BIM56445 - Film and audio products: tax deferral schemes for qualifying films: exit schemes
All of the tax benefits to an investor in a film tax deferral
scheme normally arise in the first 3 years of the scheme. After
this, although the investor will continue to receive income, that
income normally has to be applied in entirety in meeting
liabilities (interest and capital repayments) on a loan obtained to
fund most of the investment (see
BIM56405,
BIM56455 and
BIM56460). However, the investor still
has to pay tax on that income; so remaining in the scheme leads to
a net cost to the investor: in effect repayment of the tax
deferred.
A number of complex avoidance schemes have been designed to
enable investors (both individual partners and groups of companies)
to ‘exit' from the schemes, so turning a tax deferral into an
overall tax gain. Legislation was therefore introduced to prevent
individuals trading alone or in partnership or groups of companies
from exiting. This legislation applies from 10 December 2003 for
individuals (FA04/S119 to S123 – see
BIM56600) and from 2 December 2004 for
companies (FA05/S66 to S71 – see
BIM56650). There are no transitional
provisions for these measures.
‘Exit’ is a generic term to describe any set of
arrangements whereby an investor obtains the benefit of loss relief
(or a tax deduction) through using the film tax reliefs which
becomes greater than the amount which is actually lost. Although
specific rules were introduced to counter this in FA04 and FA05, we
have successfully challenged some exit schemes before this. It is
important to continue to monitor the returns of any individuals or
companies that have benefited from film tax reliefs. Cases should
be referred to Anti-avoidance Group (Films) where:
- an individual who has claimed losses from a film partnership or trade ceases to show taxable income, or shows reduced income, from that partnership or trade;
- an individual claims losses from a film partnership in excess of his capital contribution to the partnership;
- at the inception of a partnership there is a guaranteed sale of the interests in the partnership;
- there are arrangements which may lead to the early termination of a lease (or licence);
- a film partnership claims to be, or becomes, non-resident;
- a company owning rights to income from a film on which relief has been claimed is transferred out of a group of companies;
- there is a disposal of any rights to income arising from a film (on which relief has been claimed) by a company or a partnership or an individual trading alone.
