BIM56555 - Film and audio products: avoidance: partnerships: losses derived from exploiting a licence: schemes

This is another type of partnership avoidance scheme which, while based on the film industry, used general accounting and tax principles rather than the special rules for films in an attempt to avoid tax. The scheme itself could, in principle be used with products other than films.

This scheme appears to have been marketed first in 2002/03. In 2003/04 several new schemes were marketed and the Government acted to stop all of these on 10 February 2004. As with the other schemes described in this chapter, we have doubts as to whether they worked as intended, and Anti-Avoidance Group (Films) would like to see any cases which appear to be similar (whether or not related to films) to those described below.

Description of scheme

This is a brief and broad overview of the way the schemes were intended to work. These schemes were run jointly with large US studios, and were based on expenditure on prints and advertising (P&A). This is the cost of making copies of the film for exhibition and of marketing the film. P&A spend is often as large as, or larger than, the cost of producing the film.

• A partnership of wealthy individuals is set up to market a film.
• A studio grants the partnership licences to market and share in the profits of a slate of films.
• Individual investors invest capital in the partnership – 30% out of their own cash and 70% from loans from a bank. The bank loans are guaranteed by the studio.
• The partnership pays all the money to a marketing subsidiary of the US studios.
• The marketing subsidiary spends money on P&A as agent for the partnership, but also adds more in its own right.
• In return for this expenditure the partnership gets a minimum income guarantee over 7 years – sufficient for the partners to repay their loans – but weighted towards the end of the 7 year period, plus a small share of distribution profits.
• The partnership claims an up front deduction for its marketing expenditure as a normal revenue Schedule D Case 1 deduction, and as it has no income to begin with makes a loss of £100.
• The partners claim their share of the ‘trading’ losses against their other income and gains – obtaining a tax repayment of £40 (100 @ 40%), giving them a cash profit of £10 on their investment of £30.
• At this point the scheme looks like a tax deferral scheme (see BIM56455), although there is potentially a rather high hurdle rate unless they receive more than the minimum from the marketing subsidiary.
• One further twist was therefore added. The studio has an option after 2 years to acquire back the licences for a price equal to an amount sufficient for the partners to repay their loans and, on the basis that the receipt is contended to be a capital receipt, the CGT on the chargeable gain.
• After taper relief, the CGT is about 10%.
• Although described as an option, the exercise of the option is certain to occur in practice.
• The overall result of this is the Exchequer loses £40 – £10 = £30, the studio gains £20 and the partner gains £10 (a 33% profit). In practice, the studio and partners will pay a substantial slice of their gains to the scheme organisers.

Like the schemes described at BIM56535, this scheme is based on a circulation of the studio’s own money in order to enhance tax losses of the individual partners. Rather than manipulating profit shares it seeks to build in an exit to turn a tax deferral scheme into a tax gain.

This scheme used films which were largely US studio films, not qualifying British films. These schemes are being challenged but as they were widely marketed and could be applied to products other than films, the matter was put beyond doubt by another general partnership anti- avoidance measure ( BIM56560).