BIM56460 - Film and audio products: tax deferral schemes for qualifying films: company example

This example is illustrative of a sale and leaseback arrangement which accesses relief for qualifying British films to obtain a tax deferral. The example is for a company using films costing more than £15m to produce to which F2A92/S42 (‘Section 42’ – see BIM56330) applies. There is an example of a similar arrangement for a partnership, based on a less expensive film at BIM56455.

The example is simplified to show the key elements of a sale and leaseback scheme, although particular details and amounts may vary on a case to case basis. We do not give pre-clearance on any film schemes, and, owing to the high prevalence of tax avoidance involving film schemes, each case should be examined carefully on its own facts.

The structure is very similar to that for a partnership.

1. Company B is a subsidiary of a banking group of companies (the bank) and purchases a film costing £100m, say, from film producer F.
2. B borrows £100m from another company in the bank’s group of companies in order to fund this.
3. B immediately leases the film back to F for 15 years.
4. F places £92m (that is, 92%) on deposit to secure the future lease rentals. F keeps the balance of £8m (8%) as its net benefit from the sale and lease back transaction.
5. B has spent £100m on acquiring the film, and makes a claim to deduct this expenditure under Section 42 (3 year write off – see BIM56330) in computing the profits and losses of its trade of exploitation of the master versions of films.
6. Lease rentals are payable annually and set to increase at no more than 5% each year (see BIM56430).
7. In the first few years B has little, or no, net income from its trade, so it makes a loss of £100m which it surrenders by way of group relief against other taxable profits of the bank (that is, profits of the rest of the group of companies, of which B is part).
8. In this way B reduces the bank’s tax liability by £30m (£100m times 30%).
9. As the lease rentals are received by B, these are fully earmarked to pay off interest and capital on B’s loan of £100m. Part of the rentals are used to pay interest, which B deducts as a trading expense from its trading income, and part of the rentals repays capital. Amounts used to pay interest are deductible by B in computing its trading profits, but amounts used to pay off capital are not.
10. The full amount of lease rentals received is, however, taxable as B’s trading income.
11. In fact B will only receive sufficient lease rentals to repay £90m of the loan – the balance of £10m is effectively the bank’s investment in the film (analogous to the cash element of the contribution made to the partnership by the partners in the example at BIM56455).
12. After 15 years, B will therefore pay additional tax of £27m (£90m at 30%). In practice, B may not have sufficient funds to pay this tax and repay the loan – so the actual cost is likely to be passed on to other companies in the banking group.
13. At the end of the 15 years B is therefore £7m out of pocket overall compared to not having entered the arrangement (it has received tax relief of £30m, paid additional tax of £27m and contributed a net £10m to the making of the film).
14. This is the right result from the Exchequer’s perspective as B (or rather the bank) has contributed a net £10m to the cost of the film, and has received tax relief at 30% on this.
15. In effect B has had a low interest loan of £20m over 15 years, funded by the Exchequer, as an incentive to invest in a film. The bank will aim to reinvest those funds to obtain a higher return.
16. Although the bank as a whole has used £100m of its funds to do this – in effect £90m of the capital has been lent to F as it would in the normal course of the bank’s business. Only £10m has actually been paid away irrevocably. The overall effect is therefore similar to the partnership tax deferral described at BIM56455

Additional points

The above example produces the same result for the bank whether or not the film is successful.

The accounts of the bank and of B are likely to differ significantly from the tax treatment described (see BIM56410).

Although most schemes seen have involved banking groups, other groups of companies have also entered into similar transactions.

Finally, a number of schemes have also been devised in which the subsidiary purports to be the producer/licensor of a film with a similar tax deferral structure as sale and leaseback schemes (see BIM56405). Any such schemes should be referred to CT&VAT (Technical) for advice.