Samarkand Film Partnership No 3 and Others v Revenue and Customs Commissioners; R (on the application of Samarkand Film Partnership No 3) v Revenue and Customs Commissioners; R (on the application of Proteus Film Partnership No 1) v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 April 2015 |
| Neutral Citation | [2015] UKUT 211 (TCC) |
| Date | 29 April 2015 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Mr Justice Nugee, Judge Greg Sinfield
Michael Furness QC and Conall Patton, counsel, instructed by Freshfields Bruckhaus Deringer LLP, solicitors, appeared for the Appellants
John Tallon QC and Jonathan Swift QC with David Yates and Joanne Clement, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Income tax Partnerships engaging in sale and leaseback of films and partners claiming losses under film acquisition relief provisions in Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 130140 Whether trading Held no Appeal dismissed If trading, whether business carried on on a commercial basis Amount of acquisition expenditure incurred in respect of original master version of The Queen Whether partnership loss rules in Income and Corporation Taxes Act 1988 (ICTA 1988), s. 118ZE restrict use of any loss Whether Proteus's relevant period less than 12 months (ITTOIA 2005, s. 138) Whether expenditure of a revenue nature.
Judicial review Whether claimants had legitimate expectation derived from HMRC's Business Income Manual Whether claimants had legitimate expectation derived from HMRC's settled practice Whether HMRC acted with conspicuous unfairness.
The Upper Tribunal (UT) upheld a First-tier Tribunal (FTT) decision regarding a film leasing scheme in Samarkand Film Partnership No. 3 TAX[2011] TC 01453, ruling that partners of two partnerships, which had entered into sale and leaseback transactions in relation to films, were not entitled to loss relief in respect of tax losses which the partnerships claimed arose from the acquisition of films and other costs incurred by the partnerships. The UT found that the FTT was entitled to conclude that the partnerships had not been trading and that the partners were not entitled to sideways loss relief because the businesses of the partnerships were not carried on on a commercial basis with a view to a profit.
The UT also dismissed the claimants' applications for judicial review. The applications were brought on the basis of legitimate expectation derived from HMRC's Business Income Manual and/or HMRC's settled practice.
Samarkand Film Partnership No 3 (Samarkand) acquired interests in the films The Queen and Irina Palm in 200607 and Proteus Film Partnership No 1 (Proteus) acquired an interest in Oliver Twist in 200506. The films were acquired under arrangements that incorporated pre-ordained elements that included the acquisition of the films and a lease back to the seller via a company in return for fixed, increasing, secured and guaranteed rental payments for a 15 year period. The partners claimed losses under the film acquisition relief provisions of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), s. 130144. The partners also claimed trading deductions for fees paid by the partnerships to Future Capital Partners Ltd (Future), who acted as agent for the partnerships and negotiated the transactions on their behalf and provided other services.
HMRC disallowed the claimed loss relief in respect of the expenditure on the films and the deduction of fees paid to Future. This was on the basis that many of the conditions required to be met for the relief for the losses of a partnership to be available and the allowability of deductions in computing partnership income for expenditure on films were not satisfied and that consequently the partners were not entitled to the benefit of loss relief or that it should be limited.
Assessing purely the business of the partnership and not that business together with the separate individual affairs of the partners, so that the borrowings of the partners and their ability to obtain tax relief were irrelevant to determining whether the business of the partnerships was a trade (unlike in Barclays Mercantile Business Finance Ltd v Mawson (HMIT) TAX[2003] BTC 81, where the business was found to encompass its financial arrangements and the use of tax reliefs), the FTT found that the activity could not be treated as a separate acquisition of the film and its later leasing, but as a single composite transaction. As such the FTT held that the partnerships were not carrying on a trade. In conclusion the FTT found that:
The commercial nature of these agreements was the payment of a lump sum in return for a series of fixed payments over 15 years. That type of transaction carried out on its own is not in our view an adventure in the nature of trade.
