As a result of the two rulings in the cases published this week, HM Revenue & Customs (HMRC) said it “has won two major tax avoidance battles against the Ingenious Film Partnership and Icebreaker avoidance schemes in cases worth more than £820m ($1.1bn, €968m) in tax owed and interest”.
However, a spokesman for one of the two schemes involved, Ingenious Film Partners, has taken issue with HMRC’s statement, contending that the ruling in its case contained elements that vindicated its own arguments.
HMRC said that the Ingenious Film Partners scheme tried to use artificial losses arising from investments in a range of movies, including the blockbusters Avatar, Life of Pi and Die Hard 4, to create artificial losses from investments in limited liability partnerships.
It argued the Ingenious scheme members claimed to have financed 100% of the cost of producing the films and some video and computer games, the bulk of which was written off in the first year, giving the partnerships large losses that were set against other income.
Only 30% of the expenditure was actually funded from the partners’ cash, and the other 70% was routed through the partnership on paper only, it said.
However, the Ingenious spokesman said the latest tribunal judgment had drawn a clear distinction between the Ingenious film partnerships and all other film arrangements that have appeared before the courts in recent years by recognising that the Ingenious film partnerships were trading and that those trades were conducted with a view to profit.
“In the judgment repeated references are made to the quality of the partnership films, the critical acclaim they received and their box office success. All of this vindicates Ingenious’ position that these were legitimate film businesses and not tax avoidance schemes,” the spokesman said.
The impact of this, according to Ingenious, is that the trading losses its investors had claimed will be reduced and therefore the ability to offset those lossess against tax due will also be reduced, albeit not to zero as HMRC had argued.
This means it’s likely Ingenious and HMRC will have to negotiate the scale of the losses that can be claimed against other income to determine an investor’s new tax bill and this may have to be done on a film by film, year by year basis.
HMRC said in its statement on Friday that clients of the Ingenious scheme were given the opportunity to settle nearly four years ago and now face big bills for interest and legal fees on top of the unpaid tax liability that results from using the scheme.
The second scheme, known as Icebreaker Partnerships, which had also attempted to create artificial losses from investments in limited liability partnerships, had its appeal dismissed entirely, which HMRC would save the taxpayer around $134m in lost tax.
The individual members who participated in the Icebreaker Partnerships contributed some money of their own scheme and a rather larger amount of borrowed money, in order to provide finance for a range of creative projects, including films.
Each of these partnerships claimed to have made a significant trading loss in its first year which the individual members sought to claim as an allowable loss against their income tax liability.
After HMRC won its first case against Icebreaker in 2014 it emerged that Gary Barlow and fellow Take That stars Howard Donald and Mark Owen, along with around 44,000 other wealthy investors, had been involved in the scheme.
In that original case the judgement stated: “The underlying, and fundamental, conclusion we have reached is that the Icebreaker scheme is, and was known and understood by all concerned to be, a tax avoidance scheme.”
The tax office said the Icebreaker scheme members claimed tax relief on losses many times higher than the actual amount they invested in the partnerships.
Of both the Icebreaker and Ingenious schemes, Jennie Granger, director general of Enforcement & Compliance at HMRC, said: “These were some of the biggest films of all time, and the schemes involved people claiming far more in tax than they invested in the first place.
“We always say that if something is too good to be true then it probably is. And in this case the long legal battle will mean that investors face even bigger bills for interest and legal costs.”
HMRC aalso said that as a result of its latest victories a further 46 limited liability partnerships, affecting almost 1,000 members of the schemes, were likely to be affected.
It added that these latest successes highlighted the continued efforts it was making to tackle tax avoidance through the Accelerated Payments regime.
“In the two years since the legislation was introduced, more than £2.5bn has been paid on Accelerated Payment Notices, and more than 50,000 notices have been issued,” HMRC said.