Degorce
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 March 2013 |
| Neutral Citation | [2013] UKFTT 178 (TC) |
| Date | 04 March 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 178 (TC)
Judge J. Blewitt, C. E. Farquharson
Mr Jonathan Peacock QC leading Mr Jolyon Maugham, Counsel, instructed by Field Fisher Waterhouse LLP appeared for the Appellant
Mr Michael Gibbon QC leading Mr Michael Jones, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax - loss relief claimed from sole trader film distribution activity. Issues arising: (1) Was the appellant carrying on a trade; (2) Was business carried on on a commercial basis; (3) Was business carried on with a view to the realisation/reasonable expectation of profit; (4) Were the profits calculated in accordance with GAAP; (5) What would profits calculated in accordance with GAAP have been; (6) Was the expenditure incurred wholly and exclusively for the business.
The First-tier Tribunal decided that a taxpayer's purchase and subsequent sale of film rights in a tax avoidance scheme was not a trade that gave rise to Case 1 losses under the Income and Corporation Taxes Act 1988 ("ICTA 1988"), Income and Corporation Taxes Act 1988 section 380 subsec-or-para 1s. 380(1). The transaction was one-off since there was no element of repetition and there was no evidence relating to the taxpayer's activities either before or after the relevant period. He also did not carry on a business on a commercial basis with a view to the realisation or reasonable expectation of profit. The entire focus of his transaction was on the potential tax relief and he made no economic return on the films. The Tribunal also decided that the taxpayer's profits were not calculated in accordance with the generally accepted accounting practice ("GAAP") since it did not show a true and fair view of his state of affairs. The asset and loan should have been presented as a linked presentation in the balance sheet. Finally, the Tribunal found that the expenditure on the rights in the films was not wholly and exclusively laid out for the purposes of the trade since the money went into a loop to enable the taxpayer to indulge in the scheme.
The taxpayer appealed against HMRC's amendment on his self-assessment return for the year ended 5 April 2007. The amendment was on the basis that his sole trade activity did not give rise to trading losses under ICTA 1988, Income and Corporation Taxes Act 1988 section 380 subsec-or-para 1s. 380(1).
On 2 April 2007, the taxpayer signed an acceptance form for a company ("GPictures"), a subsidiary of a group of companies ("Goldcrest"). That form recorded a payment of 21,923,456 in respect of rights in the film Star Trek XI. The initial payment on acceptance was to be 4,823,160. The remaining balance was financed by the taxpayer by means of a loan from another Goldcrest subsidiary ("GFunding"). On the same day, a Guernsey company acquired control of a British Virgin Islands company ("Upsticks") at the request of Goldcrest. A film distribution entity entered into four deeds with Upsticks in relation to film rights of, among others, The Love Guru and Tropic Thunder. Upsticks then entered into four deeds with another Goldcrest subsidiary in relation to the same film rights.
On 4 April 2007, the taxpayer was informed that Star Trek XI was no longer available. Goldcrest provided the taxpayer with a financial analysis and valuation in respect of The Love Guru and Tropic Thunder, as replacement for Star Trek XI.
On 16 April 2007, GFunding confirmed acceptance of the taxpayer's application for a loan facility for the purpose of purchasing the film rights. On 1 May 2007, the taxpayer signed an acceptance form for GPictures in respect of those films.
On 25 January 2008, the taxpayer filed his tax return for the relevant year which stated a loss of 20,151,186.00. That loss was offset against other income of 18,849,319.70 which arose in the tax year, leaving a loss of 1,301,866.30 to be carried forward.
HMRC contented that the taxpayer was involved in a tax avoidance scheme. The primary aim of such a scheme was to generate artificial income tax losses for the participants and fees for Goldcrest. The losses generated in respect of the participants did not represent true economic loss. The scheme was intended to allow the participants to attain leverage for their losses through the use of limited recourse financing. GFunding's recourse under the loan agreement was limited to the distribution revenues received by the taxpayer. Even if the taxpayer was found to have carried on a trade, that was not on a commercial basis with a view to the realisation or reasonable expectation of profit. Furthermore, the profits of the trade were not calculated in accordance with the GAAP. The taxpayer's expenditure on the film rights was not wholly and exclusively laid out for the purposes of the trade.
