Another film scheme has fall foul of tax rules as HMRC wins the Goldcrest case at the Court of Appeal over a tax avoidance scheme involving a hedge fund manager who used a film scheme promoted by Goldcrest Pictures Ltd to avoid paying £7.5m of tax
The fallout from the ruling could see a further windfall for the Exchequeur with an estimated £36.1m of tax at stake in related cases, which were waiting on the outcome of this appeal.
Goldcrest Pictures, who are behind box office hits such as Twilight, Gandhi and Chariots of Fire, sold film rights to 21 wealthy investors. The purpose of the scheme was to create artificial losses from the sale of film rights so scheme users could considerably reduce their tax bills.
In the closing days of the 2006/07 tax year, Patrice Degorce, a French national living and working in London, entered into a series of transactions designed by the promoters of the scheme to produce an allowable trading loss in that year which he could claim to set off against his income from other sources which was expected to be approximately £19m.
If the scheme worked, its effect was to generate a tax loss of £20,151,186 in the initial period of his activity as a sole trader which ran from 2 to 5 April 2007.
Degorce paid £22m, which HMRC said was an inflated amount, for the rights of two Paramount Picture films, Tropic Thunder and The Love Guru, although he only paid £4.8m of his own money, with the rest provided in the form of a loan through Paramount Pictures. He then sold the rights back to Goldcrest Pictures on the same day for a fraction of the price.
Degorce was introduced to the Goldcrest scheme by HSBC Private Bank, who were paid a finders-fee of £438,000.
HMRC challenged the scheme saying that this did not amount to trading, with Degorce losing at both a First Tier Tribunal (FTT) and Upper Tribunal. He then took the case to the Court of Appeal [Patrick Degorce and the Commissioners for Her Majesty’s Revenue and Customs,  EWCA Civ 1427].
The Court of Appeal judges said the transactions into which Degorce entered were of considerable complexity, and they evidently comprised a pre-planned package. HMRC had never contended that any of the transactions, or any part of the overall package, was a sham, but focused on the fundamental issue whether, in entering into the transactions, Degorce was indeed beginning to carry on a trade of the distribution and exploitation of film rights.
If he was not a trader, in the sense understood by the law, no losses of the trade could have been generated in the first few days of its operation, and the scheme entirely failed to achieve its fiscal objectives.
The judge found that the FTT had made no error of law in its findings, except to the extent that it had declined to take account of the taxpayer’s film-related activities before or after April 2007.
However, he agreed with the Upper Tribunal that there was no ‘realistic possibility’ that the FTT would have reached a different conclusion had it considered those activities given that the transactions in this case were ‘self-contained in the sense that all the steps in the scheme were taken within the space of a few days’ and no further effort on the part of the taxpayer was required.
The judge concluded that the FTT had made no material error of law in deciding the taxpayer had not been engaged in a trade when he entered into the relevant transactions
After reviewing the decision of the FTT and Upper Tribunal, plus other evidence, the Court of Appeal decided that Degorce, the head of the Mayfair-based hedge fund Theleme Partners, was not trading film production, and therefore this was an avoidance scheme.
HMRC said that since the Goldcrest scheme was implemented, anti-avoidance legislation has been enacted to prevent the use of similar schemes in the future.
Representatives of Patrice Degorce have been contacted for comment.
Report by Pat Sweet