BIM37785 - Wholly & exclusively: duality of, or non-trade, purpose: loans/advances to others: by film writer to company to produce a film
Artistic director's loans to film-company used to 'showcase' his talent
It is essentially a question of fact whether a particular
transaction or activity falls within the taxpayer’s trade
profession or vocation. Expenditure on matters that fall outside is
not allowable.
In the case of Lunt v Wellesly [1945] 27TC78, Wellsley was a
film writer who decided to set up as an artistic producer. An
artistic film producer was described by the Commissioners as a
person: ‘who conceives the type of picture to be made,
acquires a story or sometimes writes a story, engages a cast, with
power to dismiss them if need be, and supervises the designs of the
scenes and costumes, and so on; and that in doing this it is his
creative conception which appears on the screen.’
Wellesly acquired the rights to a novel, ‘The general
goes too far’, and dramatised it for filming. To produce the
film, Wellesly established a company of which he was one of the two
directors. Once it was known that Wellesly had commenced work on
the project failure to complete would have been disastrous to his
prestige and prospects in the film industry. The capital of the
company being insufficient to allow completion of the project,
Wellesly made various unsecured interest free advances to the
company and also guaranteed its bank overdraft. The film was
ultimately produced at a loss to the company and Wellesly not only
failed to recover the advances that he had made to the company but
he was also called upon to pay up under the guarantee to the bank.
The court found that there was sufficient evidence to uphold
the Commissioners’ decision that the sums expended by
Wellesly were wholly and exclusively for the purpose of his
profession and were not on capital account.
MacNaghten J explained the court’s reasons for
believing the expenditure to satisfy the wholly and exclusively
test. The judge drew an analogy with a professional musician who,
wishing to favourably impress critics, hires a concert hall and
puts on a performance to which paying customers are also admitted.
The judge thought it clear that any profit from the venture would
be taxable and so any loss should be allowable. MacNaghten J
thought the expenditure produced results that were all too
transitory for the expenditure to be considered capital.
For detailed guidance on the capital/revenue divide see
BIM35000 onwards.
For those who do not have ready access to tax case volumes,
the part of MacNaghten J’s judgement on which the above
guidance is based is set out below, 27TC mid to lower part of page
83 and why the expenditure was not on capital account, 27TC foot of
page 83 and head of page 84:
Ignorant of the intricacies of the film
industry, I may be making a mistake in thinking that the present
case is analogous to that of a professional musician who gives a
recital at the Wigmore Hall, or, bolder still, at the Albert Hall,
and goes to great expense in arranging for such recital, and gives
that recital for the purpose for which the Respondent here said he
set about to produce the film ‘The High Command.’ The
musician hopes that the critics will be favourably impressed by his
performance. I am assuming a case where a charge is made to persons
other than the critics for coming in, and the recital resulted in a
profit. In those circumstances I apprehend the Inspector of Taxes
would demur very much if the professional musician proposed to
exclude any profit made by the recital. If that is so, and the
recital instead of producing a profit resulted in a financial loss,
I do not see how it could be said that the loss that the musician
incurred was not a loss to be included in the computation of the
profits for that year. So, here, the artistic film producer
advanced money in order that his talent as an artistic film
producer might become known to the public, or at least to the
trade, and lost it. That disposes of the first point raised in this
case, namely, were these sums amounting to £1,500 and the
guarantee to the bank of £1,253 moneys wholly and exclusively
expended by the Respondent for the purposes of his profession. The
General Commissioners have answered that question in the
affirmative. I think there was ample evidence to support their
finding of fact….
…I think there is some difficulty in
saying that this money was employed as capital in the Respondent's
profession of artistic film producer. Mr. Hills [counsel for
the Crown],
in reply, put it, I think, rather more
attractively by suggesting, if it did not come within the actual
words of [what is now ICTA88/S74 (1)(f)],
apart altogether from that Rule, it ought to
be looked upon as a capital payment or acquiring a capital
asset.
Whether a sum is capital or not must depend
upon the particular facts of the case. What does the Respondent get
by the expenditure of this money? In this transitory world nothing
is permanent, but, of all the fleeting objects before our eyes,
what the Respondent was getting seems to me to be almost the most
transitory. He was to produce a film which the trade would consider
showed that he was a talented artistic producer of films, so that
the trade, impressed with his merits as an artistic producer, would
be disposed to employ him. The money was expended for that, to gain
the good opinion of the trade. To describe it as capital in the
business of an artistic film producer seems to me to be a misuse of
language, however widely the word be understood.
