InSamarkand Film Partnership and others v HMRC[2017] EWCA Civ 77 (24 February 2017), the Court of Appeal found that two film partnerships had not been trading so that the scheme they had implemented failed.
Two film partnerships had acquired rights in Oliver Twist,The Queen and Irina Palm. In each case, the films were acquired as part of a single transaction which encompassed their acquisition and their associated leaseback in return for fixed, increasing, secured and guaranteed rental payments for a 15 year period.
The partnerships were marketed to wealthy individuals resident but not domiciled in the UK, who wished to generate substantial losses to set against their taxable income by taking advantage of the 100% first year allowance available on expenditure for the production and acquisition of a film (ITOIA 2005 ss 130 to 144). Under s 134, this favourable treatment is only available to taxpayers carrying on a trade. The issue was therefore whether the partnerships were carrying on a trade. Both the FTT and the UT had found that no trade was established.
The Court of Appeal observed that Eclipse [2015] EWCA Civ 95 is authority for the proposition that whether or not an activity constitutes a trade ‘depends upon an evaluation of all the facts relating to it against the background of the applicable legal principles’.
The court rejected the taxpayers’ contention that the FTT had been guilty of a recharacterisation of the transactions ‘into something else’. It found that the FTT had simply expressed ‘the ultimate inference of fact which they drew from the totality of the primary facts which they had found’. It also refused to take into account the borrowings made and the losses actually incurred by the partners in their personal capacities. The fact that the partnerships had no legal personality did not mean that the partnership business was not separate from the affairs of the partners.
Finally, the taxpayers’ application for judicial review also failed. The guidance they relied upon contained a ‘health warning’ that it did not apply in cases of suspected tax avoidance and HMRC had reasonable grounds to suggest tax avoidance.
Why it matters: The Court of Appeal reiterated the principles set out in Eclipse and refused to distinguish this case from it. In doing so, it refused to consider in isolation the purchase and leaseback of the films, as ‘inherently trading activities’.
InSamarkand Film Partnership and others v HMRC[2017] EWCA Civ 77 (24 February 2017), the Court of Appeal found that two film partnerships had not been trading so that the scheme they had implemented failed.
Two film partnerships had acquired rights in Oliver Twist,The Queen and Irina Palm. In each case, the films were acquired as part of a single transaction which encompassed their acquisition and their associated leaseback in return for fixed, increasing, secured and guaranteed rental payments for a 15 year period.
The partnerships were marketed to wealthy individuals resident but not domiciled in the UK, who wished to generate substantial losses to set against their taxable income by taking advantage of the 100% first year allowance available on expenditure for the production and acquisition of a film (ITOIA 2005 ss 130 to 144). Under s 134, this favourable treatment is only available to taxpayers carrying on a trade. The issue was therefore whether the partnerships were carrying on a trade. Both the FTT and the UT had found that no trade was established.
The Court of Appeal observed that Eclipse [2015] EWCA Civ 95 is authority for the proposition that whether or not an activity constitutes a trade ‘depends upon an evaluation of all the facts relating to it against the background of the applicable legal principles’.
The court rejected the taxpayers’ contention that the FTT had been guilty of a recharacterisation of the transactions ‘into something else’. It found that the FTT had simply expressed ‘the ultimate inference of fact which they drew from the totality of the primary facts which they had found’. It also refused to take into account the borrowings made and the losses actually incurred by the partners in their personal capacities. The fact that the partnerships had no legal personality did not mean that the partnership business was not separate from the affairs of the partners.
Finally, the taxpayers’ application for judicial review also failed. The guidance they relied upon contained a ‘health warning’ that it did not apply in cases of suspected tax avoidance and HMRC had reasonable grounds to suggest tax avoidance.
Why it matters: The Court of Appeal reiterated the principles set out in Eclipse and refused to distinguish this case from it. In doing so, it refused to consider in isolation the purchase and leaseback of the films, as ‘inherently trading activities’.
