BIM56670 - Film and audio products: avoidance: corporate exit schemes: chargeable events

Under the legislation to counter corporate exit schemes by companies benefited by film relief, an exit charge is imposed on the film rights company (see BIM56660) when the following conditions are met:

• an exit event has occurred on or after 2 December 2004; and
• a claim for a deduction under F2A92/S42 (‘Section 42’, see BIM56330) has, at any time, been made in respect of expenditure relating to the film by the film rights company or any other company.

Remember that a claim under Section 42 includes a claim for a deduction under that section as amended by F2A97/S48 - BIM56380.

The film is the film in relation to which the film rights company is guaranteed (see BIM56665) income.

A chargeable event can only arise if there is a claim under Section 42. However, there are no restrictions on when the claim is made, or on who the claim is made by, other than it must be made by (or on behalf of) a company.

The claim can be made at any time. It can be made before 2 December 2004, or on or after that date. It can be made before, at the same time as, or after the exit event. This is necessary, as otherwise a company might attempt to avoid a charge by incurring expenditure on the production or acquisition of a film, entering into a guaranteed income agreement, then effecting an exit and only after this lodging a claim for a period before the exit.

The claim need not be for the maximum amount allowed under Section 42: any claim under section 42 will do.

The claim can be made by the film rights company itself or by any other company. Note that there is no restriction on the company that makes the claim under section 42 – it does not need to be made by a group company. Although this may seem very wide, it would be difficult to define the company that makes the claim without leaving a loophole in the legislation whereby a group could avoid the charge by restructuring. In practice the legislation is focused because the charge only applies where there is guaranteed income from a film on which there is a claim under Section 42 for expenditure on the production or acquisition of the master version.

Although the making of the Section 42 claim is a requirement for a chargeable event, the exit charge (see BIM56675) arises at the time of the exit event. If, exceptionally, the Section 42 claim is made after the exit event it may be necessary to make a discovery that a chargeable event has occurred – although in practice this is very unlikely to occur.

Exit events

Exit events are all defined in relation to the film rights company, or, more accurately, the company that is the film rights company immediately before the exit event as some exit events can lead to a company ceasing to be the film rights company. There are three types of exit event. An exit event occurs on each occasion that:

• the film rights company ceases to be a 75% subsidiary of the principal company (‘exit event X’); or
• the film rights company ceases to be within the charge to CT (‘exit event Y’); or
• there is a relevant disposal at undervalue, by the film rights company, of the rights to guaranteed income under the guaranteed income agreement (‘exit event Z’).

For what is meant by the principal company see BIM56660. If, exceptionally, there are a chain of transfers of the film rights company (or film rights companies) between different groups then the principal company will be a different company for each exit event.

Relevant disposal at undervalue

A relevant disposal is a disposal by the film rights company, directly or indirectly, to a third party of rights to guaranteed income under the guaranteed income agreement. A third party is defined as any person who is neither the principal company nor a 75% subsidiary of the principal company. Note that intra-group transfers will, therefore, not be subject to the film exit charge.

A disposal is at undervalue if the amount of the consideration for the disposal which the film rights company receives, and brings into account as taxable income of its trade at the time of the disposal, is less than the value of the disposed rights (see BIM56680) immediately before the disposal. Note that in determining whether a disposal is at undervalue, only that consideration received by the film rights company which is both taxable income of its trade and is recognised immediately is relevant.

Disposal is widely defined for these purposes. It means any surrender, giving up, assignment or other disposal. It includes a disposal where the disposed rights are disposed of alone or where the disposal is part of a larger disposal. Where the disposed rights are disposed of as part of a larger disposal, the amount of the disposal consideration for the larger disposal which is attributable to the relevant disposal (that is, of the rights to guaranteed income under the agreement) is to be determined on a just and reasonable basis.