed).

‘As with other recent film scheme cases, the FTT found that the film partnership was not trading, nor (if it was) was the trade conducted on a commercial basis and with a view to profit. Further, even if the partnership was trading, like the company in Kerrison [2017] TC 05800, these companies existed for the purposes of the scheme and not to carry on a qualifying trade.

‘And even if wrong on the trading issues, under the capital gains computational provisions, the loss could be reduced/extinguished by TCGA 1992, s. 17 or 38 or 30 and 125A, and any loss that did arise would, in any event, not be an “allowable loss” under TCGA 1992, s. 16A because it arose as part of a tax avoidance scheme.’

John Hardy, Richard Moxon and Her Majesty’s Commissioners for Revenue and Customs, 2017 UKFTT 754 TC06165 is here.

Report by Pat Sweet

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