Court blow for film scheme investors

The courts have dismissed another appeal by investors in disputed film schemes, maintaining the tax authority's strong recent record in litigating against tax evasion.

The upper tax tribunal sustained a 2011 ruling in favour of HM Revenue & Customs, judging that two film partnerships promoted by Future Capital Partners were not carrying out a trade - a pre-requisite for investors to qualify for tax reliefs.

Like many film financing partnerships promoted during the 2000s, Proteus 1 (which invested in a remake of Oliver Twist) and Samarkand 3 (which acquired interests in The Queen and Irina Palm) followed a "sale and leaseback" model, where film rights were bought and sub-licensed.

Richard Morley, a partner at accountants BDO, said the ruling is "very significant" as it could affect a number of similar schemes. "If the decision is not appealed, it would be logical for [HM Revenue & Customs] to follow up with follower notices."

Where schemes are deemed sufficiently similar to ones successfully litigated against, HMRC can send "follower notices" - demands to settle disputed tax associated with their investments - to their participants.

Both FCP schemes, which were highly leveraged, incurred large upfront losses against which partnership investors could claim income tax relief. Unpaid tax, plus interest, is claimed by the Revenue.

Michael Avient, personal tax partner at UHY Hacker Young, said the upper tribunal's decision illustrates its unwillingness to overturn first tier tribunal rulings made on the basis that no trade was carried out.

"It sends a strong message that if your scheme was found not to be trading at the first tribunal, it's very unlikely you will be able to overturn the decision on appeal."

An appeal for a judicial review, on the grounds that HMRC was breaching its guidance and practice in denying tax reliefs, was also refused.

Successful applications for judicial reviews - which can be brought against a government authority on grounds of illegality, irrationality or procedural impropriety - have also been made against HMRC's use of accelerated payment notices to collect tax associated with disputed arrangements.

Reviews brought on behalf of investors in Ingenious film partnerships and in the Liberty scheme, involving hundreds of millions in contested tax, are currently pending.

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