Micro Fusion 2004-1 LLP v Her Majesty's Revenue & Customs, SPC 00695
| Jurisdiction | UK Non-devolved |
| Judge | John CLARK,A Edward SADLER |
| Judgment Date | 30 June 2008 |
| Respondent | Her Majesty's Revenue & Customs |
| Appellant | Micro Fusion 2004-1 LLP |
| Reference | SPC 00695 |
| Court | First-tier Tribunal (Tax Chamber) |
Spc00695
Income tax – limited liability partnership – whether partnership engaged in trade of exploitation of films – yes – whether film constituted trading stock so as to deny relief under s 42 F(No 2)A 1992 or s 48 F(No 2)A 1997 – no – date of commencement of partnership’s business and basis period applicable – s 40B(3)(b)(ii) F(No 2)A 1992 – date film completed – s 43(3) F(No 2)A 1992 – whether arrangements for exploitation of film a deferred income agreement in respect of a film which is within s 60 FA 2005 – no – whether film consultancy fees incurred deductible – yes
MICRO FUSION 2004-1 LLP Appellant
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Special Commissioners: EDWARD SADLER
JOHN CLARK
Sitting in public in London on 18 – 22 and 25 – 26 February 2008
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
© CROWN COPYRIGHT 2008
DECISION
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The appellant in this appeal is the limited liability partnership, Micro Fusion 2004-1 LLP (“Micro Fusion”). Micro Fusion contends that it carries on a trade or business which consists of or includes the exploitation of films, and in relation to that trade has claimed a loss in its tax return for the year to 5 April 2005 of £12,413,398, being an apportionment of a loss of £15,338,199 which Micro Fusion claims it incurred in its accounting period beginning on 6 April 2004 and ending on 30 June 2005.
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That loss of £15,338, 199 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 Future Films Limited (“Future”) for film consultancy services. In detail:
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Micro Fusion claimed relief on its expenditure of £13,642,547 on commissioning the production of a film entitled Mrs Henderson Presents; of that amount £13,444,455 was claimed under s 48, Finance (No. 2) Act 1997 (“section 48”), and £222,380 was claimed under s 42, Finance (No. 2) Act 1992 (“section 42”); and
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Micro Fusion claimed a trading loss of £1,694,884 of which £1,616,889 was attributable to fees paid to Future.
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On 2 February 2007 the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”) issued a closure notice amending Micro Fusion’s return by disallowing its claim to relief under section 48 and section 42, and disallowing all but £188,156 of the loss claimed as a trading loss. On 8 February 2007 Micro Fusion appealed against that closure notice, and it is that appeal which is now before us.
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Since the closure notice was issued the case has developed, so that in the case as it was argued there are two matters which were not within the scope of the amendments made to the tax return in the closure notice, and this raises certain procedural questions referred to at the end of this decision. First, in the course of the hearing of the appeal HMRC contended that the whole of the trading loss claimed should be disallowed. Secondly, HMRC contend that Micro Fusion is liable to tax on a notional receipt under the provisions of s 60, Finance Act 2005, as referred to below in the section of this decision dealing with the Section 60 issue.
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As mentioned, this appeal relates to claims made for the tax year ending 5 April 2005. If, on the facts, we find against Micro Fusion on the matter referred to below as the Completion issue, the consequence is that Micro Fusion’s claims for relief will be made (on directly corresponding terms) for the following tax year. The parties therefore invited us to determine matters, in this eventuality, by reference to an appeal treated as made by Micro Fusion for the tax year ending 5 April 2006 (notwithstanding that, of course, the processes of a claim, refusal, and appeal have not occurred). We have agreed to proceed on that basis.
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More generally, and having regard to the number of distinct issues in this appeal, the parties asked that we should concern ourselves only with those issues in principle, rather than the detailed figures, leaving it to the parties to resolve the figures so as to give effect to our decisions in principle. Again, we have agreed to proceed on that basis.
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The parties identified six issues which require our decision:
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Whether, having regard to the manner in which it sought to make a profit from the film Mrs Henderson Presents, Micro Fusion was carrying on “a trade or business which consists of or includes the exploitation of film” within section 42(1) (the “Nature of Trade issue”). This issue goes to Micro Fusion’s entitlement to relief under section 42 and section 48 since it is a condition of such relief that such a trade is carried on;
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Whether the film Mrs Henderson Presents constituted trading stock (as defined in s 100(2), Income and Corporation Taxes Act 1988 (“ICTA 1988”)) of Micro Fusion (the “Trading Stock issue”) This issue, by reason of section 42(8) (which denies relief where the film constitutes trading stock), also goes to Micro Fusion’s entitlement to relief under section 42 and section 48;
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Whether, if Micro Fusion was carrying on a trade or business which consists of or includes the exploitation of film, that trade commenced on 6 April 2004, and if it did not, the date on which that trade did commence. Related to this is the question of the proportion of the expenditure which it incurred on the production of the film Mrs Henderson Presents which can be claimed for relief in the tax year 2004/05 by the application of s 40B(3) F(No 2)A 1992 in the situation where Micro Fusion commenced its trade part-way through that tax year (these related issues are together the “Commencement issue”). This issue goes only to the period in which relief can be claimed and the amount of that relief claimable for the tax year 2004/05;
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Whether, if Micro Fusion was carrying on a trade or business which consists of or includes the exploitation of film, the film Mrs Henderson Presents was “completed” (as defined in s 43(3) F(No 2)A 1992) on or before 30 June 2005 (that is, within the “relevant period” in relation to Micro Fusion, as provided in section 42(3)(a)) (the “Completion issue”). This issue also goes only to the period in which relief can be claimed (in this case, whether in the tax year ended 5 April 2005 or the tax year ended 5 April 2006);
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Whether, if Micro Fusion was carrying on a trade or business which consists of or includes the exploitation of film, the arrangements Micro Fusion entered into for the exploitation of the film Mrs Henderson Presents comprised a “deferred income agreement in respect of a film” to which the provisions of s 60, Finance Act 2005 (“section 60”) apply (the “Section 60 issue”). This issue goes to the question of whether Micro Fusion is to be treated as receiving in the relevant period a deemed income receipt for the purposes of its trade; and
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Whether the fees of £1,616,889 incurred by Micro Fusion to Future were properly deductible in the calculation of the profits of Micro Fusion’s trade for the purposes of its tax return for the tax year ended 5 April 2005 (the “Deductibility of Fees issue”). This issue goes to the quantum of the loss claimed by Micro Fusion for that tax year.
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In summary our decision is as follows:
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As to the Nature of Trade issue, in relation to the film Mrs Henderson Presents Micro Fusion was carrying on “a trade or business which consists of or includes the exploitation of film” within section 42(1);
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As to the Trading Stock issue, the film Mrs Henderson Presents did not constitute trading stock (as defined in s 100(2), ICTA 1988), and in consequence Micro Fusion is not precluded by section 42(8) from claiming relief under section 42 and section 48;
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