HM Revenue and Customs v Halcyon Films LLP
| Jurisdiction | England & Wales |
| Judge | Lord Justice Etherton,Lord Justice Rimer,The Chancellor |
| Judgment Date | 19 March 2010 |
| Neutral Citation | [2010] EWCA Civ 261 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 March 2010 |
| Docket Number | Case No: A3/2009/1411 |
[2010] EWCA Civ 261
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
Mr Justice Davis
Before: The Chancellor of the High Court Lord Justice Rimer
and
Lord Justice Etherton
Case No: A3/2009/1411
Ingrid Simler QC and Andreas Giedhill (instructed by HM Revenue & Customs) for the
Appellants
Jonathan Peacock QC and Jolyon Maugham (instructed by DLA Piper) for the
Respondents
Hearing dates: 23rd and 24th February 2010
Lord Justice Etherton:
Introduction
This appeal by the Commissioners for HM Revenue and Customs (“HMRC”) raises a short point of law on the meaning and effect of section 101 of the Finance Act 2002. That was one of a number of related statutory provisions, now repealed, which at the relevant time governed tax relief for expenditure on the production and acquisition of British films. It is a second appeal within CPR 52. 13. Patten LJ gave permission to appeal on the grounds that it raises a point of law of sufficient importance, relevant to a number of other cases, and with a sufficient prospect of success to warrant a second appeal.
The facts
For the purpose of identifying and resolving the point of law in issue on this appeal, the factual context may be summarised very briefly. The Respondent, Halcyon Films LLP (“Halcyon”), acquires feature films from film distributors and leases them back. In its tax return for the year to 5 April 2004 it claimed a loss of £14, 021, 371. That loss principally comprised a deduction of £12, 183, 932 under section 42 of the Finance (No. 2) Act 1992 (“section 42”), representing relief on Halcyon's expenditure in the tax year on the acquisition of three films, entitled Asylum, Method and Samantha's Child.
Following an enquiry into Halcyon's return, on 18 January 2007 HMRC issued a closure notice, disallowing the claim to section 42 relief in its entirety. On 25 January 2007 Halcyon gave notice of appeal to the Special Commissioners. The appeal was heard over seven days from 18 to 26 February 2008 in conjunction with an appeal by Micro Fusion 2004-1 LLP (“Micro Fusion”), which raised different issues of principle as to the availability of section 42 relief.
On 30 June 2008 the Special Commissioners (Edward Sadler and John Clark) handed down separate judgments in respect of Micro Fusion and Halcyon. They allowed both Micro Fusion's and Halcyon's appeals. HMRC appealed in both cases. HMRC's appeals were heard together by Davis J. On 22 May 2009 he handed down a composite judgment in both appeals. He allowed HMRC's appeal in respect of Micro Fusion, but dismissed their appeal in respect of Halcyon.
We heard together HMRC's appeal from Davis J in respect of Halcyon and an appeal by Micro Fusion. This judgment is concerned only with the former.
The issue and the statutory framework
Before the Special Commissioners there were four issues in dispute between HMRC and Halcyon. By the time of the hearing before Davis J there was only one. That issue was whether, on the agreed facts, s.101 of the Finance Act 2002 (“section 101”) precluded Halcyon from claiming any relief under section 42. Davis J held that it did not. HMCR submit that he was wrong in that conclusion.
The resolution of that issue turns on the inter-relationship between section 42, section 48 of the Finance (No 2) Act 1997 (“section 48”) and section 101. Each of those provisions was concerned with relieving expenditure on the production or acquisition of a “qualifying” film, as defined by section 43(1) of the Finance (No 2) Act 1992. That was a film which satisfied certain criteria and was certified by the Secretary of State as “a British film” for the purposes of schedule 1 to the Films Act 1985.
Davis J said in paragraph 16 of his judgment, and both sides accept, that the purpose behind section 42 was a desire to encourage investment in the British film industry by granting appropriate tax incentives. Section 42 enabled a person who had incurred production expenditure on a qualifying film, or who had incurred expenditure on acquiring a qualifying film, to write off that expenditure over a three year period. It was in the following terms, so far as relevant.
