Ingenious film scheme ruled tax avoidance at appeal

HMRC has scored a win at the Upper Tribunal as judges rule that the Ingenious film scheme was tax avoidance with the tax authorities expecting to recoup millions in unpaid taxes

The long-running case involved a dispute between HMRC and investors over tax liabilities related to film and game investment schemes promoted by the Ingenious group of companies, which involved investments in a series of blockbuster films including Avatar, Life of Pi and Die Hard 4, between 2000 and 2013.

Investment in the LLPs was promoted by members of the Ingenious Media Group 25 (Ingenious) to individual high net worth investors, including footballers, actors and celebrities.

Collectively there were 35 loss claims in dispute, including the loss claims made by the follower LLPs, with initial estimates of tax losses totalling over £1.6bn according to court papers, although the LLPs argued that some of the tax at stake was recoverable by HMRC ‘as and when the LLPs make taxable profits’.

HMRC has won the latest phase in the case which first reached the tax tribunal in 2016. The case at the Upper Tribunal was heard for over three weeks this spring.

This means that the tax authority could be in line to recover around £450m in unpaid tax. Some of the tax has already been recovered with investors paying up after receiving accelerated payment notices, while others, who decided against taking up the HMRC settlement scheme and held out for a final decision in their favour, will face demands for payment of tax with hefty penalties and interest charges.

An HMRC spokesperson told Accountancy Daily: ‘We are pleased with the very positive outcome in HMRC’s favour in this case. This win defeats eight avoidance schemes which used film or games investments to create losses.

‘Users of the scheme were given the opportunity to settle their tax affairs a number of years ago and many did. Those who chose to take the case to court are now worse off than those who settled with us.

‘HMRC has won around 90% of tax avoidance cases taken to litigation in the past three years, with many more settling before it reaches that stage.’

Ingenious is likely to appeal the decision.

A spokesperson for Ingenious Media said: ‘We are disappointed by this decision. We believe it fails to reflect the facts presented to the court, misunderstands how the film industry operates, and fails to correct the flawed interpretation of commercial film contracts delivered by the lower court. We anticipate that the partnerships will seek permission to appeal.

‘The break-even threshold for the films in question in this litigation demonstrably conforms to the industry average. Each film was capable of delivering substantial profits, based on a reasonable expectation of box office performance. Indeed this slate of high quality, award winning films delivered a significantly greater number of profitable films than the industry average. All but one of the 65 films the partnerships produced achieved a theatrical release.

‘These film partnerships were trading within an industry environment which is universally acknowledged to be risky and volatile and where it is impossible to predict box office performance. The partnerships did however mitigate the commercial risks inherent in the film business in the best way possible whilst delivering both significant taxable revenues and a relatively high number of profitable films. Those films which were not profitable nevertheless recovered a good proportion of their costs.

'Notwithstanding the decision's failure to correct the contractual and commercial errors made by the FTT, we are confident they will be properly addressed by a higher court.’

The appeal

The latest appeal at the Upper Tribunal, Ingenious Games LLP and Others and Revenue and Customs: [2019] UKUT 226 (TCC), centred on whether the limited liability partnerships (LLPs) established to carry on activities relating to the production of films and games using capital contributions from individual members of the LLPs broke tax rules, under Income Tax (Trading and Other Income) Act 2005, and sections of the Corporation Tax Act.

The appeals of the LLPs are lead appeals for five follower LLPs. Collectively the 35 loss claims in dispute, including the loss claims made by the follower LLPs, amount to over £1.6bn, though the LLPs say that some of the tax at stake was, and all of that tax could be, recovered by HMRC as and when the LLPs make taxable profits.

HMRC argued that the LLPs’ position did not reflect the substance and reality of the arrangements entered into by them. They contend that the arrangements were designed to generate first-year losses and to facilitate claims by the investors for sideways loss relief in respect of those losses.

The appeal and cross-appeal were against two decisions of the First Tier Tribunal (FTT) (Judge Hellier and Julian Stafford), the first of which was released on 2 August 2016 (the decision) and the second of which was released on 17 May 2017 (the ‘further decision’).

The appellants’ appeal argued that the FTT failed to understand the contractual agreements entered into by the LLPs and that they were not carrying on business with a ‘view to profit’, adding that ‘the FTT’s assumption that a film investor contributing x per cent of the cost would expect to receive x per cent of the net income of the film was contrary both to the evidence before it (including the evidence of HMRC’s expert witness) and commercial common sense’.

The Upper Tribunal said that ‘the contracts were ordinary commercial contracts and the sums laid out were circulating rather than fixed capital; the rights acquired by each LLP against the various CDs were in each case not an asset put to work by the LLP to generate income but were without more the immediate source of each LLP’s income’.

Accordingly, the judges ruled that the rights were not stock, stating: ‘The LLPs acquired and held financial assets. We are also not convinced by the raw material analogy. The financial assets acquired by the LLPs were not assets which were worked on, used or incorporated into something else.‘

The tribunal ruled in favour of HMRC, concluding that none of the LLPs were carrying on a trade, or doing so with a view to a profit, and that the expenditure incurred by the LLPs was capital rather than income in nature.

The Upper Tribunal ruling, released 26 July 2019, is available here. The hearing was held over 21 days in March/April 2019.

Sara White | 30-07-2019

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