Samarkand Film Partnership No. 3 and Others v The Commissioners for HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Justice Henderson,Lord Justice David Richards,Lady Justice Arden |
| Judgment Date | 24 February 2017 |
| Neutral Citation | [2017] EWCA Civ 77 |
| Docket Number | Case No: A3/2015/2441 and A3/2015/2443 |
| Court | Court of Appeal (Civil Division) |
| Date | 24 February 2017 |
[2017] EWCA Civ 77
Lady Justice Arden
Lord Justice David Richards
and
Lord Justice Henderson
Case No: A3/2015/2441 and A3/2015/2443
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
MR JUSTICE NUGEE AND JUDGE SINFIELD
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Michael Furness QC (instructed by Pinsent Masons LLP) for the Appellants
Mr John Tallon QC and Mr David Yates (instructed by the General Counsel and Solicitor to HMRC) for the Respondents on the Tax appeal
Mr Jonathan Swift QC and Ms Joanne Clement (instructed by the General Counsel and Solicitor to HMRC) for the Respondents on the Judicial Review appeal
Hearing dates: 29 and 30 November and 1 December 2016
Approved Judgment
Introduction
The main issue on these appeals is whether two "film scheme" partnerships, which were marketed to wealthy individuals resident but not domiciled in the United Kingdom who wished to generate substantial first year losses to set against their taxable income, were carrying on a trade. If the partnerships were not trading, the schemes failed to achieve their fiscal objective in accordance with the relevant legislation governing the grant of tax relief for the financing of films. The First-tier Tribunal (Judge Hellier and John Robinson) ("the FTT"), in a decision released on 20 September 2011 after a ten day hearing in May 2011, found that the partnerships were not trading, so the schemes failed. The FTT also dealt with a number of subsidiary issues in their long (514 paragraphs) and careful decision: see [2011] UKFTT 610 (TC), reported at [2012] SFTD 1 as Samarkand Film Partnerships No. 3 v HMRC ("the FTT Decision").
The taxpayer partnerships then appealed to the Upper Tribunal (Nugee J and Judge Sinfield) ("the UT"), and also sought judicial review of HMRC's decision to refuse the relevant reliefs on the principal ground that they had a legitimate expectation, derived from representations and assurances allegedly made by HMRC in a published Business Income Manual ("BIM"), or from HMRC's settled practice, which precluded HMRC from relying on the main arguments which they had advanced to the FTT. In particular, the taxpayers relied on a "plain vanilla" example of a sale and leaseback arrangement in the BIM which, it was said, HMRC had undertaken not to challenge, and was materially indistinguishable from the facts of the present case. The application for judicial review could not have been made to the FTT, because (unlike the UT) the FTT has no jurisdiction to entertain such claims.
The UT released its decision ("the UT Decision") on 29 April 2015: see [2015] UKUT 211 (TCC), reported at [2015] STC 2135. The UT dismissed the taxpayers' appeals on the trading issue, holding that the FTT had been entitled to conclude on the facts that the partnerships were not carrying on a trade, and had not erred in law in reaching that conclusion. The UT also dismissed the applications for judicial review, holding in particular that no legitimate expectations could be derived from the BIM in circumstances where (as the UT found to be the case) HMRC had reasonable grounds to suspect tax avoidance, because the guidance given in the BIM was expressly made subject to such a qualification. The UT also found that HMRC had no settled practice upon which reliance could legitimately have been placed by the taxpayers, and rejected a further argument based on the principle of conspicuous unfairness.
The taxpayers now appeal to this Court, with permission granted by the UT on 30 June 2015 on all grounds. In granting permission, the UT were satisfied that the grounds of appeal raised important points of both principle and practice, and therefore satisfied the requirements for a second appeal in article 2 of the Appeals from the Upper Tribunal to the Court of Appeal Order 2008 (SI 2008/2834).
The appellants were represented before us by Mr Michael Furness QC, as they had been before the UT (although he then appeared with a junior, Mr Conall Patton). Before the FTT, the appellants had been represented by different counsel and solicitors. HMRC were represented before us by Mr John Tallon QC, leading Mr David Yates, on the tax appeal, and by Mr Jonathan Swift QC, leading Ms Joanne Clement, on the judicial review appeal, all of whom had also appeared before the UT. Mr Tallon and Mr Yates had also represented HMRC before the FTT.