“ 42 Relief for production or acquisition expenditure
(1) Subject to the following provisions of this section and any other provisions of the Tax Acts, in computing for tax purposes the profits or gains accruing to a person in a relevant period from a trade or business which consists of or includes the exploitation of films, that person shall (on making a claim) be entitled to deduct an amount in respect of any expenditure —
(a) which is expenditure to which subsection ( 2) or (3) below applies…
(2) This subsection applies to any expenditure of a revenue nature incurred by the claimant on the production of a film —
(a) which was completed in the relevant period to which the claim relates or an earlier relevant period, and
(b) the master negative of which or any master tape or master disc of which is a qualifying film, tape or disc.
(3) This subsection applies to any expenditure of a revenue nature incurred by the claimant on the acquisition of the master negative of a film or any master tape or master disc of a film where; —
(a) the film was completed in the relevant period to which the claim relates or an earlier relevant period, and
(b) the master negative, tape or disc is a qualifying film, tape or disc.
(4) Any amount deducted for a relevant period under subsection (1) above shall not exceed —
(a) one third of the total expenditure incurred by the claimant on the production of the film concerned or the acquisition of the master negative or any master tape or master disc of it,
(b) one third of the sum obtained by deducting from the amount of that total expenditure the amount of so much of that total expenditure as has already been deducted by virtue of section 41 above, or
(c) so much of that total expenditure as has not already been deducted by virtue of section 40B or 41 above or this section, whichever is less….
(5) In relation to a relevant period of less than twelve months, the references to one third in subsection (4) above shall be read as references to a proportionately smaller fraction.
In a report published in 1996 the Advisory Committee on Film and Finance (the Middleton Committee) recommended to the Secretary of State for National Heritage that, among other things, the British film industry be assisted by permitting 100 per cent of production or acquisition expenditure to be written-off in the period or periods in which it was incurred. That recommendation was broadly implemented by section 48, but only in respect of small qualifying films. That section modified section 42 by providing, broadly speaking, that, in the case of a film with total production costs of £15 million or less, a person who had incurred expenditure on its production or acquisition could write-off that expenditure over a one year period rather than over three years. It was in the following terms, so far as relevant.
“48 Relief for expenditure on production and acquisition
(1) Subject to subsection (4) below, section 42 of the Finance (No 2) Act 1992 shall have effect in relation to any expenditure to which this section applies as if the following subsection were substituted for subsections (4) and (5) (which for any period limit relief for film production and acquisition expenditure to a third, or a proportionately reduced fraction, of the relievable expenditure) —
“(4)The amount deducted for a relevant period under subsection (1) above shall not exceed so much of the total production expenditure incurred by the claimant on—
(a) the production of the film concerned, or
(b) the acquisition of the master negative or any master tape or master disc of it,
as has not already been deducted by virtue of section 40B or section 41 above of this section.”
(2) Subject to subsection (3) below, this section applies to so much of any expenditure falling within paragraphs (a) and (b) of section 42(1) of the Finance (No 2) Act 1992 as is expenditure in relation to which each of the following conditions is satisfied, that is to say —
(a) the expenditure is expenditure incurred on or after 2 nd July 1997 and before 2 nd July 2005,
(b) the film concerned is a film with a total production expenditure of £15 million or less; and
(c) the film concerned is a film completed on or after 2 nd July 1997.
(3) This section does not apply to so much of any expenditure falling within section 42(3) of the Finance (No 2) Act 1992 (acquisition expenditure) as exceeds the amount of the total production expenditure on the film concerned.
(4) Where this section applies to only part of any expenditure to which subsection ( 2) or (3) of section 42 of the Finance (No 2) Act 1992 applies in the case of any film, the amount deducted by virtue of subsection (1) of that section for a relevant period shall not exceed the sum of the following amounts —
(a) the maximum amount of expenditure to which this section applies that is deductible for that period in accordance with subsection (1) above; and
(b) the maximum amount specified in subsection (5) below.
(5) The amount mentioned in subsection (4) above is the maximum amount which would be deductible for the relevant period in accordance with subsection (4) of section 42 of the Finance (No 2) Act 1992 if—
(a) in paragraphs (a) and (b) of that subsection (but not in paragraph
(c)) the references to expenditure incurred by the claimant did...
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