BIM56360 - Film and audio products: deductions for qualifying films: restrictions on relief on or after 2 December 2004: double dipping

References on this page to ‘Section 42’ should be read as including both F2A92/S42 and ITTOIA/S138 and S138A, and ‘Section 48’ should be read as including both F2A97/S48 and ITTOIA/S139 and S140. ‘Claims’ to relief should be read as including allocations of expenditure under ITTOIA/S138 to 140 (see BIM56318), and references to claims under Section 42 include claims under that section as amended by Section 48.

Background

Film tax relief under Section 42 and Section 48 is normally accessed by third party financiers (partnerships of wealthy individuals or large groups of companies – usually banks) using tax deferral schemes (see BIM56400 onwards). In these schemes the financier incurs expenditure on the production or acquisition of the master version of a film and then leases or licences the film back to the film producer or a film distributor. In effect, the film producer obtains a cash benefit by ‘selling’ the tax deduction to a third party with income to shelter.

In the normal course of events, there would appear to be little point in a producer or acquirer claiming relief if his intention was to then sell the master version as he would be entitled to a full deduction under F2A92/S40B to set against the sale proceeds, and would not need the benefit of the accelerated relief (see BIM56243).

However, several tax avoidance schemes were devised which aimed to defer the sale proceeds or shelter them offshore in order that the reliefs might be obtained more than once on a film without a matching receipt. The first such scheme, involving multiple acquisitions, was discovered in the spring of 2002, and was quickly countered by FA02/S101. This measure was introduced late in the Finance Bill process, so was narrowly focussed on the particular scheme, and applied only to relief under Section 48 (see BIM56530).

Several new schemes came to light late in 2004 affecting both relief under Section 42 and Section 48. These schemes had become very widespread with most films produced in 2003 and 2004 using some form of double (or multiple) dipping arrangements. It is doubtful whether these schemes worked technically under the then existing legislation. However, given the prevalence of the schemes, the Government decided to put the matter beyond doubt in FA05. Counter measures were introduced with effect from 2 December 2004 to ensure that the reliefs could not be obtained more than once on any film on or after that date, but subject to transitional rules directed primarily at films which were in production then (see BIM56365).

Any films where you think double dipping may have taken place and which are not caught by the new rules, including films where it is claimed the transitional provisions apply, should be referred to Anti-Avoidance Group (Films).

Anti-avoidance rules

Although the legislation to counter double dipping is complex, the complexity arises primarily from the need to cover all possible scenarios in the transitional provisions. The basic rules are very simple.

• The provisions only apply to claims to relief made on or after 2 December 2004, which are not within the transitional rules (BIM56365).
• Only one person may claim relief under Section 42 (person includes a partnership, an individual or a company).
• Relief can be given for either production expenditure or acquisition expenditure, but not for both.
• A person can only claim relief under Section 42 for expenditure incurred on the production of the original master version of a film if he owns that master version when the film is completed. (The producer does not need to still own the master version when the claim is made.)
• A person can only claim relief for expenditure incurred on his first acquisition of the original master version of a film. It does not matter if the film was acquired (and sold) by someone else before this, provided that person has not already claimed relief under Section 42.
• Relief is given on a first come first served basis. The first person that makes a valid claim ( BIM56317) to relief under Section 42 (or submits a return making a valid deduction – BIM56318) is the only person entitled to relief. That person can claim relief over a number of relevant periods (see BIM56330 and BIM56380), but no other person can claim relief once the first claim is made. Exceptionally, if a person both produces a film and having disposed of it, subsequently reacquires the film, that person may only obtain relief under Section 42 or Section 48 for whichever is claimed first out of his production expenditure and his acquisition expenditure.
• Any expenditure incurred on the production or acquisition of a film which cannot be relieved under Section 42 or Section 48 by virtue of these rules is still relievable under the income matching and cost recovery rules in F2A92/S40B (see BIM56215 and BIM56230) providing the master version is not trading stock ( BIM56255).
• Although the rules only affect claims made on or after 2 December 2004, where a claim is made before 2 December 2004 it will prevent a later claim unless that later claim is exempted by the transitional rules.

The effect of these provisions is that if relief is claimed under Section 42 for production expenditure, there can be no claim for acquisition expenditure on the same film. If the first claim is for acquisition expenditure there can be no claim for production expenditure or for expenditure on any other acquisition of the film.

Order of claims

If, exceptionally, two or more claims under Section 42 are received simultaneously HMRC can decide which claim is to have priority. Any such cases should be referred to CT&VAT (Technical).

The first come first served rule is to be applied strictly, but should not cause problems in practice as the film producer will normally decide whether it wishes to claim the relief itself or whether an acquirer will claim the relief (e.g., through a sale and lease back). Similarly, it is likely that any acquirer wishing to claim the relief will also obtain assurances from the seller that no-one else has claimed or will claim relief on the film.

It is incumbent on the person claiming the relief to ensure that no other previous or subsequent owner of the film has done so. Where a claim is made and you are uncertain whether any previous or subsequent owners of the film have already done so, you should make necessary enquiries to confirm the position.

Multiple acquisitions

These changes supersede the rule preventing Section 48 relief for multiple acquisitions ( BIM56530), so FA02/S101 is repealed for claims to relief on or after 2 December 2004 except for claims subject to the transitional rules.

Examples showing application of the new rules are at BIM56375.