Although the FTT's finding that the partnerships were not trading was enough to dispose of the appeals, in case it was wrong it considered the other issues on the assumption that the partnerships were trading. The FTT found that if there was a trade, the businesses of the partnerships were not carried on on a commercial basis in the relevant periods. The FTT found that the purchase and leasing of the rights in The Queen was not a commercial transaction because, in present value terms Samarkand made a loss of 1.35m on the acquisition and leasing of the film. The FTT also found that the purchase and leasing of the rights in relation to Irina Palm and Oliver Twist would result in losses which meant that those transactions could not be regarded as commercial unless there were collateral benefits that outweighed the commercial loss and the tax reliefs which the partners hoped to obtain could not be considered to be collateral benefits accruing to the partnerships. The FTT noted that the way the partnerships had carried out the transactions showed that:
the partnerships were not seriously interested in making profits. Instead the business focus was on ensuring that investors got tax relief and Future got its fee. Those were not serious financial benefits to the business of the partnership. That is another aspect of the lack of commerciality displayed in the purchase of a rental stream for more than its value.
The FTT did, however, find that the trade was carried on with a view to the realisation of profits or with a reasonable expectation of profit, because the gross receipts from the leases would always exceed the initial outlay on the purchase of the film over the periods of the leases.
The quantum of any relief was also discussed in detail, with the FTT finding that:
the whole of the price paid under the sale and purchase agreement on Irina Palm was incurred wholly and exclusively or the purposes of Samarkand's business;
as Samarkand had acquired the master negative and certain rights to distribute and exploit The Queen from Pathé Slate, which had no right to receive any net profits from the film, the FTT found the rights transferred by Pathé Slate to Samarkand to be worthless and concluded that Samarkand did not incur expenditure of 8.2m on the acquisition of The Queen, but it was instead no more than 1% of the 8.2m paid, but that amount was paid wholly and exclusively for the partnership's business;
1.1m of the price paid by Proteus for Oliver Twist was not incurred on the film as Future had arranged to increase the purchase price by this amount because it had discovered that more capital had been subscribed than the amount in the opinion, but the whole amount was paid wholly and exclusively for the partnership's business;
35% of the fees paid by the Proteus to Future, and 45% of the fees paid by Samarkand to Future were revenue in nature, with the remainder being capital and therefore not deductible; and
any loss arising to Proteus in its first period would be restricted by the application of ITTOIA 2005, s. 138(6) because its relevant period was less than 12 months.
The FTT accordingly dismissed the appeals.
The appellants appealed against the FTT's conclusions, contending that there was a trade and that it was carried on on a commercial basis. The appellants also appealed against the restriction on the expenditure incurred by Samarkand on the acquisition of The Queen and the length of Proteus' relevant period. The appellants also contended that costs incurred identifying a lease party and negotiating the lease should have been regarded as revenue expenses and 100% of the fees paid by Proteus to Future were wholly and exclusively for the purposes of its trade.
The UT found that the FTT was entitled to conclude that the partnerships had not been trading as there had been no identifiable error of law in their statement of the principles and nor did the UT consider that it could be said that the only true and reasonable conclusion from the facts was that the only true and reasonable conclusion from the facts was that the partnerships were trading. When deciding whether the partnerships were trading what mattered was what the partnership actually did by examining the particular transaction in question and that is what the FTT did.
The UT then went on to consider whether the businesses of the partnerships were carried on on a commercial basis with a view to a profit. The UT found that the question to be answered was can a trade carried on by the partnership, which would otherwise be uncommercial, be said to be carried on on a commercial basis not because of extra benefits accruing to the partnership as part of its business but because of extra benefits accruing to the individual partners? (i.e. because of the tax relief claimed by the partners). The UT did not find this easy to resolve, but considered that the FTT was right to answer this question no. So however commercial the individual partners were being in accessing the tax reliefs, they did so by deliberately causing the partnerships to trade in an uncommercial manner. The UT appreciated that...
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