HM Revenue and Customs v Micro Fusion 2004-1 LLP; HM Revenue and Customs v Halcyon Films LLP
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR JUSTICE DAVIS,Mr Justice Davis |
| Judgment Date | 22 May 2009 |
| Neutral Citation | [2009] EWHC 1082 (Ch) |
| Docket Number | Case No: CH/2008/APP/0578 |
| Court | Chancery Division |
| Date | 22 May 2009 |
[2009] EWHC 1082 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Before: The Honourable Mr Justice Davis
Case No: CH/2008/APP/0578
CH/2008/APP/0579
Ms Ingrid Simler QC and Mr Andreas Gledhill (instructed by Solicitor to HM Revenue & Customs) for the Appellants
Mr Jonathan Peacock QC and Mr Jolyon Maugham (instructed by DLA Piper UK LLP) for the Respondents
Hearing dates: 27 th, 30 th, 31 st March and 1 st April 2009
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Davis:
Introduction
1. These are two separate appeals brought by the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) against two decisions of Special Commissioners (Mr Edward Sadler and Mr John Clark) released on 30 June 2008.
2. The context of the dispute in each case is film finance and the availability of tax relief. Significant sums of money are at stake and I was also told that – although the relevant legislation has since been altered – there may be other cases which may be affected by the outcome of these cases.
3. The respondents to each appeal are limited liability partnerships: Micro Fusion Limited 2004–1 LLP (“Micro Fusion”) and Halcyon Films LLP (“Halcyon”) respectively. The issues raised on each of the two appeals are distinct. They variously involve an assessment of the meaning and effect of complex documentation entered into for the purposes of the overall transaction in question and the meaning and effect of applicable, or potentially applicable, statutory provisions.
4. HMRC were represented on each appeal by Miss Ingrid Simler QC and Mr Andreas Gledhill. Micro Fusion and Halcyon were represented by Mr Jonathan Peacock QC and Mr Jolyon Maugham. I am grateful to all counsel concerned for their careful and detailed written and oral arguments.
The issues in the Micro Fusion appeal
5. The background facts and circumstances are set out very helpfully and in very great detail in the decision of the Special Commissioners. The hearing before them extended over some seven sitting days; and they received a significant quantity of evidence, written and oral. A number of issues which they had to decide are not sought to be challenged on this appeal.
6. The main issue raised on this appeal is whether HMRC rightly disallowed Micro Fusion's claims to make deductions under section 42 of the Finance (No.2) Act 1992 (“the 1992 Act”) and section 48 of the Finance (No. 2) Act 1997 (“the 1997 Act”). More specifically, the principal questions were:—
6.1 Did Micro Fusion carry on a trade or business which consisted of or included “the exploitation of films” within the meaning of section 42 of the 1992 Act? It is common ground that that is a precondition of claiming relief under both section 42 of the 1992 Act and section 48 of the 1997 Act; further or alternatively
6.2 Did the film in question constitute “trading stock” within the meaning of section 100(2) of the Income and Corporation Taxes Act 1988, so that relief otherwise available under section 42 or 48 was thereby precluded by reason of section 42(8)?
A further question potentially arising was this:—
6.3 If deductions for losses could be made under section 42 and section 48, did section 60 of the Finance Act 2005 apply so as in effect to reduce the amount of deductions that could properly be made for tax purposes?
As to this third question, a yet further point was raised, to the effect that the Court has no jurisdiction to hear, and HMRC could not pursue, the section 60 ground: because, as it is asserted, the closure notice served on Micro Fusion by the Inspector of Taxes had not relied on section 60. This jurisdictional point was expressly left open by the Special Commissioners (on the agreed footing that it could be pursued on any appeal to the High Court): the Special Commissioners decided the third issue substantively, reaching a conclusion – as on the first two issues – adverse to HMRC.
7. The relevant facts, as found by the Special Commissioners, are in summary these.
8. Micro Fusion was incorporated as a limited liability partnership on 9 July 2003, changing its name to its present name with effect from 11 June 2004. By its Partnership Deed dated 16 December 2004 but expressed to have effect from 1 October 2004 the partnership business was defined as “the trade of the production and/or acquisition and exploitation of Qualifying Films [as defined] and the other business set out in Clause 1.2”. Clause 1.2 provided that the partnership should carry on the Business “including the production, acquisition and in connection therewith granting rights over and otherwise turning to account Qualifying Films ….”. The members of Micro Fusion were a number of individuals: it is clear that their investment in the partnership was in part motivated by hoped for taxation advantages as well by hoped for profits.
