HMRC secures partial victory at tax tribunal over Ingenious film schemes

After a 48-day hearing at the First Tier Tribunal (FTT), HMRC has scored a win against Ingenious Media in a long-running tax saga over film and game investment schemes, although there are mixed views on the outright winner as the game element of the case was rejected, reports Sara White

The case centred around a disputed £1bn of tax and interest, which HMRC was trying to reclaim from Ingenious Media, Inside Track Productions LLP and Ingenious Film Partners 2 LLP over a dispute relating to a series of film and video game investment schemes, which the tax authority asserted was avoidance [Ingenious Games LLP, Inside Track Productions LLP, Ingenious Film Partners 2 LLP v Commissioners for her Majesty’s Revenue & Customs Appeal numbers: TC/2012/6581; 2013/118; 2013/122]

The hearing was held over 48 days at the FTT from November 2014 ending in December 2015 and the judgment was only just released on 2 August. It runs to 342 pages, highlighting the complexity of the case and the issues at stake.

The Ingenious scheme tried to use artificial losses arising from investments in a range of movies, including the blockbusters Avatar, Life of Pi and Die Hard 4. However, the video games element of the case was ruled acceptable although this involved a much smaller claim centring around some £35m in disputed tax.

This is a decision on appeals made by the appellant limited liability partnerships (LLPs), Inside Track Productions LLP, Ingenious Film Partners 2 LLP and Ingenious Games LLP, against closure notices issued to them by HMRC which amended their partnership tax returns to deny their claims for trading losses.

Ingenious special advisor Martin Smith said: ‘We are happy to have a won a victory on the really big point, ie, trading with a view to profit. This is excellent news.

‘However, we strongly dispute the Tribunal’s findings on partnership accounting, which is not good news for our historic investors who, considered in the full context of this long-running argument, have reason to feel hard done by.

‘Our initial response on the accounting of the partnerships is that the Tribunal has, with the benefit of hindsight, made a completely uncommercial judgment about film profitability.  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 where the Tribunal has erred.’

In the judgment made at the FTT, the tribunal ruled that HMRC and the appellants in Inside Track Productions LLP (ITP) and Ingenious Film Partners 2 LLP (IFP2), relating to schemes involving video games production, needed to come to an agreement over outstanding tax at stake in a part-dismissal of the appeal, while the judges dismissed the appeal by Ingenious Games (IG).

The ruling states: ‘Accordingly to this extent we dismiss the appeals of IG and allow in part the appeals of IFP2 and ITP. Formally we adjourn those two appeals for the parties to agree the computations; if they cannot agree they may apply for the hearing to be resumed.

‘We say “to this extent” because the appellant says that HMRC seek further to adjust the untaxed interest in IG’s 2007/8 return to £174,000, and to bring into tax miscellaneous income of £790,000 for 2008/9.

‘We have heard no argument on these issues and have made no decision in relation to them.’

The Tribunal found that if the expenditure was appropriately, in its view, restricted to 35% and 30% respectively then the structures could be treated as trading with a view to profit.

Ingenious reaction

Commenting on the decision, an Ingenious Media spokesman said: 'We have consistently maintained that our film production partnerships were bona fide businesses run for profit and we are pleased that the Tribunal has recognised this.  

'However we dispute the basis on which the Tribunal has restricted loss relief to investors and are therefore considering an appeal.

'We are reviewing the judgment in fine detail and will comment further in due course. Ingenious has not commented on the ruling but they would have the right to appeal the decision over the video games tax relief element of the decision.'

With a split decision, there could well be an appeal on this element of the case, although HMRC is adamant that the ruling is watertight from their perspective.

On the games issue, an HMRC spokesperson told Accountancy said: ‘We did achieve the knock out win on the games aspect as well. The participants in that scheme will receive no loss relief.

‘The loss relief participants will get (yet to be determined) will be significantly less than they have claimed and will be a lot less than the cash they have spent on the schemes.

‘And they'll have the interest and legal fees on top - so all in all a very expensive punt for the investors.’

Taxpayers appeal allowed (but only in part)

Commenting on the FTT decision on the Ingenious Film Partnership, Dawn Register, partner, BDO Tax Dispute Resolution, said: ‘This does not appear to be an outright victory for either HMRC or Ingenious. Instead both sides are likely to be considering onward appeals and the final decision may in fact still be years away.

‘Taxpayers wanting a “silver bullet” answer to agree their tax affairs with HMRC, who have been waiting with bated breath, will clearly be disappointed.

‘However, this decision could prove to be the basis of a settlement, although as a First Tier decision it does not create a legally binding precedent for other cases.

‘Participants in what HMRC deem to be “avoidance schemes” need to be mindful of the timing of new legislation in April 2017, which may label them ‘serial avoiders’ and bring with it nasty new penalties and restrictions. The name is deceptive because the Serial Avoiders Regime can apply even if someone only participated in one scheme. We would advise anyone involved in such schemes to seek professional advice on all options immediately.’

Ingenious Games LLP, Inside Track Productions LLP, Ingenious Film Partners 2 LLP v Commissioners for her Majesty’s Revenue & Customs Appeal numbers: TC/2012/6581; 2013/118; 2013/122

The ruling is available PDF icondecisionfinal_-_tc2012.6581_2013.0118_2013.0122_-_ingenious_-_02.0.pdf

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