In Samarkand Film Partnership No 3, Proteus Film Partnership and three partners v HMRC [2015] UKUT 211 (29 April 2015), the UT found that the partners were not entitled to loss relief and that they had not had a legitimate expectation that the relief would be available.
The issue was whether two partnerships, which had acquired and leased films under sale and leaseback arrangements, were entitled to loss relief in respect of losses which arose on the acquisition of the films. If so, their partners could claim sideways relief under ICTA 1988 ss 380 and 381 to set the losses against their taxable income from other sources.
The purchase of an asset which a person intends to exploit over a period of time is normally treated as capital expenditure. However, ITTOIA 2005 s 134 provides that in the case of a film, the expenditure should be regarded as revenue in nature. Furthermore, ss 138 and 140 allow loss relief to be claimed in advance of the normal rules. Relief is not available, though, if the expenses are not incurred wholly and exclusively for the purposes of a trade or if the losses are not connected with or arising out of a trade.
The UT found that the FTT had been entitled to conclude that the partnerships had not been carrying on a trade, so that no loss relief was available to the partners. This was so, even though a transaction of that type could have constituted a trade. In particular, it accepted the FTT’s factual finding that the commercial nature of the agreements was ‘the payment of a lump sum in return for a series of fixed payments over 15 years’.
No further arguments were required following the release of the Court of Appeal’s decision in Eclipse Film Partners [2015] EWCA Civ 95, which recommended a ‘realistic approach to the transaction’. The UT added that even if the partnerships had been conducting a trade, they would not have been doing so on a commercial basis, as the transactions were intended to produce a loss in net present value terms. This analysis was not affected by the fact that the individual partners were accruing ‘extra benefits’ as a result of the tax reliefs. Those reliefs were obtained by ‘deliberately causing the partnership to trade in an uncommercial manner’.
The two judges disagreed as to whether, in any event, one of the partnerships had incurred the expenditure for the acquisition of a film (as opposed to that of an income stream). The president exercised its casting vote on this issue, finding that the partnership had incurred the expenditure for the purchase of a film. This was because it had acted bona fide in the belief that it was acquiring valuable rights.
The taxpayers also claimed judicial review on the ground that HMRC’s denial of relief was at odds with its own published guidance in HMRC’s Business Income Manual (BIM). The UT pointed out that unlike IR20, which was aimed to give taxpayers guidance on residence, the BIM was intended for the use of HMRC staff – although it was made available to the public. The UT observed that the BIM stressed in several places that the relief was aimed at tax deferral only. Furthermore, the BIM included clear statements that transactions involving tax avoidance would be closely scrutinised and that the guidance may not be applied to them. The argument that this statement suggested that HMRC reserved the right to treat similar transactions differently was robustly rejected. ‘Taxpayers may not like that statement but they could not say that they derived a legitimate expectation that was at odds with it.’ Finally, the UT found that HMRC had reasonably thought that tax avoidance was at play. Several features indicated that the aim of the transactions was not tax deferment but tax avoidance.
Why it matters: The appeal failed on both the ‘trading issue’ and the legitimate expectation issue. On the trading issue, the UT simply reiterated the points made by the FTT on the basis of its factual findings. On the legitimate expectation issue, the taxpayers could not rely on HMRC’s description of a plain vanilla transaction (claiming that their arrangements were similar) and ignore the general statement about tax avoidance. They could not ‘take out the plums they liked and ignore the duff they did not’.
In Samarkand Film Partnership No 3, Proteus Film Partnership and three partners v HMRC [2015] UKUT 211 (29 April 2015), the UT found that the partners were not entitled to loss relief and that they had not had a legitimate expectation that the relief would be available.
The issue was whether two partnerships, which had acquired and leased films under sale and leaseback arrangements, were entitled to loss relief in respect of losses which arose on the acquisition of the films. If so, their partners could claim sideways relief under ICTA 1988 ss 380 and 381 to set the losses against their taxable income from other sources.
The purchase of an asset which a person intends to exploit over a period of time is normally treated as capital expenditure. However, ITTOIA 2005 s 134 provides that in the case of a film, the expenditure should be regarded as revenue in nature. Furthermore, ss 138 and 140 allow loss relief to be claimed in advance of the normal rules. Relief is not available, though, if the expenses are not incurred wholly and exclusively for the purposes of a trade or if the losses are not connected with or arising out of a trade.
The UT found that the FTT had been entitled to conclude that the partnerships had not been carrying on a trade, so that no loss relief was available to the partners. This was so, even though a transaction of that type could have constituted a trade. In particular, it accepted the FTT’s factual finding that the commercial nature of the agreements was ‘the payment of a lump sum in return for a series of fixed payments over 15 years’.
No further arguments were required following the release of the Court of Appeal’s decision in Eclipse Film Partners [2015] EWCA Civ 95, which recommended a ‘realistic approach to the transaction’. The UT added that even if the partnerships had been conducting a trade, they would not have been doing so on a commercial basis, as the transactions were intended to produce a loss in net present value terms. This analysis was not affected by the fact that the individual partners were accruing ‘extra benefits’ as a result of the tax reliefs. Those reliefs were obtained by ‘deliberately causing the partnership to trade in an uncommercial manner’.
The two judges disagreed as to whether, in any event, one of the partnerships had incurred the expenditure for the acquisition of a film (as opposed to that of an income stream). The president exercised its casting vote on this issue, finding that the partnership had incurred the expenditure for the purchase of a film. This was because it had acted bona fide in the belief that it was acquiring valuable rights.
The taxpayers also claimed judicial review on the ground that HMRC’s denial of relief was at odds with its own published guidance in HMRC’s Business Income Manual (BIM). The UT pointed out that unlike IR20, which was aimed to give taxpayers guidance on residence, the BIM was intended for the use of HMRC staff – although it was made available to the public. The UT observed that the BIM stressed in several places that the relief was aimed at tax deferral only. Furthermore, the BIM included clear statements that transactions involving tax avoidance would be closely scrutinised and that the guidance may not be applied to them. The argument that this statement suggested that HMRC reserved the right to treat similar transactions differently was robustly rejected. ‘Taxpayers may not like that statement but they could not say that they derived a legitimate expectation that was at odds with it.’ Finally, the UT found that HMRC had reasonably thought that tax avoidance was at play. Several features indicated that the aim of the transactions was not tax deferment but tax avoidance.
Why it matters: The appeal failed on both the ‘trading issue’ and the legitimate expectation issue. On the trading issue, the UT simply reiterated the points made by the FTT on the basis of its factual findings. On the legitimate expectation issue, the taxpayers could not rely on HMRC’s description of a plain vanilla transaction (claiming that their arrangements were similar) and ignore the general statement about tax avoidance. They could not ‘take out the plums they liked and ignore the duff they did not’.
