BIM56530 - Film and audio products: avoidance: successive acquisitions

FA02/S101

Legislation was introduced by FA02/S101 to stop schemes which were being marketed in 2002 and which were seeking to obtain relief under F2A97/S48 (‘Section 48’ – see BIM56380) on multiple acquisitions of the same film. In effect, the schemes were seeking to obtain multiple sale and leaseback deals on each film, and were an early form of double (or rather multiple) dipping – see BIM56360.

The legislation

The legislation applies to acquisition expenditure, incurred on or after 30 June 2002, on the master versions of films. It restricts relief under Section 48 to:

• the first acquisition by the producer, and
• the first acquisition directly from the producer.

The rules from CAA01/S5 are imported to determine the time when acquisition expenditure is incurred for the commencement of this provision. This replicates the definition of when expenditure is incurred generally for the purposes of Section 48 relief (see BIM56385).

It should be noted that where relief under Section 48 is prohibited by this rule, it is not possible to obtain relief under the 3 year rule in F2A92/S42 (‘Section 42’ – see BIM56330) on the prohibited expenditure. This is because relief for films costing £15m or less to produce can only be given under Section 48, apart from any expenditure in excess of the total production expenditure which may be relieved under Section 42 ( BIM56335). Acquisition expenditure prohibited under the rule can be relieved under F2A92/S40B ( BIM56215 and BIM56230). In practice you are unlikely to see this as multiple acquisition arrangements are unlikely to arise outside of tax avoidance schemes.

The double dipping rules introduced on 2 December 2004 were more wide ranging than FA02/S101, and effectively made it redundant. FA02/S101 was repealed by FA05 for claims to relief on or after 2 December 2004 (BIM56360), except for films within the transitional rules, and for which the provision continues to apply.

Meaning of ‘the producer’

The key to applying this legislation is in identifying the person who will be regarded as the producer. The producer is defined in FA02/S101 as the person who commissions the making of the film and is entitled to control its exploitation. This will be the person who makes the initial decision to go ahead with making the film and who will benefit from the rights to exploit the finished product – in effect the controlling mind behind the making of the film. Usually, this person is called the ‘commissioning producer’, or occasionally the ‘commissioning distributor’.

Films are almost invariably made by special purpose companies (production companies) set up for the sole purpose of making a single film. This company will generally be controlled and usually owned by the commissioning producer, or in a co-production, by the commissioning co- producers. Often the person commissioning the film will be a film distributor, such as one of the large US studios, or for a small independent film it might even be an individual or group of individuals.

The production company will either make the film on behalf of the commissioning producer (that is, simply providing production services) or may make the film as principal. Following completion of the film, the production company will either sell and lease back the film itself, or sell it to a commissioning producer/distributor who then sells and leases the film back. The latter structure is common with overseas producers who do not want the profits from the film to be taxed in the UK.

The legislation therefore allows an acquisition by the (commissioning) producer and an acquisition from the (commissioning) producer. In practice, it is rare for a producer that acquires the film to claim Section 48 relief. If it is resident, it will obtain full relief on the sale under F2A92/S40B (see BIM56243), and a claim under Section 48 would be pointless. However, the legislation also allows for relief where the acquisition is from a person (the commissioning producer) who need not be the immediate maker of the film (that is, the production company).

The (commissioning) producer has to be the person who commissions the making of the film and is entitled to control its exploitation. This person ought to be reasonably easy to identify from the contractual and practical arrangements for making the film. It is not, however, sufficient to merely have a contract which states that ‘X is the commissioning producer’, the test of commissioning producer is a practical one based on certain actual activities (commissioning) and rights (entitlement to exploit). It would be unusual, for example, for a third party financier to meet the commissioning producer requirement as they neither commission the film nor have any practical control over how it is exploited. Despite this, we have seen schemes (primarily related to double dipping, but also GAAP schemes – see BIM56535) where it is argued that bank subsidiaries, passive partnerships and brass plate companies in tax havens are the producer.

Nonetheless, there may be a number of persons, particularly in a film making group or co- production arrangement who can be genuinely considered to be the producer for the purposes of Section 101. The master negative of the film may be assigned between such parties involved in the production without triggering an acquisition directly from the producer, although only the first such ‘producer’ that acquires the film would be entitled to relief under Section 48. A sale by any person within such a structure to a person outside the structure is the acquisition directly from the producer.

Any cases where it is argued that a person is the producer who does not satisfy the necessary tests (commissioning and control), and there is an attempt to obtain relief more than once on the same film, should be referred to CT&VAT (Technical).

Example 1

An American film studio with its own distribution arm buys the rights to a screenplay. The studio commissions two co-producers to make the film. The co-producers set up a special purpose company to carry out the production. On completion of the film the special purpose company sells the film to a distribution subsidiary of the studio. This subsidiary then carries out a sale and leaseback with a film partnership (see BIM56400 onwards), and arranges distribution of the film.

In this example the studio is the producer as defined by FA02/S101. However, an acquisition of the master negative by the studio subsidiary (or the co-producers) from the special purpose company will be an acquisition by the producer for the purpose of the legislation. The sale by the distribution subsidiary will be the first acquisition directly from the producer.

Example 2

Two co-producers enter into an agreement to produce a film and set up a special purpose company for that purpose. Subsequently, an agreement is entered into to provide funds for the production whereby the person providing the finance has the right to acquire the completed master negative.

In this case the persons who commissioned and have the initial exploitation rights in the film are the co-producers. The production financing agreement is the means by which they seek to exploit the completed master negative. A sale of the master negative to the person providing the finance, whether by the co-producers or the special purpose company, will be an acquisition directly from the producer. Any subsequent sale will not qualify for relief under F2A97/S48.