BIM56505 - Film and audio products: avoidance: overview of what to look out for

The film tax reliefs for qualifying films in F2A92/S42 ( BIM56330) and F2A97/S48 ( BIM56380) and ITTOIA/S138 to S140 provide generous incentives to encourage investment in qualifying British films. These reliefs give a fixed and accelerated deduction for expenditure and are normally accessed through tax deferment schemes (principally sale and leaseback) which are economically equivalent to low interest loans to the investor – normally over a period of 15 years - and are largely risk free, independent of the success or failure of a film (see BIM56400 onwards). Occasionally the reliefs have been used to mitigate the cost of speculative investments in films, which, like any other commercial investment, gives a return only if the venture is successful.

A large number of investment schemes have been set up which use these reliefs legitimately in the way that they were intended, and have led to substantial increases in the numbers of British films produced. Unfortunately, in parallel to this a very aggressive tax avoidance industry has developed, which has devised a large number of artificial schemes based around expenditure on films, and which has required substantial amounts of anti-avoidance legislation, principally in FA02, FA04 and FA05. Not all of these measures relate explicitly to the film reliefs. There are also a number of anti-avoidance measures for partnerships which have general application to all trades, albeit most of the avoidance schemes were film related.

We believe that these measures should be effective in stopping most avoidance activity in the film industry. However, tax avoidance can be a very lucrative business for those devising schemes – even where the schemes do not work under the law – and we are aware that new avoidance schemes are still being devised and marketed.

Most film tax avoidance falls into one of two broad categories:

Tax gain. In film tax deferral schemes the overall effect once the scheme has unwound is that overall the investor receives tax relief on losses equal to the actual amount that he has lost. In tax avoidance schemes such as the exit schemes ( BIM56600 and BIM56650), loss manipulation schemes ( BIM56535), non-repayable loan schemes ( BIM56545) and licence derived loss schemes ( BIM56555), a tax gain is achieved by either attributing greater amounts than actual losses to the investor or by reimbursing the investor for expenditure in a non-taxable or capital form.

Unintended tax advantage. Other schemes have been devised where benefits, such as tax deferral, intended only for qualifying films, are applied for unintended purposes or in unintended ways. Examples are inflated acquisition price schemes ( BIM56335), TV programme schemes ( BIM56110), double dipping schemes ( BIM56360), tax deferral schemes unrelated to the qualifying film reliefs ( BIM56565) and schemes deferring tax for more than 15 years ( BIM56700).

Often the level of complexity of a scheme or arrangement is another indicator of tax avoidance, particularly where steps are inserted with no clear commercial purpose.

If you come across any film schemes or arrangements where you think that tax avoidance of any description is apparent, and which are not covered elsewhere in this guidance, you should make a report outlining the facts of the case to CT&VAT (Technical).

A dedicated nation-wide film team under the auspices of Anti-Avoidance Group has also been set up to deal with film partnerships. If you receive details of a film partnership that is not already dealt with by the film team or you need to make a report on a partnership you should notify Anti- Avoidance Group (Films) at 22 Kingsway, London, WC2B 6NR.