Investors in a film scheme that is part of a long-running tax avoidance battle now face large bills for interest and legal fees as well as £434m in unpaid tax.
Both HM Revenue and Customs and Ingenious film partnerships have claimed to have “won” the First Tier tax tribunal decision released yesterday.
The hearing involved Ingenious subsidiaries Inside Track Productions, Ingenious Film Partners 2 and Ingenious Games.
The Ingenious scheme members claimed to have financed 100 per cent of the cost of producing films and games.
However, HMRC claimed the majority of the cost was written off in the first year, giving the partners large losses that were set against other income. It alleged only 30 per cent of the cost was funded by partners’ cash and the other 70 per cent was put through the partnership on paper only.
In its decision, the tribunal dismissed the appeals of Ingenious Games and allowed in part the appeals of Ingenious Film Partners 2 and Inside Track productions.
It found that all three subsidiaries were trading to make a profit. It found that Inside Track incurred only 35 per cent of the cost of production and Ingenious Film Partners 2 and Ingenious Games incurred 30 per cent of the budgeted cost of each film and game.
The tribunal also ruled the subsidiaries’ losses were not calculated in line with “generally accepted accounting practice”.
The tribunal has adjourned the appeals relating to Ingenious Film Partnerships 2 and Inside Track Productions to give the parties time to agree the tax calculations. If an agreement is not reached then the appeal can continue.
An Ingenious spokesman says the company is considering an appeal of the decision.
He says: “We have consistently maintained that our film production partnerships were bona fide businesses run for profit and we are pleased that the tribunal has recognised this.
“However we dispute the basis on which the tribunal has restricted loss relief to investors and are therefore considering an appeal.
“We are reviewing the judgment in fine detail and will comment further in due course.”
HMRC director general of enforcement and compliance Jennie Granger says: “These were some of the biggest films of all time, and the schemes involved people claiming far more in tax than they invested in the first place. We always say that if something is too good to be true then it probably is. And in this case the long legal battle will mean that investors face even bigger bills for interest and legal costs.”
BDO tax dispute resolution partner Dawn Register considers the tribunal decision is not an outright victory for either HMRC or Ingenious.
She says: “Both sides are likely to be considering onward appeals and the final decision may in fact still be years away.
“Taxpayers wanting a ‘silver bullet’ answer to agree their tax affairs with HMRC, who have been waiting with bated breath, will clearly be disappointed.
“However, this decision could prove to be the basis of a settlement, although as a First Tier decision it does not create a legally binding precedent for other cases.”
Partner at accountancy firm UHY Hacker Young Michael Avient says investors in the scheme will be out of pocket.
He says: “If you were an investor in one of these structures you would have put in either 35 per cent or 30 per cent respectively of your own cash. The aim was to get back 40 per cent of the claim, which could equate to £32. The investor was therefore meant to get most, if not all, of their cash contribution back through a tax claim.
“The tribunal’s decision effectively reduces the ’return’ through the tax claim to either £14 or £12.
“Therefore, if the investor was looking for the tax claim to cover their cash investment in the structure, they have clearly not achieved this aim.”