The main way in which the film tax relief for qualifying British
films has been accessed is through tax deferral arrangements, such
as sale and lease back, by groups of companies (usually banks) or
by partnerships of wealthy individuals. These arrangements are
described at
BIM56400 onwards.
An illustrative example showing how these arrangements work
for a banking group of companies is shown at
BIM56460. If you are not already
familiar with this example, you should refer to it before reading
the rest of this guidance on corporate exit schemes.
You will see from the example that the net economic effect of
the scheme is similar to the bank having lent £100m to the
film producer. The film reliefs and sale and finance leaseback
arrangements have, in effect, allowed the bank to obtain a tax
deduction for the money it has lent. However, staying within this
structure means that the bank will also have to pay tax on the
capital repayments of the loan (that is, the ‘capital’
element of the finance lease rentals – see
BIM56410).
The bank cannot simply give up the income stream as it wants
to have its loan repaid, and to continue receiving interest on the
outstanding balance. The fellow subsidiary that lent B the money is
not itself taxed on its receipts of capital, although it is taxed
on the interest. In order to exit from the scheme with a tax
advantage, the bank needs to remove B, or B’s rights to
income and liabilities under the loan, out of the group in a way
which will enable B to continue to make full repayments of interest
and capital on its loan.
In exit schemes this is normally achieved by selling B out of
the group (or by transferring the finance lease and loan
liabilities to another company and selling that company out of the
group). This will not work unless B can be sold to another company
that is capable of sheltering B’s income from tax. There are
some groups of companies which have substantial unused losses, and
where those losses are expected to continue to arise each year for
the foreseeable future. Such a group would be able to use group
relief to shelter B’s finance leasing profits from tax
– thus enabling B to continue to pay the bank the full amount
of interest and capital on its loan.
Legislation to counter this is at FA05/S66 to S71, and is
effective from 2 December 2004. The legislation works by imposing a
de-grouping charge on the company that leaves the group.
Although we have not seen any other exit structures than the
one described above, it might be possible for the group to dispose
of its finance lease and loan liabilities in some other way, such
as transferring the licence into the UK branch of a non-resident
group company, or a company incorporated offshore and resident here
by management and control, or by disposing of the finance lease at
undervalue. To prevent any attempt to devise exit structures such
as these, the legislation also ensures that any exits in that form
will give rise to an exit charge.
The legislation is described in more detail at
BIM56660 onwards.
