Halcyon Films LLP v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judgment Date | 30 June 2008 |
| Date | 30 June 2008 |
| Court | Special Commissioners (UK) |
special commissioners decision
Edward Sadler, John Clark
Jonathan Peacock QC and Jolyon Maugham, instructed by DLA Piper, for the Appellant
Ingrid Simler QC and Andreas Gledhill, instructed by the General Counsel and Solicitor for HM Revenue and Customs, for the Respondents
Income tax - limited liability partnership - investment in films - expenditure on the acquisition of the master negative of a film - whether deduction under Finance (No. 2) Act 1992 section 42s. 42 F(No. 2)A 1992 precluded by Finance Act 2002 section 101s. 101 FA 2002 - no - date of commencement of partnership's business and basis period applicable - Finance (No. 2) Act 1992 section 40B subsec-or-para 3s. 40B(3)(b)(ii) F(No. 2)A 1992 - whether any part of acquisition expenditure on films to be disallowed - no - whether film consultancy fees incurred deductible - yes
The special commissioners decided that a limited liability partnership which carried on a trade or business which consisted of or included the exploitation of films was not precluded from claiming relief for its acquisition expenditure in respect of the films under F(No. 2)A 1992, Finance (No. 2) Act 1992 section 42s. 42 by reason of FA 2002, Finance Act 2002 section 101s. 101, since s. 101 applied only to deny relief for the whole of the acquisition expenditure in the year of its expenditure which would otherwise be claimed by reason of F(No. 2)A, Finance (No. 2) Act 1992 section 48s. 48.
The taxpayer was a limited liability partnership which carried on a trade or business which consisted of or included the exploitation of films. In relation to that trade it claimed a loss in its tax return for the year to 5 April 2004 of £14,021,371, which the taxpayer claimed it incurred in its accounting period ending on 5 April 2004. That loss of £14,021,371 comprised a claim for relief under the special provisions relating to expenditure incurred on films and a loss in computing profits arising by reason of the payment of fees to LMI for film consultancy services.
The taxpayer claimed relief totalling £12,183,932 in respect of its expenditure on the acquisition of three films. Relief for that expenditure on the films was claimed under F(No. 2)A 1992, Finance (No. 2) Act 1992 section 42s. 42; and the taxpayer claimed a trading loss of £1,837,439 of which £1,805,592 was attributable to fees paid to LMI. The Revenue issued a closure notice amending the taxpayer's return by disallowing its claim to relief under s. 42, and disallowing all but £240,760 of the loss claimed as a trading loss. The taxpayer appealed against that closure notice.
Whether the taxpayer was precluded from claiming relief under s. 42 of the 1992 Act by reason of FA 2002, s. 101 ("the Finance Act 2002 section 101section 101 issue"); if so, whether it commenced its trade or business which consisted of or included the exploitation of film on 31 March 2003, and if it did not, the date on which that trade did commence ("the commencement issue"); whether the whole of the expenditure which the taxpayer claimed was incurred on the acquisition of the master negatives of the films qualified for relief, or whether part of that expenditure fell to be disallowed on the basis that it was expenditure on matters not comprising the acquisition costs of the films ("the disallowance issue"); and whether the fees of £1,805,592 incurred by the taxpayer to LMI were properly deductible in the calculation of the profits of the taxpayer's trade for the purposes of its tax return for the tax year ended 5 April 2004 ("the deductibility of fees issue").
The special commissioners (Edward Sadler and John Clark) allowed the appeal in principle.
Finance Act 2002 section 101Section 101 restricted the scope for relief under Finance Act 1997 section 48s. 48 of the 1997 Act in respect of acquisition expenditure, which s. 101(2)(a) defined in terms of relief for acquisition expenditure under Finance (No. 2) Act 1992 section 42 subsec-or-para 3s. 42(3) of the 1992 Act. Finance Act 1997 section 48 subsec-or-para 3Section 48(3) made clear that s. 48 did not apply to any acquisition expenditure within Finance (No. 2) Act 1992 section 42 subsec-or-para 3s. 42(3) in excess of the total production expenditure. Finance Act 1997 section 48 subsec-or-para 4Section 48(4) ensured that where s. 48 applied to only part of any expenditure falling within s. 42(2) or (3), there was a limit on the total that could be deducted under Finance (No. 2) Act 1992 section 42 subsec-or-para 1s. 42(1). Thus, by the use of s. 48(3), (4) and (5) to separate out expenditure which was in excess of the total production expenditure and ensure that it was brought back within Finance (No. 2) Act 1992 section 42s. 42, Finance Act 1997 section 48s. 48 preserved the deductibility of certain expenditure under s. 42 where that expenditure did not qualify under s. 48. As s. 48(4) referred to the respective deductions being made by virtue of Finance (No. 2) Act 1992 section 42 subsec-or-para 1s. 42(1), it was not consistent with an argument that Finance Act 1997 section 48s. 48 provided a self-standing relief.
