Ingenious Games LLP and Others v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 July 2019 |
| Date | 26 July 2019 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2019] UKUT 226 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mrs Justice Falk, Judge Tim Herrington
Pushpinder Saini QC, David Milne QC, Richard Vallat QC, James Rivett QC, Edward Waldegrave and George Molyneaux, Counsel, instructed by White & Case LLP, appeared for the Appellants (“the LLPs”)
Malcolm Gammie CBE QC, Jonathan Davey QC, Catherine Addy QC, Michael Jones, Ruth Hughes, Imran Afzal, Nicholas Macklam, Sam Chandler and Oscar Schonfeld, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents (“HMRC”)
Income tax and Corporation tax – LLPs established to carry on activities relating to the production of films and games – Individual members of the LLPs making capital contributions for membership – Funding also coming from commissioning distributor – Whether activities carried on by the LLPs constituted a trade – Whether activities of the LLPs carried on with a view to profit – Whether expenditure incurred by the LLPs equal to 100% of production budget of film or game – Whether expenditure incurred wholly or exclusively for purposes of LLPs' trade – Whether LLPs' accounts compiled in accordance with generally accepted accounting practice – Whether LLPs' expenditure on film and games rights was capital expenditure for tax purposes ITTOIA 2005, s. 25, 26, 33, 34, 863– CTA 2009, s. 46, 47, 53, 54, 1262, 1273.
The Upper Tribunal (UT) allowed HMRC's appeal against the decision of the First-tier Tribunal (FTT) in Ingenious Games LLP; Inside Track Productions LLP; Ingenious Film Partners 2 LLP [2016] TC 05270, finding that the LLPs were not carrying on a trade.
This is the appeal by Ingenious Games LLP (“IG”), Inside Track Productions LLP (“ITP”) and Ingenious Films Partners 2 LLP (“IFP2”) (together, the “LLPs”), and cross-appeal by HMRC, against two decisions of the FTT:
- Ingenious Games LLP; Inside Track Productions LLP; Ingenious Film Partners 2 LLP [2016] TC 05270(the first decision); and
- Ingenious Games LLP [2017] TC 05893 (the second decision).
The appeals of the LLPs are lead appeals for five follower LLPs.
Investment in the LLPs was promoted by members of the Ingenious Media Group (“Ingenious”) to individual high net worth investors. The LLPs were part of a complex business structure (the Commissioning Distributor Model, or CDM) relating to the production of films and video or computer games. The CDM comprised a suite of agreements which were all entered into at the same time. A typical business structure is summarised in the diagram below using illustrative figures.
The LLPs appealed to the FTT against the issue by HMRC of closure notices amending the LLPs' partnership tax returns for successive tax years 2003 to 2010 to deny claims for trading losses. It fell to the FTT to determine firstly, whether and to what extent the LLPs' claims for trading losses should be allowed and secondly, whether those losses were revenue or capital in nature.
The following six issues emerged before the FTT:
- The trading issue: Were the LLPs carrying on a trade?
- The view to profit issue: Were they doing so with a view to profit?
- The incurred issue: Did they incur expenditure equal to 100% of the budget of the film or game?
- The wholly and exclusively issue: Was their expenditure incurred wholly and exclusively for the purposes of their trade?
- The GAAP issue: Were their losses computed correctly as a matter of generally accepted accounting practice (GAAP)?
- The income/capital issue: Was the expenditure revenue or capital in nature?
The FTT found in the first decision that ITP and IFP2 were carrying on a trade with a view to a profit, and therefore incurred trading losses in the tax year in question, but to a smaller extent than claimed; and in the second decision, that most of the limited expenditure found to have been incurred was capital expenditure, which could not create a trading loss. Consequently, approximately 97% of the losses claimed by ITP and 96% of the losses claimed by IFP2 were disallowed.
The FTT found that IG was not carrying on a trade; therefore, all of its losses were disallowed.
Before the UT, HMRC advanced two grounds of appeal and the LLPs eight grounds of appeal, as set out below.
HMRC's grounds of appeal:
- Ground 1: the FTT was wrong to conclude that the activities carried on by ITP and IFP2 amounted in law to a trade; and
- Ground 2: the FTT erred in its interpretation and application of the with a view to profit test.
The LLPs' grounds of appeal:
- Ground 1: the FTT erred in law in its construction of the contractual agreements entered into by the LLPs;
- Ground 2: the FTT erred in law in making findings of fact that no tribunal properly instructed on the law could have reached;
- Ground 3: the FTT erred in law in its conclusions as to the extent of any trade carried on by the LLPs and in any event in its conclusion that IG was not trading;
- Ground 4: the FTT erred in law in finding that, if the relevant arrangements were carried out on the Ingenious Basis, the LLPs were not carrying on business with a view to profit;
- Ground 5: the FTT erred in law in finding the LLPs did not incur 100% of the budgeted cost of each film or game;
- Ground 6: the FTT erred in law in finding that part of the LLPs' expenditure (including the EP fee) was not incurred wholly and exclusively for the purposes of the relevant LLP's trade;
- Ground 7: the FTT erred in law in finding that the LLPs' accounts were not in accordance with GAAP; and
- Ground 8: the FTT erred in law in finding that, on the basis of its conclusions on the other issues, the LLPs' expenditure on films and games was, for the most part, capital.
