Alchemist (Devil's Gate) Film Partnership
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 October 2012 |
| Neutral Citation | [2013] UKFTT 157 (TC) |
| Date | 05 October 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 157 (TC)
Sir Stephen Oliver QC, Charles Baker FCA
Michael Sherry and Anne Redston, counsel appeared for the Appellant
J McClelland, counsel, instructed by the General Counsel for HM Revenue and Customs, appeared for the Respondents
Films - Relief for expenditure on production - Deferments - Unconditional obligation to pay - Contracts between production company and individual members of production team - Claim for relief by Partnership - Deferred amounts payable to cast and crew as and when exploitation income was received from sales agent - No exploitation income received by Partnership in year of claim - Whether agreement between production company and Partnership transferred obligation to pay deferments to Partnership - Whether an unconditional obligation to pay deferments in year of claim - Appeal dismissed - F(No.2)A 1992, Finance (No. 2) Act 1992 section 42s. 42 and F(No.2)A 1997 Finance (No. 2) Act 1997 section 48s. 48 - CAA 2001, Capital Allowances Act 2001 section 5 subsec-or-para 1 section 5 subsec-or-para 5ss. 5(1) and (5)
The First-tier Tribunal decided that the amount representing the entitlements to remuneration of individual production team members from the proceeds of a film company's exploitation of a film was not a capital expenditure by the taxpayer partnership for purposes of Finance (No. 2) Act 1997 ("F(No. 2)A 1997"), Finance (No. 2) Act 1997 section 48 subsec-or-para 4s. 48(4). The contracts for the cast and crew services were all between the individual members and the film company. Nothing in the production and financing agreement between that company and the taxpayer had displaced the former's obligations to account to the individual members. Furthermore, the agreement excluded, as contingent deferments, the taxpayer's responsibility for the relevant amount. The Tribunal also decided that there was no unconditional obligation to pay the remuneration as at the relevant period. The taxpayer's obligation was triggered by the combined effect of a series of events which were outside the control of those who were in some way or another contractually committed to make the film. It was wholly dependent upon there being an inflow of sufficient net income.
The taxpayer partnership appealed against HMRC's amendment to its partnership return for the accounting period ending April 2002.
In November 2001, a partnership agreement was executed forming the taxpayer for the purpose of producing a film.
Starting in late 2001, a company ("AFDG") entered into a number of production team contracts ("PTCs") with cast, crew and other service providers. In each case, the fixed amount was to be paid by instalments during the period, for which the individual member of the production team was obliged to provide services. The more significant members of the production team were to participate in a specific percentage of the producer's profit. In one case, a member was to become entitled to the deferred cast and crew amount ("DCCA") in increments according to AFDG's net revenue from the exploitation of the film.
In March 2002, the taxpayer entered into a production and financing agreement ("PFA") with AFDG. By then, the various PTCs had been signed and the services of the cast and crew under the PTCs had been performed. Under the PFA, AFDG agreed to produce the film according to various specifications and deliver it to the taxpayer. The taxpayer agreed to pay up to £597,000, with the remaining budget sums to be paid out of the film proceeds. The effect of the PFA was to transfer ownership of the completed film to the taxpayer with exclusive rights to exploit the film.
In its tax return for the relevant year, the taxpayer claimed relief under F(No. 2)A 1997, Finance (No. 2) Act 1997 section 48s. 48 for the film production costs of £1,916,011, comprising £1,223,132 by way of DCCA. In March 2010, HMRC issued a closure notice of their enquiry into the tax return. They reduced the taxpayer's loss to £597,300, being the amount it actually contributed.
HMRC contended that the taxpayer never undertook to pay any of the DCCA. Instead, the relevant contracts with the individual members of the production team had been entered into by AFDG. The obligation to discharge the rights of those individuals to their DCCA remained with AFDG. The only relevant agreement, to which the taxpayer was a party, was the PFA with AFDG. The PFA specifically excluded from the taxpayer's commitment the contingent deferments, i.e. the obligations in respect of the DCCA contained in the individual PTCs.