The taxpayer contended that he carried on a single trade of acquiring and exploiting film distribution rights. He exercised discretion as to which films or territories to acquire on a commercial basis and formed a commercial view about the right price for those rights following negotiations. He sought to make a profit from his exploitation of the rights and the accounts were properly prepared in accordance with UK GAAP. The cost acquiring the rights was an expense that was wholly and exclusively incurred for the purpose of his trade of acquiring and selling of film distribution rights.
(2) Whether the taxpayer carried on a trade so that it gave rise to Case 1 losses under ICTA 1988, Income and Corporation Taxes Act 1988 section 380 subsec-or-para 1s. 380(1).
(3) Whether the taxpayer carried on a business on a commercial basis, with a view to the realisation or reasonable expectation of profit.
(4) Whether the profits were calculated in accordance with GAAP.
(5) Whether the expenditure on the rights in the films was wholly and exclusively laid out for the purposes of the trade.
Held, dismissing the taxpayer's appeal:
In respect of the first issue, the Tribunal held that there was no element of repetition in the taxpayer's transaction. There was no evidence relating to the taxpayer's activities either pre or post 2006-07. Thus, the transaction was a one-off transaction. The taxpayer's activities involving the film industry pre and post 2006-07 did not relate to the trade of a hedge fund manager, which he otherwise carried on. Both parties agreed that the item purchased was resold as it stood and resold in one lot, which pointed away from trade. The taxpayer only held the asset for a very short period, during which he had no power to interfere with it or use it to obtain income and was obliged to immediately assign the rights as part of the overall transaction. The purchase and assignment was executed simultaneously. The potential income stream, which formed part of the transaction, was the asset acquired by the taxpayer and which provided no income for him. Looking at the reality of the whole picture, the asset was indicative of non-trading activity. The overall indication in applying the badges of trade was that the nature of the composite transactions was not of a trading nature.
Furthermore, the only real understanding the taxpayer had of the scheme was in respect of the tax implications. His purchase and subsequent sale of the film rights could not be viewed as a purchase and subsequent sale of an asset. The transactions were inextricably linked and there was no regard to the true value of the rights. In reality, his activities were focused on the close of the financial year and that his activity was limited to obtaining fixed receipts as proscribed by the agreement signed, which could not be deemed as trade. Thus, that was not an adventure in the nature of trade.
In respect of the second issue, the Tribunal held that the price paid for the rights was not intended by the taxpayer to be a reasonable and commercial price. The entire focus of the transaction was on the potential tax relief when viewed against the loss at which the rights were sold and for which there was no independent assessment.
There should be some evidence of a serious interest in profit of some description which would require recouping any loss in order to be achieved by the taxpayer. The films did not necessarily need to be worldwide successes in order to achieve that. However, given the restricted potential receipts, combined with the amount paid and received for the rights, taken together with the evidence that to date, the taxpayer had made no economic return on the two films. Thus, there was no basis upon which the taxpayer could have had a reasonable expectation of financial benefits/profit.
In respect of the third issue, the Tribunal held that the taxpayer's financial accounts at the relevant period did not show a true and fair view of his state of affairs and had not been produced in accordance with UK GAAP. The asset and loan should have been presented as a linked presentation in the balance sheet. The linked presentation method as proposed by HMRC's expert witness should be adopted in calculating the profits and the valuation method of the taxpayer's expert witness would be applicable in order to calculate the profits relating to each film in accordance with GAAP.
In respect of the last issue, the Tribunal held that the expenditure on the rights in the films was not wholly and exclusively laid out or expended for the purposes of the trade. The loan was paid directly from GFunding to GPictures, which was a limited recourse loan. The money went into a loop to enable the taxpayer to indulge in a tax avoidance scheme. In reality, there was no incurring of expenditure of the borrowed money in the acquisition of the rights.
1.This reference concerns the Appellant's self-assessment for the year ended 5 April 2007 which showed a net loss for tax purposes in the sum of 20,151,186. The Appellant claimed loss relief in respect of his sole trader film distribution activity...
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