Patrick Degorce v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Henderson,Lady Justice Thirlwall,Lord Justice Longmore |
| Judgment Date | 06 October 2017 |
| Neutral Citation | [2017] EWCA Civ 1427 |
| Docket Number | Case No: A3/2015/3547 |
| Court | Court of Appeal (Civil Division) |
| Date | 06 October 2017 |
[2017] EWCA Civ 1427
Lord Justice Longmore
Lord Justice Henderson
and
Lady Justice Thirlwall
Case No: A3/2015/3547
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
MR JUSTICE HILDYARD AND JUDGE BISHOPP
Royal Courts of Justice
Strand, London, WC2A 2LL
Ms Hui Ling McCarthy (instructed by Enyo Law LLP) for the Appellant
Mr Michael Gibbon QC and Mr Michael Jones (instructed by the General Counsel and Solicitor to HMRC) for the Respondents
Hearing dates: 14 and 15 June 2017
Judgment Approved
Introduction
At all material times the appellant taxpayer, Mr Patrick Degorce, was a successful hedge fund manager. Although a French national, he lived with his family and worked in the United Kingdom. In the closing days of the 2006/07 tax year, he entered into a series of transactions designed by the promoters of the scheme to produce an allowable trading loss in that year which he could claim to set off against his income from other sources which was expected to be approximately £19 million. If the scheme worked, its effect was to generate a tax loss of £20,151,186 in the initial period of his activity as a sole trader which ran from 2 to 5 April 2007.
The scheme was known as "the Goldcrest Film Scheme" or "the Goldcrest Pictures Scheme". Goldcrest is the name of the group which promoted the scheme, and various companies in the group participated in the transactions. It is common ground (although this may not have been known to Mr Degorce at the time) that the scheme fell within the provisions of Part 7 of the Finance Act 2004 which require the disclosure to HMRC of certain tax avoidance schemes – the so-called DOTAS provisions – and that it had been duly disclosed to HMRC before it was implemented.
Mr Degorce was introduced to the scheme by the Specialist Tax Group of HSBC Private Bank. On or around 2 April 2007, Mr Degorce received a letter from the Bank which referred to a "Goldcrest Business Proposal" and gave information about the structure of the scheme and its intended tax treatment. The letter made clear that, if Mr Degorce subscribed to the scheme, the Bank would receive an introducer's fee from Goldcrest.
The letter gave the following description of how the scheme was intended to operate:
" Structure and taxation
The business proposal provides the opportunity for an individual to engage in the global film industry on a sole trader basis.
With assistance from Goldcrest Pictures, the individual will undertake a trade of purchasing and exploiting film distribution rights in defined territories and specific films.
The financing of such transactions can potentially be leveraged by a limited recourse loan from a Goldcrest entity. Such a loan is expected to cover 78% of the transaction with the balance of 22% coming from the individual's own funds …
Should the individual choose to apply for a loan to cover 78% of the total transactions, it would be 5 years in term on a limited recourse basis. The loan would be secured by a security interest in the Sole Trader's distribution rights with a commercial rate of interest. The interest and principal would be repayable from a percentage of revenues generated by the exploitation of the distribution rights.
Based upon information provided by Goldcrest Pictures, the Sole Trader will decide to purchase certain territorial rights in defined films from Goldcrest Film Rights Limited. Goldcrest Pictures will then provide ongoing film advisory and administrative services to the Sole Trader covered by the up front fees payable and a performance related fee based on the Sole Trader's exploitation receipts …
The Sole Trader contracts to dispose of his rights to a Goldcrest Distributor in return for a pre agreed share of exploitation revenues which will be monitored by Goldcrest. It is a proportion of these revenues that will be used to repay the loan to Goldcrest Funding (expected to be 55–60% of revenues generated).
Whilst the trade is carried on with a view to being a profitable venture, it is likely that a loss will arise in the first Accounting Period due to Generally Accepted Accounting Principles ("UK GAAP").
Under UK GAAP balance sheet assets represented by "work in progress" (for incomplete films) or "trading stock" (for completed but unsold films) must be valued in the accounts at the lower of:
— Cost; and
— Net realisable value.
Due to the nature of the arrangements entered into to exploit the films, it is anticipated that the net realisable value of the assets will be substantially lower than cost as revenues from the exploitation of distribution rights will not yet be realised and will therefore be uncertain.
