Legislation was announced on 2 December 2004 to prevent
avoidance schemes where partners sought to inflate claims to
trading loss relief by attribution of contributions to the
partnership on which they do not bear the financial risk (
BIM56545). The legislation is not
specific to film partnerships, and detailed guidance on the new
rules is contained at
BIM72600 onwards. This page gives only a
brief overview of the rules with regard to specific points of
application for film partnerships.
The legislation is at FA05/S73 to S78 and in the Partnerships
(Restrictions on Contributions to a Trade) Regulations 2005. These
regulations were also applied to the film exit charge, for
individuals benefited by film relief, by FA05/S79 which inserted a
new section in FA04 at FA04/S122A (see
BIM56635).
The provisions apply to individual partners who are:
For all of these partners the amount of trading loss relief that can be claimed under ICTA88/S380, ICTA88/S381, or FA91/S72 (‘sideways loss relief’) is capped by the partner’s contribution to the trade (that is, the amount which the partner invests as capital in the partnership). The regulations apply restrictions on the amount that is treated as being an individual’s contribution to the trade so as to:
The restrictions apply to all trading losses of a partner who starts trading on or after 2 December 2004. Where a partner is part of a partnership trading both before and on or after 2 December 2004, then the partnership losses are computed as if there was an accounting date on 1 December 2004 – and the new restrictions only apply to the partner’s share of the losses sustained after that date (a partner’s allocation of losses has to be based on the partnership sharing arrangements in place throughout – a partner can’t be allocated just pre-announcement losses).
The key to this legislation is in the restrictions on what is deemed to be a contribution to a trade, and this is contained in the regulations. Although generally the schemes we have seen involve loans, the legislation also caters for reimbursed contributions which are not loans. The restrictions apply to arrangements in place when the contribution is made, and also arrangements made subsequently which result in the partner not having met the cost of his contribution himself.
Where a partner’s capital contribution is financed in part or whole by a loan, the contribution is reduced to the extent that:
A loan includes not just the immediate loan to finance the
contribution, but also any replacement loan or loans.
There are a few points to note here.
It is sufficient if any kind of arrangements are in place
where someone else
may bear the cost of repayment. This is because
many schemes merely have options or guarantees that may be
exercised or come into play in certain circumstances (albeit in
practice the exercise may be certain). This does not mean that a
normal commercial arrangement where a person takes out commercial
insurance to cover loan repayments in the event of an unlikely or
unforeseen event (such as long term illness) would be caught. There
the person taking out the insurance is in effect covering the risk
and cost himself (in most instances insurance will not lead to
repayment). However, if the terms of the insurance were
uncommercial in that the costs would almost inevitably be borne by
the ‘insurer’ then the rules may apply. It will
generally be obvious which circumstance applies.
The second and third tests are simple factual tests –
there is no need to establish any arrangements or agreements.
Assumption or release of a loan here do not require formal legal
documentation – the test is a practical one of what has
actually happened.
The fourth test is to prevent those schemes where a loan is
said to be repayable on full recourse terms, but in practice never
is. Terms of loans can vary significantly. All of the terms of a
loan should be considered including rates of interest and the
period of the loan, but remembering that the main focus is on the
actual repayment terms.
The regulations stipulate that the cost incurred in repaying
the loan must be substantially less than it would be under
arm’s length repayment terms. Generally, cases where this
type of avoidance occurs will be obvious. Factors such as perpetual
or very long term roll up of interest, and loans from
non-commercial (particularly off-shore entities or trusts) need
careful attention. Although the test is over 5 years, the terms
over a longer period may also be relevant.
The restrictions also apply where a capital contribution is
not financed by a loan, but is or may be subsequently reimbursed.
The contribution is reduced to the extent that:
In all cases, ‘another person’ can be a partnership, and includes the partnership to which the contribution is made and of which the individual is a partner. A particular form of scheme caught by this is one where a partner has a right to receive an amount on the winding up of a partnership, or the sale of his partnership interest, irrespective of the success of the partnership and the share he has contributed to it (that is, where the cost is ultimately borne by someone else).
These regulations are intentionally wide ranging, and specific exemptions are required to ensure that acceptable situations in which partners’ may not have to bear the finance cost of their capital contributions are not caught unintentionally. In particular, an individual’s contribution is not restricted where:
The first prevents situations where friends or family
contribute. For example, a person may borrow money secured on his
home (that is, a mortgage) for which both he and his spouse/partner
may be jointly liable. Although, someone else may be liable to
repay the loan, the restriction does not apply because this is in
the normal course of a family relationship.
The second ensures someone who cannot pay and therefore has a
loan written off, for example, through insolvency, is not caught.
However, if the person initially could not have possibly repaid the
loan when it was made, then the repayment, assumption or release of
the loan by someone else will trigger the restriction.
The final exemption is primarily directed at film sale and
lease back partnerships (but may exceptionally apply in some other
circumstances). Under accountancy practice (see
BIM56410), the finance lease rentals
received by the partnership are treated as part repayments of
capital and part of interest on a loan. Withdrawal of the full
rental payments may therefore be shown in the accounts as
reimbursement or withdrawal of partnership capital. However, these
lease rentals are fully taxable on the partner as income of the
trade – so the regulations exclude these sums from the
restrictions.
Most film partnerships are tax deferral schemes, primarily sale
and lease back (see
BIM56400 onwards). Attempts to avoid the
tax deferral are prevented by the exit charge (
BIM56600 onwards). There are schemes
where investors in film partnerships do so on the basis of a
genuine speculative risk investment in films. However, we have also
seen many partnerships, principally production partnerships, print
and advertising/marketing, and film development partnerships, which
are tax avoidance schemes.
Particular care is needed in examining and monitoring these
partnerships. Where avoidance is present, this will usually be
apparent at the outset through arrangements to repay loans.
However, in some schemes arrangements may not be fully apparent
from the information memorandum prepared by the scheme organisers,
particularly schemes in which the loan is not repayable.
Any case where you suspect information is being concealed or
misrepresented, or where there is any evidence of tax evasion,
should be referred immediately to Anti-Avoidance Group (Films) in
accordance with
BIM56505.
