HMRC wins case over £26m tax in ‘The Queen’ film partnership scheme

The Court of Appeal has ruled in favour of HMRC in a long running legal battle over the use of film partnership schemes as tax avoidance, which acquired interest in the films The Queen and Polanski’s Oliver Twist, ruling that the partnerships were not trading so tax relief was not due

The Court of Appeal, in Samarkand Film Partnership No. 3 & Ors v Revenue and Customs [2017] EWCA Civ 77, dismissed appeals from Proteus Film Partnership and Samarkand Film Partnership, upholding a previous judgment that they were not trading and the £26m of tax relief was not due.

The main issue was whether the two film scheme partnerships, which were marketed to wealthy individuals resident but not domiciled in the UK who wanted 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 be in accordance with legislation governing the grant of tax relief for the funding of the films.

Both the First Tier Tribunal and Upper tribunal ruled that both partnerships were not trading, which also dismissed the partnerships’ judicial review claims, brought on the basis of an alleged breach of a legitimate expectation said to arise from the terms of HMRC’S business income manual (BIM).

The court confirmed HMRC’s view that the partnerships were not trading and there were never any losses available to investors to reduce their tax bills. The decision could potentially impact on other cases worth £286 million.

The judge said: ‘It seems to me the Upper Tribunal were fully entitled to conclude that HMRC did have reasonable grounds to suspect tax avoidance in the relevant sense. Indeed, it is striking that the evidence of two of the taxpayers' own witnesses, Mr Gough (a solicitor and partner of DLA Piper LLP UK) and Mr Levy (the managing director of Future) in significant respects supported the inference that the schemes were indeed designed for tax avoidance.

‘Equally striking is the fact that Proteus apparently migrated to Jersey in December 2012, and the fact that all of the members of Samarkand were non-UK domiciled.’

The judge said that HMRC was right to deny the partnerships tax relief, with HMRC acting correctly in the circumstances where:

  • the taxpayers were not entitled to that relief as a matter of law;
  • the BIM contained no clear, unambiguous and unequivocal promise that the relief would be granted to the taxpayers;
  • HMRC had never given the impression that all sale and leaseback transactions would be eligible for relief, but had raised repeated concerns about tax avoidance in this area; and
  • HMRC had no settled practice of granting relief to taxpayers in the same situation as the appellants. In such circumstances, the Upper Tribunal rightly concluded that it was not unfair, let alone conspicuously or outrageously so, for HMRC to do exactly what they had said they might do, which was not to apply the guidance in the BIM where they considered that there was or might be tax avoidance.

Director General, Customer Compliance, Jennie Granger said: ‘This scheme deliberately sought to exploit the tax reliefs put in place to help boost the British film industry, but it didn’t pay off. We’re delighted with the win which means we’ve protected £26m of taxpayers’ money.’

This case is one of several in which film partnerships marketed to wealthy individuals as vehicles for generating claims to substantial loss relief of an amount significantly in excess of the funds they had invested out of their own pockets (so that the tax repayment would have covered most or all of their investment) have hit the rocks. The Eclipse case itself, on which the judgment here was largely based, is a prime example. In January 2016, HMRC wrote to taxpayers whose litigation on similar schemes was still pending encouraging them to settle, and has been issuing accelerated payment notices. However, in the Ingenious cases ([2016] TC 05270), both sides have scored a partial victory before the FTT. On different facts, two of the partnerships were found to be trading with a view to profit, but the resulting loss claims were restricted, broadly, to the amounts that the taxpayers had invested out of their own funds.

Parliament has now become involved. Only a few days ago, Andrew Tyrie MP, Chair of the House of Commons Treasury Select Committee, wrote to the Chancellor of the Exchequer claiming that HMRC’s tax-avoidance campaign may be jeopardising the success of the film tax relief scheme itself and asking what was being done ‘to ensure that any egregious schemes are not causing other less offensive tax-planning arrangements to be caught up in the very long running inquiries’.

Samarkand Film Partnership No. 3 & Ors v Revenue and Customs [2017] EWCA Civ 77 is available here

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