The UT addressed the grounds of appeal in the context of dealing with each of the six issues, as set out in the table below.
| Issue | HMRC's Grounds | LLPs' Grounds |
| Trading issue | Ground 1 | Ground 3 |
| View to profit issue | Ground 2 | Ground 4 |
| Incurred issue | Ground 5 | |
| Wholly and exclusively issue | Ground 6 | |
| GAAP issue | Ground 7 | |
| Income/capital issue | Ground 8 |
The UT took a two-step approach to the LLPs' Ground 1: firstly, the UT set out some general conclusions with regard to the construction of the contractual documents and secondly, the UT applied those conclusions to the relevant contractual issue that arose for each issue.
The LLP's Ground 2 consisted originally of 110 separate challenges to the FTT's findings of fact, a large number of which remained by the time of the hearing. The UT set out is approach in this area in the following terms: “If we conclude that one or more of the LLPs' criticisms of the FTT's findings of fact are made out, we may still consider whether the remainder, taken together with those matters relied upon by the FTT which were not challenged, nonetheless constituted a sufficient basis for the Decision.”
The LLPs argued that the FTT made an error of law by: (1) overlooking well-established principles of contractual construction; and (2) applying the Ramsay principle at this stage in the process. Briefly, the Ramsay principle, as set out WT Ramsay Ltd v IR Commrs; Eilbeck (HMIT) v Rawling (1981) 54 TC 101, is based upon the premise that in construing a tax statute, the courts are not limited to a strict literal construction but are permitted to arrive at a conclusion which corresponds with the parties' intentions.
The UT were not persuaded that the FTT was correct in viewing what was a series of contracts as a single composite agreement; rather, the starting position should have been to consider the contracts separately. However, the UT accepted that where a number of contracts are entered into, and those contracts cross-refer, or are intended to operate only as a package, this does not mean that the relevant authority is required to “adopt blinkers in looking at each agreement”.
In summary, the UT accepted that, in determining the legal rights and obligations acquired by the LLPs pursuant to the contractual arrangements, the FTT was entitled and correct to look at the entirety of each set of transaction documents, which it had found were entered into at the same time and as a single package.
The UT rejected the argument put forward by the LLPs that, at this first stage of contractual construction, the Ramsay approach should be ignored: “there is no reason why the tribunal should not come to a conclusion as to the overall effect of the arrangements through a process of construing the relevant contracts alongside a consideration of the extent to which the application of the Ramsay principle affects the position”.
The UT applied the principles set out above in determining three key questions with regard to the contractual arrangements, as set out below.
| Question | Conclusion reached by the UT |
| Was the LLP obliged to pay 100 as regards the funding of a film or game and did it have any right to receive BDR? | No, on both counts; the LLP only had to pay 30, and was never exposed to the risk of paying any more than 30, and the LLP did not obtain any substantive legal or equitable rights to BDR. |
| Did the LLP acquire any acquisition, ownership and disposal of film and game rights? | No, the true nature of the transactions, viewed realistically, was that they did not involve the acquisition, ownership and disposal of film and game rights. |
| Was the LLP in reality a producer of films? | No, the LLP had a limited role in relation to the production of films. |
As stated above, the FTT had found that ITP and IFP2 were carrying on a trade and that IG was not carrying on a trade. The UT found that the FTT had made material errors of law in reaching its decision with regard to ITP and IFP2. The UT remade that decision, ruling that the companies did not carry on a trade. The UT upheld the FTT's decision with regard to IG. In summary...
To continue reading
Request your trial
-
BCM Cayman LP and Others
...a number of commercial documents and legal relationships which are not alleged to be shams. [131] In Ingenious Games LLP v R & C Commrs [2019] BTC 521 (“Ingenious”) the Upper Tribunal (Falk J and Judge Herrington) having referred to the decision of the House of Lords in Antoniades v Villier......
-
West Burton Property Ltd
...I would add that this is a totally different question from the one addressed by the Upper Tribunal in Ingenious Games LLP v R & C Commrs [2019] BTC 521, where the taxpayers had entered into a non-recourse borrowing to finance 70 of the 100 which each of them had provided for the production ......
-
R (on the application of Cobalt Data Centre 2 LLP and Another) v R & C Commissioners
...acquired the relevant interests and that it was a subjective test. The UT referred the decision in Ingenious Games LLP v R & C Commrs [2019] BTC 521 which endorsed that approach. The subjective view being tested was that of the controlling minds behind the two LLPs and there was no need for......
-
Ladywalk LLP
...to determine the true meaning of the June 2014 contract. [203] As noted by the Upper Tribunal in Ingenious Games LLP v R & C Commrs [2019] BTC 521 at [79], the basic principles to be applied to the construction of written contracts have been set out in a number of relatively recent Supreme ......