BIM56565 - Film and audio products: avoidance: guaranteed income schemes: overview

The anti-avoidance measure announced on 10 February 2004, and described at BIM56560, acts by imposing a charge to tax when an individual partner disposes of rights to income for consideration not otherwise subject to IT. This is generally described as an exit charge (although the legislation does not require the partner to actually leave the partnership). The immediate response of the avoidance scheme promoters was to adapt their schemes to achieve long term tax deferral for the investing partners, rather than an outright tax gain.

The government acted immediately when these schemes were discovered by announcing new counter measures effective from 26 March 2004.

The new schemes were based on the ‘print and advertising’ scheme described at BIM56555, adapted to give a very similar tax deferral structure to a film sale and lease back described at BIM56455. You should refer to the guidance at both of those pages for more detail, but in summary the schemes were designed to work as follows.

• A partnership spends money on marketing (‘prints and advertising’) films under licence from the film owners (generally large US studios).
• The money is paid to, and the actual work is carried out by, a marketing subsidiary of the studio acting as ‘agent’ for the partnership.
• In return for this expenditure the partnership is guaranteed a minimum return which is equivalent in amount (in proportion to the expenditure incurred) to the lease rental payments described at BIM56455.
• The partnership is funded by individual wealthy partners, through about 20% cash out of their own resources and 80% through a loan secured against the guaranteed payments under the agency agreement. Those payments are in turn underwritten (by a letter of credit or security deposit) by the studio.
• The terms are designed to be very similar to the tax deferral arrangement described in BIM56455, for example, with spreading of receipts over 15 years and the payments tapered to increase by no more than 5% each year.

From the exchequer’s perspective, the overall effect of this is equivalent to a long term interest free loan from the Exchequer to the investing partners (equivalent to 40% of the marketing costs), and the studio benefits with a net subsidy of about 15% of its marketing costs. Whilst limited tax deferral structures are tolerated in order to give financial assistance to producers of qualifying British films, the Government was not prepared to bear the costs of similar arrangements to subsidise marketing costs of film studios and distributors.

The measure announced on 26 March 2004 was designed to prevent film partnerships from using any form of tax deferral arrangements (not just schemes related to print and advertising expenditure) unless expenditure incurred related to narrowly defined amounts of expenditure on the master versions of qualifying British films. The measure is described at BIM56570 onwards. It is directed only at partnerships exploiting films. However, there is some evidence that avoidance scheme operators have been migrating to other products and business sectors. If you discover any similar schemes unrelated to films, these should be referred to Anti-Avoidance Group (Films) in accordance with BIM56505.