The taxpayer contended that the PFA made it liable to pay the DCCA. The PFA required the taxpayer to pay to AFDG for its services as executive producer. Of the total production cost, £597,000 should be payable out of the initial cash budget, with the balance being contractually due from the taxpayer. That included the amounts which the producer had incurred by entering into the agreements with the cast and crew. In any event, there was an absolute necessity, as an implied term, that the taxpayer be responsible for discharging the deferral liabilities of AFDG under the PTC.
(2) Whether the amount representing the aggregate of the DCCA was a capital expenditure by the taxpayer on the production of the film for purposes of F(No. 2)A 1997, Finance (No. 2) Act 1997 section 48 subsec-or-para 4s. 48(4).
(3) Whether the taxpayer had an unconditional obligation to pay the DCCA as at the relevant period.
Held, dismissing the taxpayer's appeal:
The Tribunal held that the PTCs for the cast and crew services were all between the individual members of the production team and AFDG. Nothing in the PFA had displaced AFDG's obligations in the PTCs to account to the individual members of the production team for their shares of DCCA. Nor could the PFA be read as showing that the taxpayer had assumed those liabilities. In particular, the definition of budget figure in the PFA was not imposing an obligation on the taxpayer which had been specifically excluded in the main body of that agreement. AFDG would remain contractually bound to those individuals to account to them for their respective DCCA. Furthermore, the passing of the obligation in respect of the DCCA to the taxpayer could not be implied into the PFA. No such implication was required to make the arrangements embodied in the PFA effective. The rights to be paid contingent deferments were triggered the moment the net income from exploitation of the film flowed in. The PFA was silent on the procedure for exploiting the film. The express terms of the PFA excluded, as contingent deferments, the taxpayer's responsibility for DCCA. Thus, the amount representing the DCCA was not capital expenditure by the taxpayer on the production of the film for purposes of F(No. 2)A 1997, Finance (No. 2) Act 1997 section 48 subsec-or-para 4s. 48(4).
F(No.2)A 1997, Finance (No. 2) Act 1997 section 48 subsec-or-para 4s. 48(4) gives relief for "expenditure incurred by the claimant on the production of the film". The Capital Allowances Act 2001, Capital Allowances Act 2001 section 5 subsec-or-para 1s. 5(1) lays down the general rule that "an amount of capital expenditure is to be treated as incurred as soon as there is an unconditional obligation to pay it".
Here, it was the taxpayer's case that its obligation came into being once the services under the PTCs were performed. The assumed obligation, being the obligation to pay the DCCA, arose when and only when net income reached the levels prescribed in the PTC. It was triggered by the combined effect of a series of events which were outside the control of those who were in some way or another contractually committed to make the film. Thus, the commitments of the taxpayer to pay the DCCA were conditional obligations contained in an unconditional contract.
The Tribunal did not accept the taxpayer's argument that the obligation to account for the DCCA to the individual production team members was not conditional because once the relevant PTC had been signed and the services performed, obligations became unconditional and payment was just a matter of timing. There remained the contingency that the event triggering the obligation to pay might never occur. The obligation was wholly dependent upon there being an inflow of sufficient net income. No one, either at the date of signing the PTC or at the time when the individual production team member furnished his or her performance work on the film, could know whether sufficient net income originating from ticket and DVD sales would ever come into the reckoning of net income. The Tribunal, therefore, rejected the argument that there was an unconditional obligation to pay the DCCA as at 5 April 2002.
1.The Alchemist (Devil's Gate) Film Partnership ("the Partnership") appeals against HMRC's amendment to the Partnership return for the accounting period ending 5 April 2002. The Partnership return, as submitted, had shown losses of £1,920,259. The effect of HMRC's amendment was to reduce the Partnership losses by £1,322,959 to £597,300.
2.Expenditure incurred on the production of a film is deductible as soon as there is an unconditional obligation to pay it. In the present case expenditure was incurred by the Partnership on the creation of a film; this was spent by the Partnership during the period to 5 April 2002 and there is no dispute that that amount is deductible. The dispute concerns "deferred" amounts to which the cast and crew (and certain others involved in the creation of the film) were entitled to under their individual performance contracts. We refer to those performance contracts as "the Production Team Contracts". Those deferred amounts (which we refer to as "the Deferred Cast and Crew Amounts") were to be calculated by reference to the proceeds of exploitation of the film. The Partnership has claimed to deduct the aggregate of those...
To continue reading
Request your trial