The financial illustration in the enclosed Business Proposal assumes that the average net realisable value will be 12% of each asset's acquisition price, although the net realisable value will vary from film to film and from territory to territory and may be higher or lower.
The projected loss will be adjusted for tax purposes and, as a result, for a 40% taxpayer, a tax loss of approximately 34% of the 100% committed capital is expected to arise.
The cashflow in the above scenario for someone committing total capital of £1 million would be:-
Initial cash subscribed
£220,000
Estimated net tax relief
£343,556
Net initial cash benefit
+£123,556
…"
The letter also drew Mr Degorce's attention to various "risk factors", including reference to advice received from Tax Counsel on "the appropriate level of involvement undertaken by an individual to demonstrate an active trade". The Bank's advice was "that any individual considering this Business Proposal should be prepared and able to spend ten hours per week engaged in the trade throughout".
The enclosed Business Proposal by Goldcrest Pictures Limited emphasised that the proposal was for the subscriber to trade in his own right as a sole trader, with "an opportunity to engage in the global film industry assisted by the Goldcrest group of companies, one of the longest-established and most celebrated film companies in the UK". Under the heading "Your Trade", the proposal said:
"You will undertake the trade of purchasing and exploiting distribution rights in high quality commercial films as detailed in Schedule 1. You will be assisted by Goldcrest Pictures, who will leverage Goldcrest's production, post-production and sales relationships to identify and evaluate film opportunities for you. In the course of your trade you will have the opportunity to:
? Acquire distribution rights;
? Sell the distribution rights;
? Generate profits from exploitation of the rights.
When advising you during the course of your trade Goldcrest Pictures will:
? Employ Goldcrest's experience in the film business to negotiate acquisition and distribution agreements for you;
? Draw on Goldcrest's ability to track and collect your exploitation revenue.
You will undertake the trade in your sole name and nothing in any of the agreements to which you will be a party is intended to form a partnership."
On 2 April 2007 Mr Degorce signed an acceptance form for Goldcrest Pictures Limited, which recorded a "Payment Amount" of £21,923,457 and an initial payment on acceptance of £4,823,160 (equal to 22% of the Payment Amount). Mr Degorce also authorised Goldcrest Pictures Limited as his attorney to sign what were defined as "Relevant Agreements", i.e. all documents which he needed to execute in order to participate in the scheme, and he agreed to confirm and ratify the execution of all Relevant Agreements. On the same day, Mr Degorce applied to another Goldcrest company, Goldcrest Funding Limited, for a loan of the remaining 78% of the Payment Amount. The other documents needed to set up the scheme were also executed between 2 and 5 April 2007.
The transactions into which Mr Degorce entered were of considerable complexity, and they evidently comprised a pre-planned package. HMRC have never contended that any of the transactions, or any part of the overall package, was a sham. They have instead focused their attack on the fundamental issue whether, in entering into the transactions, Mr Degorce was indeed beginning to carry on a trade of the distribution and exploitation of film rights. If he was not a trader, in the sense understood by the law, no losses of the trade could have been generated in the first few days of its operation, and the scheme entirely failed to achieve its fiscal objectives. On this analysis, all that Mr Degorce actually did, albeit by elaborate means, was to purchase an investment in film distribution rights. If, on the other hand, Mr Degorce did embark on a real trade, a number of further issues arise which, if answered adversely to Mr Degorce, will either eliminate or reduce the relief which he claims. Those further issues are, in short:
(a) whether the trade was carried on by Mr Degorce on a commercial basis;
(b) whether the trade was carried on with a view to the realisation of profits or, in the alternative, whether it was carried on so as to afford a reasonable expectation of profit;
(c) whether the profits of the trade for the year of assessment 2006/07 were calculated in accordance with UK GAAP; and
(d) whether Mr Degorce's expenditure on rights in two films, Tropic Thunder and The Love Guru, was wholly and exclusively laid out or expended for the purposes of the trade.
It is important to stress at the outset that this appeal relates only to the tax year 2006/07. It first came before the First-tier Tribunal (Judge Blewitt, or Judge Dean as she now is, and Mrs C E Farquharson) ("the FTT") on a reference made by the parties pursuant to section 28ZA of the Taxes Management Act...
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