The following examples are illustrative of the ways in which the exit charge might be applied. Actual exit arrangements are likely to be far more complex. In particular, there may be other means of challenging exit schemes which were effected before 10 December 2003.
Ms A contributes capital of £100,000 to a partnership
carrying on a trade of leasing of the master version of films. To
fund this she borrows £80,000 from a bank and puts in
£20,000 from her own funds. In 2002/03 the partnership
acquires and leases back a number of films, deducting its
expenditure under F2A97/S48 (
BIM56380). Ms A’s share of the
losses sustained is £100,000, for which she claims loss relief
under ICTA88/S380 on 6 April 2003, obtaining a tax repayment of
£40,000.
On 1 January 2004 Ms A transfers her interest and rights in
the partnership to a company based in a tax haven. That company
also takes over Ms A’s liabilities to pay interest and
capital on the loan of £80,000. Ms A pays the company a fee of
£5,000 for agreeing to do this.
Ms A has claimed loss relief in respect of a film related
loss (
BIM56610). She has disposed of her
rights to profits from the trade on or after 10 December 2003 (
BIM56620), and has received non-taxable
consideration for this – an exit event (
BIM56615). There is therefore a
chargeable event on 1 January 2004. She will be chargeable to IT
under Case VI, Schedule D on the consideration received –
which is £80,000 (see
BIM56625). This assumes the value of the
liability taken over is this amount, but the charge to tax can be
no less than this amount because this is the amount of the capital
contribution reimbursed to her – see
BIM56630 and
BIM56635).
Ms A does not receive a deduction for the £5,000
arrangement fee she has paid to the company (BIM56615).
A partnership is set up to produce and exploit a film costing
£10m. It sub-contracts the production to a production services
company. Of the partnership capital, 30% is invested by individuals
and the remaining 70% by a company based in the Isle of Man. All
the funds are expended on production of the film which is completed
on 30 November 2003. The film is then licensed to a film studio in
return for a share of profits from the film. The partnership
deducts its expenditure on the production of the film under
F2A97/S48 in its accounts drawn up to 31 March 2004, and sustains a
loss.
The partnership agreement allocates all profits and losses to
the individual partners up to 31 March 2004. All profits and losses
are then to be allocated to the corporate partner until 31 March
2006, and thereafter the shares are to be split 50:50.
Mr B invests £300k in this partnership on 1 June 2003.
His share of losses in the period to 31 March 2004 is £1m. Mr
B claims relief for these losses on 6 April 2004 under ICTA88/S380.
When Mr B submits his claim he has already disposed of his
rights to profits from the trade (when his share of losses is
reduced on 1 April 2004 – BIM56620). He has received no
consideration for this disposal. On making the claim for £1m,
his film related losses claimed will immediately become greater
than his capital contribution to the trade – by
£700,000. There is therefore an exit event on 6 April 2004
(BIM56615). On the same date all the conditions necessary for an
exit charge are met (disposal, losses claimed and exit event) so Mr
B will be deemed to have received income, chargeable to tax under
Case VI Schedule D of £700,000 for 2005/06 (BIM56625).
Mr C invests £10m in a film sale and leaseback partnership
on 1 July 2004. The partnership acquires and leases back a number
of qualifying British films, all costing less than £15m to
produce, in the period to 5 April 2005. It claims a deduction under
F2A92/S48.
Mr C has funded his investment with £2m of his own
capital and £8m out of a loan from a company D based in the
Cayman Islands. Mr C’s share of the partnership loss is
£10m, which he claims against his other income and gains under
ICTA88/S380 and S381 on 6 April 2005.
On 1 July the partnership decides to give the entire rights
to income under the film finance leases to another company based in
Vanuatu for no consideration. Mr C and the other partner’s
remain members of the partnership. Mr C does not pay any interest
or repay any capital on his loan with company D.
Undoubtedly, we would enquire very closely into the
arrangements here, as there are clearly hidden arrangements,
probably with circulating money offshore. There must also be
questions as to whether the partnership can be said to have been
trading with a view to a profit. However, let us consider how the
exit charge would apply on these bare facts.
Mr C has claimed relief for a film related loss.
There has been a disposal of Mr C’s rights to profits
from the trade.
There is also an exit event by virtue of FA04/S122A and the
Partnership (Restrictions on Contributions to a Trade) Regulations
2005 - see
BIM56550 and BIM56635. Mr C’s
costs of repaying his loan are substantially less than arm’s
length repayment terms with a bank. After 5 years from 2 December
2004, that is on 2 December 2009, Mr C’s capital contribution
will be deemed to be reduced by the outstanding loan: that is, by
£8m. At that point his losses claimed are deemed to become
greater than his capital contribution to the trade.
There will be a chargeable event at the earliest on 2
December 2009, and Mr C will be subject to a charge to IT of
£8m for 2009/10 (at the earliest). In practice, with
arrangements such as these (and there have been some) we would
clearly aim to obtain the full facts and counter the arrangements
before this.
