REV BN 16: Countering Film Tax Avoidance

Who is likely to be affected?

1. The measures will affect those producing or investing in films using financial structures described in the Inland Revenue's Technical Note issued on 2 December 2004. It will also apply to individuals in Limited Partnerships, Limited Liability Partnerships, or any other partnerships where the partner does not spend a significant amount of time working in the trade.

General description of the measure

2. As announced in the 2004 Pre-Budget Report, the measures counter tax avoidance schemes which seek to:

• obtain relief more than once on expenditure on any qualifying film;
• use film reliefs alongside arrangements to defer tax for more than 15 years;
• enable companies using 'exit' schemes intended to convert the deferral of tax into a permanent tax advantage; and
• enable partnerships to get loss relief for money not really at risk.

3. A change is also being made to align some of the rules on relief for large budget films with the rules for small budget films.

Operative date

4. The measures will be effective from the date of the announcement in the Pre- Budget Report (2 December 2004) but the terms of the commencement will be different for the different types of scheme being countered.

5. For schemes seeking to claim relief more than once on any film, the legislation will apply in general to claims made on or after 2 December 2004, except where the film was in production at that date.

6. For schemes seeking to defer tax for more than 15 years the legislation will come into effect for claims made on or after 2 December 2004, except where, before that date, the claimant has entered into an unconditional agreement guaranteeing income arising from the film in respect of which the claim is made.

7. For schemes enabling groups of companies to exit from tax deferral schemes, the legislation will apply to any exits and disposals of film rights out of those groups on or after 2 December 2004.

8. For schemes enabling partners to obtain loss relief for money that is not really at risk, the legislation will apply to partnership contributions made on or after 2 December 2004 and to agreements and arrangements made on or after that date in respect of contributions made earlier.

9. The measure aligning the rules for relief on large budget films with the rules for small budget films will apply to all films starting principal photography on or after 2 December 2004.

Current law and proposed revisions

10. The current film tax reliefs are at sections 40A to 43 Finance (No.2) Act 1992, section 48 Finance (No.2) Act 1997 and sections 99 to 101 Finance Act 2002. Without the film reliefs, expenditure on producing or buying a film would be capital expenditure, eligible for capital allowances. The film reliefs treat such expenditure as revenue expenditure and give rules as to how this expenditure can be written off.

11. The provisions in F(No.2)A 92 allow expenditure on the production or acquisition of a qualifying British film, which would otherwise be on capital account, to be treated as a revenue expense and either matched against income from the same film of written off over three years. Section 48 F(No.2)A 97 allows production or acquisition expenditure on a low budget qualifying British film to be written off immediately it is completed or acquired. Partners of Film Partnerships which invest money in films can get relief for trading losses under section 380 ICTA 1988, or under section 381 ICTA 1988 for the early years of a trade, or under section 72 Finance Act 1991 against their capital gains.

12. The provisions to counter multiple claims to relief will allow only one person to claim relief under section 42 or section 48 in respect of any one film, either for production expenditure or for acquisition expenditure, but not both.

13. The provisions to counter deferral beyond 15 years will, in cases where there is a guaranteed stream of income, restrict the relief in the proportion that 15 years bears to the length of the income stream.

14. The provisions to prevent groups of companies turning the tax deferral into a tax gain will require the companies to bring in the value of the film rights not yet brought into the tax charge as a trading receipt at the time of the exit event.

15. The provision to counter partnership abuse will prevent partners obtaining loss relief in excess of their capital contribution for which they are fully at risk, and also prevent such non-risk contributions from being counted when computing the exit charge under section 119 FA 2004 ('Exit charge for individuals benefited by film relief').

16. The measure aligning relief under section 42 with that under section 48 will ensure that the maximum amount of relief will be restricted to the amount incurred before the film was completed and payable within 4 months of completion.

Further advice

17. If you have any questions about these changes, please contact Graham Dean on 020 7147 2568. Information about Budget measures is available on the Inland Revenue website Inland Revenue website.