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 partnerships of wealthy investors or
banks. These arrangements are described at
BIM56400 onwards.
You will see from the examples at
BIM56455 and
BIM56460 that, from the point of view of
the investing partners or bank, the tax deferral arrangement takes
on the character of a low interest loan. However, the total amount
of ‘interest’ on this notional loan is independent of
the duration of the loan.
For example, consider this from the point of view of an
individual partner in a sale and leaseback partnership who funds
his investment of £100,000, say, with £20,000 of his own
funds and £80,000 from a bank loan, and sustains a trading
loss of £100,000. Initially, he has a cash surplus of
£20,000 (40% of his loss of £100,000, less his cash
investment of £20,000).
This cash surplus is like a loan of £20,000. He has to
repay the tax he has deferred and when all the deferred tax is paid
he will have paid back £32,000 to the Exchequer (see
BIM56455), leaving him £12,000 out of pocket overall. However,
it does not matter how long the tax deferral lasts – he will
still only be out of pocket by £12,000. The £12,000 is
akin to the total interest payments on a £20,000 loan, so the
longer he can defer the tax, the lower his hurdle rate and the
cheaper the loan. This may enable him to make a larger investment
than £20,000 – so that the film producer can get a
larger cut – if the deferral period is increased.
However, from the Exchequer’s perspective, the tax
deferral is like giving an interest free loan as only the tax
deferred is recovered. Therefore, the longer the deferral the more
expensive it becomes. Ultimately, as deferral periods become very
long the schemes begin to look more like tax savings.
Normally tax deferral is regarded as a form of unacceptable
tax planning, and measures have been introduced to counter schemes
that aim to defer tax – for example CAA01/S225 and FA04/S125
(see
BIM56565). However the film reliefs
would be difficult to access without tax deferral schemes and HMRC
has generally tolerated sale and leaseback schemes with deferral
periods of up to 15 years, as otherwise film tax deferral
arrangements would not be attractive to investors (see
BIM56430).
However, in 2004 a number of schemes were being marketed with
longer deferral periods and the Government acted to prevent these.
Legislation, effective from 2 December 2004, was introduced at
FA05/S60 to S65 and at ITTOIA/S142A to S142E. This legislation acts
by restricting or clawing back relief given under F2A92/S42 or
F2A97/S48, or ITTOIA/S138A to S140 where there is a deferred income
agreement (see
BIM56710) of more than 15 years.