The facts in outline
The two partnerships are Samarkand Film Partnership No. 3 ("Samarkand") and Proteus Film Partnership No. 1 ("Proteus"). The appellants are Samarkand, Proteus, the respective partners of Samarkand and Proteus, and a representative individual partner of Proteus.
In the tax year 2005/6 Proteus acquired an interest in the film "Oliver Twist", and in 2006/7 Samarkand acquired interests in the films "The Queen" and "Irina Palm". In each case, as the FTT found at [2], the films were acquired as part of a single transaction which encompassed their acquisition and their associated leaseback in return for fixed, increasing, secured and guaranteed rental payments for a 15 year period. As the FTT also found at [51], the films were "real films intended for real cinematic audiences". Indeed, each of them enjoyed a considerable measure of artistic and popular success. Each film was also certified by the Department for Culture Media and Sport as a qualifying film within Schedule 1 to the Films Act 1985, that is to say as a British film which qualified under the relevant film acquisition relief provisions in the UK tax legislation.
In the FTT Decision at [45], the FTT described "the broad pattern of events" in relation to each of Samarkand and Proteus as follows:
"(1) a partnership agreement under Jersey law was executed by two persons, one of whom was designated as the managing partner;
(2) an agreement was signed between Future [ i.e. Future Capital Partners Limited, which promoted the schemes] and the managing partner under which Future was appointed the agent of the partnership for finding films for it to exploit. That agreement contemplated that Future would receive a fee;
(3) a film was found by Future and Future made arrangements for a transaction comprising its sale to the partnership and its leasing by the partnership;
(4) a Proposal document (a Business Plan or an Information Memorandum) was issued to potential investors …;
(5) Bank of Ireland (the Facility Bank) produced letters to potential investors setting out the terms on which it could lend them up to 90% of their commitment to invest in the partnership. There was no limitation of the Bank's recourse to the partners' other assets;
(6) either (1) a certificate of the production cost of the film was to be provided or (2) Malde & Co provided an opinion letter relating to the price to be paid for the film …;
(7) persons who decided to invest signed deeds of adherence to the partnership;
(8) the partnership signed agreements to purchase films and related agreements to lease them to Haiku Releasing Ltd ("Haiku") for fixed but escalating rentals over a primary 15 year period. The purchase was conditional upon the lease agreement and vice versa;
(9) the investors paid their monies, and their loans from the Facility Bank were drawn down;
(10) the monies from the partners' aggregate contributions were paid by the partnership: (a) to the vendor of the film (or to the lessee at the request of the vendor), and (b) to Future by way of fees under the agency agreement, thus exhausting the partnership funds;
(11) Haiku placed on deposit an amount equal to about 80% of the sale price of the film. The deposit was charged as security for its rental obligations (which would be discharged from the deposit);
(12) Haiku licensed the film directly or indirectly back to the seller, for a sum equal to the amount it put on deposit;
(13) the partnerships charged their assets (including the interest in the Haiku deposit) to the Facility Bank to secure its lending to the partners;
(14) the Partners' loans and interest thereon were discharged from the rental payments emanating from Haiku's deposit."
The FTT recorded that the precise events and their sequence were different in each case, but nobody has suggested to us that anything turns on these minor differences of detail.
The sale and leaseback structure, together with the associated cash flows, are illustrated in simplified form in a helpful diagram which Mr Furness appended to his skeleton argument, and which is reproduced as Appendix 1 to this judgment. In short:
(1) the partners borrowed 8 from the Facility Bank;
(2) the partners contributed 10 to the partnership, i.e. the 8 borrowed from the Facility Bank and 2 from their own funds;
(3) the partnership bought a film from the seller for 9;
(4) the partnership leased the film to Haiku for a period of 15 years in return for fixed but escalating rentals;
(5) Haiku licensed the film directly or indirectly back to the seller;
(6) the seller paid or procured the payment of 8 to Haiku (retaining a "producer's net benefit" of 1);
(7) Haiku placed 8 on deposit to secure the guarantee of its rental obligations;
(8) the partners' loans and interest were discharged from the rental payments made out of Haiku's deposit; and
(9) the partnership paid a fee of 1 to Future who acted as agent for the partnership and negotiated the transaction on its behalf and provided other services.
See the UT Decision at [3], which is a slightly amplified version of the FTT...
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