HMRC wins landmark De Silva film scheme case in Supreme Court

A £50m tax avoidance scheme which used reliefs put in place to encourage film productions has been defeated in the Supreme Court

Overall, as a result of similar cases awaiting the ruling and accelerated payment notices (APNs) which will follow, HMRC estimates approximately £1bn of tax has been protected.

Scheme investors Jorge Manuel De Silva and Bernard Dokelman invested in and became limited partners of various partnerships under the scheme as far back as 1999. The schemes were aimed at accruing trading losses through investment in films. The partnerships claimed that they had suffered such losses in several tax years and claimed relief for film expenditure by taking advantage of tax incentives.

In the early years of trading, a limited partner could use the provisions of sections 380 and 381 of the Income and Corporation Taxes Act 1998 to set off their allocated share of trading losses of a partnership against their general income for that year, or any of the previous three years of assessment.

HMRC did not accept the partnerships claims for relief and initiated enquiries into their tax returns under section 12AC(1) of the Taxes Management Act 1970. HMRC disallowed the partnerships’ claims for expenditure funded by non-recourse or limited recourse loans to individual partners and also expenditure paid as fees to the promoters of the schemes. The partnerships appealed.

On 22 August 2011, the partnership losses were stated at much reduced levels in a partnership settlement agreement. Between September and November 2011, HMRC wrote to the appellants to advise them that their carry-back claims in their personal tax returns would be amended in line with the lower figures for the partnership losses stated in the partnership settlement agreement.

De Silva and Dokelman raised judicial review proceedings against HMRC’s decisions, arguing that HMRC was entitled to enquire into their claims only under the Taxes Management Act and that, because the statutory time limit had expired, their claims to carry back the partnership losses in full had become unchallengeable. The Upper Tribunal rejected the appellants’ claim, as did the Court of Appeal dismissed their appeal and now the Supreme Court.

Five supreme court judges, Lords Hodge, Neuberger, Kerr, Reed and Hughes unanimously dismissed De Silva and Dokelman’s case.

Michael Avient, partner at JS&Co, said: ‘The consequences of the decision are significant for HMRC.  If the decision had been different HMRC would have found itself time barred from collecting tax in many tax avoidance schemes. It would also have had to repay many of the accelerated payments it had collected as these were predicated on the basis of the existence of a valid enquiry. No doubt there was a huge sigh of relief both at HMRC and the Exchequer when the Supreme Court decision was announced.’

HMRC director general for customer strategy Jim Harra, said: ‘This is another great success in HMRC’s drive against tax avoidance. HMRC defeated De Silva and Dokelman’s tax avoidance scheme but they still argued on a technicality that the department could not collect the tax. The Supreme Court’s decision in favour of HMRC on this point will ensure that these taxpayers and others waiting behind their case will have to pay what they owe.’

The Supreme Court's ruling can be found here.

Report by Calum Fuller

Calum Fuller |Assistant editor, Accountancy magazine (up to 2018)

Calum Fuller is former assistant editor of Accountancy magazine and Accountancy Daily, published by ...

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