While Finance Act 1997 section 48s. 48 specifically provided in the case of acquisition expenditure which exceeded the total production expenditure that such excess fell back into Finance (No. 2) Act 1992 section 42s. 42, s. 48 did not indicate whether that provision was an illustration of a general principle, that expenditure which for any reason failed to qualify as deductible pursuant to Finance Act 1997 section 48s. 48 automatically reverted to being deductible under s. 42. However, the deductibility relief under Finance Act 1997 section 48s. 48 was separate from that under Finance (No. 2) Act 1992 section 42s. 42. The mechanism used was for expenditure falling within Finance Act 1997 section 48s. 48 to continue to be deductible under Finance (No. 2) Act 1992 section 42 subsec-or-para 1s. 42(1) but to be treated under the special version of Finance (No. 2) Act 1992 section 42 subsec-or-para 4s. 42(4) as wholly deductible in the relevant period rather than being deductible over three relevant periods: there was a special regime of relief for expenditure to which s. 48 applied, and that was a modified version of the basic Finance (No. 2) Act 1992 section 42s. 42 regime.
The result of s. 101 was that deductibility pursuant to the special regime effected by Finance Act 1997 section 48s. 48 (i.e. the modified Finance (No. 2) Act 1992 section 42s. 42 regime) was not available in respect of acquisition expenditure other than on an acquisition by or directly from the "producer" as defined. The structure of Finance Act 1997 section 48s. 48 and Finance (No. 2) Act 1992 section 42s. 42 was based on the concept of "deduction" in respect of "expenditure", and the references to "relief" were incidental. The effect of s. 101 was to treat acquisition expenditure relating to "non-original" acquisitions as falling outside the special Finance (No. 2) Act 1992 section 42s. 42 regime provided by Finance Act 1997 section 48s. 48. Although that did not amount to failure of one of the three conditions set out in Finance Act 1997 section 48 subsec-or-para 2s. 48(2), the effect was the same: the expenditure fell outside Finance Act 1997 section 48s. 48 and came back into (or remained within) the basic Finance (No. 2) Act 1992 section 42s. 42 regime.
The taxpayer's trade or business which consisted of or included the exploitation of film commenced not on 31 March 2003, but on 9 December 2003 when it entered into sale and leaseback transactions in relation to the master negatives of the films (Mansell v R & C CommrsSCD(2006) Sp C 551 applied).
The Exclusive Acquisition Financing Agreement (EAFA) entered into by the taxpayer created the rights and obligations it purported to create, so that the screenplay rights and the rights to produce a film were genuine. They created an obligation on the taxpayer to pay a specified sum for the rights it obtained, and that obligation was discharged. The fact that the taxpayer entered into those arrangements at a time which was intended to confer maximum tax benefits did not of itself render them a sham. Moreover, the taxpayer's failure to exploit the screenplay rights (notwithstanding certain contractual obligations to do so in the EAFA) was again not necessarily proof that those rights did not exist.
However, although the taxpayer acquired the rights which the EAFA purported to confer on it and incurred the corresponding obligations, it did not commence its trade by reason of entering into the EAFA and a film consultancy agreement (FCA). As in Micro Fusion 2004-1 LLP v R & C CommrsSCD(2008) Sp C 695, by entering into those arrangements the taxpayer put itself into the position whereby it could commence its trade of exploiting films, but it did not establish that it took action to pursue in any realistic way the exploitation of the rights it had acquired. In terms of the principles set out in the Mansell case, the taxpayer did not in truth engage in operational activities by entering into the EAFA and the FCA. Instead, the taxpayer's trade began when it acquired the master negatives of the films, being the point at which the taxpayer first engaged in the operational activities which resulted in or comprised its profit-making business.
Accordingly the taxpayer commenced its trade on 9 December 2003 and for the tax year 2003-04 for the taxpayer the "relevant period" for the purposes of s. 42 was the basis period for that tax year which, on the facts, was the period from 9 December 2003 to 5 April 2004 (Micro Fusion followed).
The amount of expenditure which the taxpayer incurred on the acquisition of the master negative of each of the films was the amount it paid under each respective sale...
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