The GAAR advisory panel has published its opinion on arrangements involving a split sale of interests in a film-related partnership, designed to avoid income tax relating to future income from the partnership. The panel’s conclusion was that the entering into and carrying out of the arrangements was not a reasonable course of action in relation to the relevant tax provisions.
The taxpayer in this case was a member of a limited liability partnership (LLP) set up for the purpose of ‘acquiring and exploiting a portfolio of qualifying British film’. The LLP used member capital contributions, funded by capital account contribution loans from a UK bank, to enter into a sale and leaseback arrangement with a film studio. The sale and leaseback arrangements, under which lease rentals were payable to the LLP, generated a large loss in the LLP in 2006/07. The taxpayer claimed loss relief against his other income in that tax year.
The LLP members entered into refinancing arrangements during 2013/14 which split the sale of their LLP capital accounts (effectively the benefit of future drawings from LLP profits) from the sale of their residual interest in the LLP.
The taxpayer sold his LLP capital account to the capital account purchaser for market value. The purchaser acquired the economic benefit of the taxpayer’s future LLP drawings, while the taxpayer retained the legal entitlement to future drawings and to his LLP interest. This was followed by the sale of the taxpayer’s LLP interest to an interest purchaser for £1. Each member made a £40,000 contribution to the LLP, to which the interest purchaser was entitled following the sale.
The panel agreed with HMRC that the arrangement was an attempt by the taxpayer to avoid income tax on the sale relating to future LLP income on which he was taxable under the original arrangements. The up-front tax deduction given on the capital account contribution loan was a relief in the form of a deferral. The taxpayer was subject to income tax on future profits derived from the rental payments to the LLP. Anti-avoidance legislation was in place to ensure that proceeds from the sale of rights to future profits should have been treated as taxable income.
The panel concluded that:
the entering into of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions; and
the carrying out of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions.
The GAAR advisory panel has published its opinion on arrangements involving a split sale of interests in a film-related partnership, designed to avoid income tax relating to future income from the partnership. The panel’s conclusion was that the entering into and carrying out of the arrangements was not a reasonable course of action in relation to the relevant tax provisions.
The taxpayer in this case was a member of a limited liability partnership (LLP) set up for the purpose of ‘acquiring and exploiting a portfolio of qualifying British film’. The LLP used member capital contributions, funded by capital account contribution loans from a UK bank, to enter into a sale and leaseback arrangement with a film studio. The sale and leaseback arrangements, under which lease rentals were payable to the LLP, generated a large loss in the LLP in 2006/07. The taxpayer claimed loss relief against his other income in that tax year.
The LLP members entered into refinancing arrangements during 2013/14 which split the sale of their LLP capital accounts (effectively the benefit of future drawings from LLP profits) from the sale of their residual interest in the LLP.
The taxpayer sold his LLP capital account to the capital account purchaser for market value. The purchaser acquired the economic benefit of the taxpayer’s future LLP drawings, while the taxpayer retained the legal entitlement to future drawings and to his LLP interest. This was followed by the sale of the taxpayer’s LLP interest to an interest purchaser for £1. Each member made a £40,000 contribution to the LLP, to which the interest purchaser was entitled following the sale.
The panel agreed with HMRC that the arrangement was an attempt by the taxpayer to avoid income tax on the sale relating to future LLP income on which he was taxable under the original arrangements. The up-front tax deduction given on the capital account contribution loan was a relief in the form of a deferral. The taxpayer was subject to income tax on future profits derived from the rental payments to the LLP. Anti-avoidance legislation was in place to ensure that proceeds from the sale of rights to future profits should have been treated as taxable income.
The panel concluded that:
the entering into of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions; and
the carrying out of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions.