9. During the course of 2004 Micro Fusion acquired a perpetual licence in a screenplay for a film called “Mrs Henderson Presents” which was released in the United Kingdom on 25 November 2005, principal photography having started in September 2004. The film was directed by Stephen Frears and starred, among others, Dame Judi Dench and Bob Hoskins. In due course, it received a number of film nominations and awards and achieved an amount of commercial success. On 8 November 2005 the Department of Culture, Media and Sport had issued a certificate in relation to “Mrs Henderson Presents” to the effect that it was a qualifying British film for the purposes of section 42 of the 1992 Act and section 48 of the 1997 Act.
10. On 21 September 2005 Micro Fusion completed its tax return for the year ended 5 April 2005. As part of that return, it included a claim for expenditure in the tax year in respect of production costs relating to “Mrs Henderson Presents”, claiming (among other things) relief under section 48 of the 1997 Act in the sum of £13,444,445 and under section 42 of the 1992 Act in the sum of £222,380. By closure notice dated 2 February 2007 HMRC among other things disallowed the claimed relief in its entirety. It was not in dispute that if such relief was available then the individual partners could set off that relief (pro-rated) against their other taxable income for the tax year in question.
11. In connection with the production, financing and distribution of “Mrs Henderson Presents” a quite remarkably elaborate and complex series of Agreements was made. It is not, fortunately, necessary for the purposes of this appeal to refer to all of them. It is, however, necessary to refer in some detail to the provisions of some of them. But before doing so it may be helpful to summarise the documentary overview provided by the Special Commissioners.
12. The documentary background is this:—
12.1 A film partnership proposal for the 2004/5 tax year was promulgated on behalf of Micro Fusion. The proposal was that individuals or companies “participate in limited liability partnerships that will produce, or commission the production of, and exploit feature films that are intended to be British Qualifying”. The prospective tax incentives were emphasised as an attraction.
12.2 By a One Picture Licence Agreement dated 1 October 2004 Pathé Productions Limited (“Pathé”) granted to Micro Fusion a licence in respect of the copyright and related rights in the screenplay provisionally entitled “Mrs Henderson Presents” for the purpose of production, exploitation, distribution and delivery of the picture “Mrs Henderson Presents”.
12.3 On 1 October 2004 Micro Fusion entered into a Production Services Agreement (“the PSA”) with a company called Mrs Henderson Presents Limited (“MHP Ltd”). The PSA, which was subsequently amended as to Annex A by a Deed of Amendment dated 28 January 2005 but stated to be with effect from 1 October 2004, in essence provided that Micro Fusion engage MHP Ltd to produce and complete the picture for Micro Fusion so as to enable Micro Fusion to effect delivery to Pathé. Under the PSA as amended Micro Fusion was also required to procure the advance of a sum equal to the Budget (as defined) to enable MHP Ltd to carry out the Production Services (as defined).
12.4 Also on 1 October 2004 Micro Fusion entered into a Distribution and Commissioning Agreement (“the DCA”) with Pathé. Under the DCA Micro Fusion agreed to produce and deliver the film to Pathé in accordance with the terms of Schedule A to the DCA. The broad effect of the DCA – it will be necessary to come back to some of its actual terms – was to require Micro Fusion to transfer to Pathé the master negative for “Mrs Henderson Presents”, and also distribution and intellectual property rights to enable Pathé to exploit the picture for a period of 21 years.
12.5 Under the DCA Pathé further agreed to make certain specified minimum payments to Micro Fusion: such payments being guaranteed by letters of credit (the issuing bank taking security from Pathé). The practical and tax rationale for such specified minimum payments, so far as the individual members of Micro Fusion are concerned, is helpfully set out in some detail in the Special Commissioners’ determination but I need not repeat it here.
12.6 A number of agreements was then or thereafter entered into with Pathé by way of security or charge or disposition in respect of its rights and assets acquired under the DCA. HMRC place some reliance on those as illustrating what HMRC say was the true nature and effect of...
To continue reading
Request your trial
-
HM Revenue and Customs v Micro Fusion 2004-1 LLP; HM Revenue and Customs v Halcyon Films LLP
...EWCA Civ 260 (2009) EWHC 1082(Ch)" class="content__heading content__heading--depth1"> [2010] EWCA Civ 260 (2009) EWHC 1082(Ch) 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 Before: The ......
-
HM Revenue and Customs v Halcyon Films LLP
...1992, s. 42 - Finance (No. 2) Act 1997, s. 48 - Finance Act 2002, s. 101. This was an appeal by HMRC from the decision of Davis J ([2009] EWHC 1082 (Ch); [2009] BTC 237) that the taxpayer was in the circumstances entitled to relief under the Finance (No. 2) Act 1992 s. 42. The taxpayer carr......