In Acamar Productions Ltd v HMRC [2022] UKFTT 74 (TC) (17 February 2022), the FTT upheld HMRC’s closure notice in respect of a film limited liability partnership, reducing the amount of its trading loss to nil.
The taxpayer was incorporated by the FF group and it, together with members of that group, entered into a complex series of transactions, all on the same day, related to the movie version of Les Miserables. The LLP made payments totalling £3m in respect of the transactions. Most of that amount was paid to another FF group entity, JPL, which JPL used to repay a bank loan which had been used by yet another FF entity to invest in the LLP, and to pay £194,000 to a company in the Universal Studios group, M. The LLP claimed a trading loss equal to the total of these payments on the basis that it was carrying on a trade of providing print and advertising services to Universal in respect of the movie, in return for rights to receive amounts in respect of the movie’s profits (under an arrangement known as the ‘Waterfall’). As part of the series of transactions, those services were subcontracted, first to JPL and then to be carried out by M.
For the LLP’s appeal to succeed it had to demonstrate that: (a) it was carrying on a trade; (b) it was carrying on that trade with a view to profit; (c) its accounts were drawn up in accordance with GAAP; and (d) that the expenses that created the loss were deductible.
The FTT found against the LLP on all four issues. It found it ‘impossible’ to see the LLP’s activities as amounting to a supply of services in return for the Waterfall rights. Instead, considering the package of agreements as a whole, its activities amounted to the acquisition of Waterfall rights for the payment of the £194,000. There was no supply of services by the LLP at all and all it had to do was ‘pay and sit back and wait’. This was in the nature of an investment not a trade. The circular funding, in the form of the bank loan, reinforced this conclusion.
On the second issue, the FTT held that there was no practical likelihood that the LLP could have made a profit and that it was in fact indifferent about doing so. The transactions had served their purpose regardless of any such profit in the form of the tax relief which the members would have obtained for the loss.
Although not strictly necessary, the FTT found that the LLP’s accounts, on the assumption that it had been trading, were not drawn up in accordance with GAAP and that the maximum expense that could have been recognised would have been the total of the payment to M and certain fees paid to the bank and to FF.
Finally, and on the same assumption, the FTT held that none of the payments were wholly and exclusively for the purposes of the trade and all of them were capital. As such none of the payments were deductible.
Why it matters: Readers who have followed previous decisions on film investments will not be surprised at the outcome here. It really is difficult to see that any of these sorts of tax-geared structures will survive the scrutiny of the courts.
In Acamar Productions Ltd v HMRC [2022] UKFTT 74 (TC) (17 February 2022), the FTT upheld HMRC’s closure notice in respect of a film limited liability partnership, reducing the amount of its trading loss to nil.
The taxpayer was incorporated by the FF group and it, together with members of that group, entered into a complex series of transactions, all on the same day, related to the movie version of Les Miserables. The LLP made payments totalling £3m in respect of the transactions. Most of that amount was paid to another FF group entity, JPL, which JPL used to repay a bank loan which had been used by yet another FF entity to invest in the LLP, and to pay £194,000 to a company in the Universal Studios group, M. The LLP claimed a trading loss equal to the total of these payments on the basis that it was carrying on a trade of providing print and advertising services to Universal in respect of the movie, in return for rights to receive amounts in respect of the movie’s profits (under an arrangement known as the ‘Waterfall’). As part of the series of transactions, those services were subcontracted, first to JPL and then to be carried out by M.
For the LLP’s appeal to succeed it had to demonstrate that: (a) it was carrying on a trade; (b) it was carrying on that trade with a view to profit; (c) its accounts were drawn up in accordance with GAAP; and (d) that the expenses that created the loss were deductible.
The FTT found against the LLP on all four issues. It found it ‘impossible’ to see the LLP’s activities as amounting to a supply of services in return for the Waterfall rights. Instead, considering the package of agreements as a whole, its activities amounted to the acquisition of Waterfall rights for the payment of the £194,000. There was no supply of services by the LLP at all and all it had to do was ‘pay and sit back and wait’. This was in the nature of an investment not a trade. The circular funding, in the form of the bank loan, reinforced this conclusion.
On the second issue, the FTT held that there was no practical likelihood that the LLP could have made a profit and that it was in fact indifferent about doing so. The transactions had served their purpose regardless of any such profit in the form of the tax relief which the members would have obtained for the loss.
Although not strictly necessary, the FTT found that the LLP’s accounts, on the assumption that it had been trading, were not drawn up in accordance with GAAP and that the maximum expense that could have been recognised would have been the total of the payment to M and certain fees paid to the bank and to FF.
Finally, and on the same assumption, the FTT held that none of the payments were wholly and exclusively for the purposes of the trade and all of them were capital. As such none of the payments were deductible.
Why it matters: Readers who have followed previous decisions on film investments will not be surprised at the outcome here. It really is difficult to see that any of these sorts of tax-geared structures will survive the scrutiny of the courts.
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