BIM56425 - Film and audio products: tax deferral schemes for qualifying films: security arrangements
In film sale and leaseback tax deferment schemes, the lessee is
often required to place sufficient funds on deposit with a bank to
guarantee, and pay, the lease rentals over the period of the lease.
Where the third party lessor is a partnership of wealthy
individuals, those individuals normally take out a loan to fund the
lion’s share of their investment in the film partnership, and
those loans are usually secured on the lease rentals (see
BIM56405 and the examples at
BIM56455 and
BIM56460). Indeed, normally the bank
lending to the partners will take a charge over the lease income
that the partnership receives, and this is used to pay off the
individual loans of the partners. However, the rentals/licence fees
are nonetheless the taxable income of the partnership, and the
individual partners must pay tax on their shares of this income. It
is in this way that the Exchequer recoups the tax which the
partners have deferred.
Where the third party lessor is a company (most commonly a
subsidiary of a bank or other large group), that company will
commonly take out a loan which similarly needs to be repaid out of
the lease rentals as these arise – but also must pay tax on
these.
The security deposit made by the lessee is often referred to
as a defeasance deposit.
A number of avoidance schemes have been devised which seek to
enable lessors (or partners in partnerships) to have their loans
repaid without receiving income on which they are taxed, thereby
turning the tax deferral into an outright tax saving. These schemes
are usually referred to as ‘exit schemes’. Other
schemes involving partnerships only have been devised where
individual partners seek to obtain the benefit of a loan to enhance
their loss without any risk of themselves being liable to repay the
loan. A number of measures were introduced in FA04 and FA05 to stop
these schemes (see
BIM56535,
BIM56600 and
BIM56650).
This does not mean that avoidance schemes before this
necessarily work, indeed Anti-avoidance Group have been able to
counter a number of them. The following cases should be referred to
Anti-avoidance Group (Films).
- Where the lessor (or the investing partners in a partnership) receives amounts to repay its borrowings in a form which is not taxable as income of the lessor (or individual partner).
- Where any arrangements exist which would enable a partner in a film partnership to have his loan repaid by someone else in the event that he received insufficient income from the film partnership (that is, where the partner does not carry full risk of repayment on default).
- Where the security deposit to guarantee the lease rentals is held by the lessor (or a connected person) rather than the lessee.
- Where the full amount of the acquisition cost claimed to have been incurred by the lessor is not actually paid (we have even seen a few extreme cases where the sale and leaseback, including the lease rentals, have been based on notional amounts without actual cash flowing – except for claims for tax repayments).
