BIM56430 - Film and audio products: tax deferral schemes for qualifying films: terms of lease or licence

Film sale and finance leaseback arrangements are tax deferral schemes. In these schemes the tax benefit to the investor from the expenditure arises in either the first year or the first three years following the investment ( BIM56205), whereas tax arising from the lease arises in later years. In most schemes most or all of the income arising under the lease is guaranteed irrespective of whether the film is successful or not, and (providing there is no avoidance) the future tax liability is similarly guaranteed.

Commercially when an income producing asset is leased or licensed, we would expect the rental payments to be spread over, and to some extent matched with, the income producing life of that asset, that is, the term of the lease reflects the economic use of the asset and the rentals are spread over the term of the lease. For almost all films, even large budget ones, the lion’s share of income will be generated in the first few years, with relatively small income generated – possibly for a long period – after this.

In practice we have normally accepted lease periods of up to 15 years (shorter periods of tax deferral may be unattractive to investors – see BIM56455 and BIM56460) with an annual escalation of lease rentals of up to 5%.

There can be a significantly increased benefit to the investor if the period is increased beyond 15 years as the tax deferral takes the character of a long term loan with a fixed amount of interest which is independent of the duration of the loan (see BIM56455 and BIM56460). Clearly this also substantially increases the long term cost to the Exchequer, and very long term deferrals would begin to take the appearance of a tax saving rather than deferral. The Government introduced legislation with effect from 2 December 2004 to prevent schemes which gave tax deferrals greater than 15 years. This legislation is described at BIM56750 onwards.