Colin Hutton: Win for taxman not in Ingenious script

Ingenious productions include the blockbuster Life of Pi. Picture: PA
Ingenious productions include the blockbuster Life of Pi. Picture: PA
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Worthy of a Hollywood blockbuster, tax battle has delivered a real cliffhanger, writes Colin Hutton

Who needs Hollywood when you can watch the drama unfold in HMRC’s attempts to close down a so-called “film investment partnership”? Last week, the First Tier Tax Tribunal delivered its judgment in a tax scheme nail-biter, which was as hotly anticipated by celebrities including former professional footballers and cricketers, as it was by legal advisers and financial organisations.

HMRC asserted that the video game and film finance schemes, operated by the Ingenious Film Group to mitigate investors’ tax liabilities, were little more than avoidance schemes which had effectively short-changed the Treasury by around £1bn in tax and interest.

The investors in the Ingenious Film Group schemes were, in large part, ex-professional sportsmen and other high net worth individuals. The scheme members claimed to have financed the full costs of producing video games as well as a number of films, including the blockbusters Avatar, Life of Pi and Die Hard 4. The vast majority of the costs were written off in the projects’ early years, showing the scheme investors incurring large losses which could be used to offset tax liabilities on other income.

HMRC issued closure notices on the schemes some years ago, a decision which was then appealed to the tribunal by Ingenious on behalf of their investors. HMRC fought the appeal, alleging that the structure of the Ingenious schemes enabled members to claim tax relief on losses from their investment which were much higher than the actual amount they had invested into the partnership. As a result, HMRC argues, the schemes were not carrying on trade with a view to profit – a key element in determining whether they were legitimate tax mitigation schemes or a channel for outright avoidance.

The tribunal found that two of the three structures adopted by Ingenious were carrying on a trade, with a view to profit, albeit on restricted basis. Therefore, while falling short of labelling the film schemes as tax avoidance mechanisms, the tribunal’s decision is expected to significantly reduce the amounts investors can claim in tax relief on their investments.

With the judgment standing at over 300 pages, it is complex and will require time for the industry to digest. The likely appeal by Ingenious is expected to follow with discussions on a possible settlement with HMRC also anticipated. Although the status of the First Tier Tax Tribunal does not create a binding legal precedent, it is highly likely to influence what happens in other similar and related litigations, a number of which have already been commenced and have been waiting for this decision.

While this is a battle that HMRC appears determined to win, it is highly unlikely that this decision will bring the curtain down on this or other film finance schemes given the sums at stake and the huge levels of resource ploughed into this litigation by both parties. Following the latest ruling, Ingenious said it would remain a major investor in UK as well as international film and television. Some of its recently-supported successes include Brooklyn, Carol and Suffragette. Equally, it is clear that HMRC is keen to recover the significant amounts which it believes are due to the UK Treasury.

In fact, this case is the tip of a larger litigation iceberg, with large numbers of financial services players or advisers now potentially facing claims that they financed, marketed or participated in schemes, which have funded a number of major UK films over the past 15 years but may not now deliver the anticipated tax savings.

The competency of accelerated payment notices, which allows HMRC to extract payment from scheme investors before disputed tax appeals are resolved, was subject to judicial review late last year. That challenge has now been dismissed, although is possible that further claims will be mounted against new powers in this arena, which are swelling given the anticipated introduction of a new Serial Avoiders Regime in April 2017.

With both Ingenious and HMRC celebrating their triumph in the latest episode of this case, it is unlikely to mark the end of the saga and, like all box office hits, we can expect a sequel.

• Colin Hutton is a partner in the disputes team at CMS