HM Revenue and Customs v Micro Fusion 2004-1 LLP; HM Revenue and Customs v Halcyon Films LLP
| Jurisdiction | England & Wales |
| Judge | The Chancellor,Lord Justice Rimer,Lord Justice Etherton |
| Judgment Date | 19 March 2010 |
| Neutral Citation | [2010] EWCA Civ 260 |
| Docket Number | Case No: A3/2009/1413 & 1411 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 March 2010 |
[2010] EWCA Civ 260
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Davis
Before: The Chancellor of the High Court
Lord Justice Rimer
and
Lord Justice Etherton
Case No: A3/2009/1413 & 1411
Mr J Peacock QC & Mr J Maugham (instructed by DLA Piper) for the Appellant
Ms I Simler QC & Mr A Gledhill (instructed by The Solicitor's Office of HMRC) for the Respondents
Hearing dates: 23 rd and 24 th February 2010
Approved Judgment
Introduction
1. In the words of the British Film Catalogue
“ Mrs Henderson Presents tells the remarkable true-life story of one of England's most prominent and eccentric society figures, Laura Henderson, who founded the historic Windmill Theatre.”
In its tax return for the year ended 5th April 2005 the appellant, Micro Fusion 2004-1 LLP (“Microfusion”), sought to deduct from the profits or gains of its trade or business costs incurred in the production of Mrs Henderson Presents of £222,380 under s.42 Finance (No.2) Act 1992 and £13,444,445 under s.48 Finance (No.2) Act 1997.
2. Such relief is dependent on satisfaction of a number of statutory conditions. The conditions relevant to this appeal are that:
(1) the trade or business Microfusion was carrying on was “a trade or business which consists of or includes the exploitation of films”, and
(2) Mrs Henderson Presents was not “trading stock, as defined in s.100(2) of the Taxes Act 1988” of that trade or business.
3. By Closure Notices issued by HMRC on 2nd February and 7th December 2007 the claims made by Microfusion were rejected on the grounds that the trade or business of Microfusion did not consist of or include the exploitation of films but, even if it did, Mrs Henderson Presents constituted trading stock of that trade or business. Microfusion duly appealed to the Special Commissioners. The parties’ respective statements of case dated 26th June and 24th September 2007 set out the rival contentions in respect of those two issues. On 5th December 2007 HMRC, without the leave of the Special Commissioners or the consent of Microfusion, amended its statement of case to raise a third issue, namely whether s.60 Finance Act 2005 applied so as to reduce the amount of relief to which Microfusion was entitled even if it were right in its contentions on the first two issues. At the hearing before the Special Commissioners counsel for Microfusion objected that HMRC was not entitled to contend that s.60 applied because it was not referred to in its closure notices but, in any event, it did not apply.
4. Thus there were and remain the following issues:
(1) whether, at the relevant time, Microfusion carried on a trade or business which consisted of or included “the exploitation of films”; and if so
(2) whether Mrs Henderson Presents was trading stock in relation to that trade or business; and if not
(3) whether the Special Commissioners had jurisdiction to entertain the contention of HMRC that s.60 Finance Act 2005 applied so as to reduce the amount of relief to which Microfusion was otherwise entitled; and if so
(4) whether s.60 Finance Act 2005 did apply.
5. The Special Commissioners answered question (1) in the affirmative and questions (2) and (4) in the negative. In those circumstances they did not find it necessary to decide question (3). The upshot was that Microfusion was entitled to the full amount of the relief it claimed. HMRC appealed to the High Court. The appeal was heard by Davis J. He answered question (1) in the negative and each of questions (2), (3) and (4) in the affirmative with the consequence that Microfusion was not entitled to any of the relief which it sought.
6. With the permission of Lloyd LJ, Microfusion now appeals to this court. Each of the four issues specified in paragraph 4 above now arises either in that appeal or under the respondent's notice issued by HMRC. I will deal with each of them in due course. First it is necessary to set out the relevant legislation and explain the factual background, in each case, in some detail.
The relevant legislation
7. The relevant provisions of Finance (No.2) Act 1992 were enacted against the background that for some years films had qualified for capital allowances as ‘plant’. The then most recent legislation was contained in s.68 Capital Allowances Act 1990. That section, which re-enacted s.72 Finance Act 1982, provided that expenditure incurred on the production or acquisition of a film should be regarded as expenditure of a revenue nature; a film for the purposes of that section was defined as the original master negative and its soundtrack.
8. The provisions of ss. 41-43 Finance (No.2) Act 1992 were new. S.41 provided relief for preliminary expenditure, s.42 for production or acquisition expenditure and s.43 contained certain definitions relevant to each of them. In each case the relief was available by way of a deduction
“…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…”
The Capital Allowances Act 2001 inserted into the Finance (No.2) Act 1992 the relevant provisions relating to capital allowances as ss. 40A – 40D. In view of certain arguments of counsel it is necessary to recognise that in ss. 40A(2) and (3), 40B(1) and 40D(2)(a) reference is made to ‘master versions’ of films in the context of the business of exploitation, production and acquisition.
9. It is unnecessary to refer further to the provisions of s.41. The relevant provisions of ss.42 and 43 (as amended following the insertion of ss.40A – 40D) are the following:
“42 (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.
…
(8) This section does not apply to the profits of a trade in which the film concerned constitutes trading stock as defined in section 100(2) of the Taxes Act 1988.
(9) This section has effect in relation to expenditure incurred –
(a) on the production of a film completed on or after 10th March 1992, or
(b) on the acquisition of the master negative, master tape or master disc of a film completed on or after that date.
43 (1) In sections 40A to 42 above and this section –
“expenditure of a revenue nature” has the meaning in section 40A(4) above,
“master disc,” in relation to a film, means the original master film disc or the original master audio disc of the film,
“master negative,” in relation to a film, means the original master negative of the film and its soundtrack (if any),
“master tape,” in relation to a film, means the original master film tape or the original master audio tape of the film,
“qualifying disc,” means a master disc of a film certified by the Secretary of State under Schedule 1 to the Films Act 1985 as a qualifying film for the purposes of section 40D above,
“qualifying film,” means a master negative of a film certified by the Secretary of State under Schedule 1 to the Films Act 1985 as a qualifying film for the purposes of section 40D above,
“qualifying tape,” means a master tape of a film certified by the Secretary of State under Schedule 1 to the Films Act 1985 as a qualifying tape for the purposes of section 40D above,
“relevant period” has the meaning given in section 40B(3) above, and…
(2) In sections 41 and 42 and this section –
(a) any reference to a film shall be construed in accordance with paragraph 1 of Schedule 1 to the Films Act 1985 and
(b) any reference to the acquisition of a master negative, master tape or master disc of a film includes a reference to the acquisition of any rights in the film (or its soundtrack) that are held or acquired with the master negative, master tape or master audio disc.”
10. The definition of...
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