BIM56570 - Film and audio products: avoidance: guaranteed income schemes: legislation

The legislation to counter the film partnership guaranteed income schemes described at BIM56565 is at FA04/S125, which introduced new sections into ICTA88 at ICTA88/S118ZL and S118ZM.

The legislation applies to:

• individual partners (whether they are general partners, limited partners or members of a limited liability partnership),
• in a partnership that carries on a trade that consists of or includes the exploitation of films,
• in the first 4 years of assessment that the individual partner carries on the trade (whether or not the trade was carried on by others before this), and
• in which there is at any time a relevant agreement in existence which guarantees the partner an amount of income,
• but only where the partner is a non-active partner in that year of assessment.

See BIM56540 for what is meant by a non-active partner.

Where these conditions apply, any trading losses sustained by the partner in any of those years of assessment can only be utilised against profits arising from the trade, unless those losses derive from exempt expenditure (see BIM56575). The effect of this is that sideways loss relief is not available against an individual’s other income and gains under ICTA88/S380, ICTA88/S381 or FA91/S72, so the individual will only be able to utilise losses against the deferred income arising from the partnership and therefore not be able to obtain a tax deferral – except where losses derive from exempt expenditure.

Terms and definitions

Note that a trade which includes the exploitation of films is wider than a trade that includes the exploitation of the master versions of films which is required for application of the special rules for deduction of expenditure incurred on the production or acquisition of the master version of a film. It includes any trade which includes the exploitation of films to any extent. Film takes the same meaning as that in Schedule 1 to the Films Act 1985 – namely ‘any record, however made, of a sequence of visual images, which is a record capable of being used as a means of showing that sequence as a moving picture’.

A relevant agreement means any agreement which is either made with a view to the individual carrying on the trade (that is, before he does so), or an agreement made whilst he is carrying it on. It includes an agreement under which he is or may be required to contribute an amount to the trade (for example, as his capital contribution). An agreement will commonly be made at partnership level, and the individual partner will be allocated a share of profits (or losses) arising under the agreement. Such an agreement is nonetheless a relevant agreement for application of these rules to the individual partner.

An agreement guarantees an individual an amount of income if the agreement, or any part of it, is designed to secure the receipt by the individual of that amount, or at least that amount of income. It does not matter when that income would be received under the agreement – that is, the income may arise (as it does in tax deferral schemes) many years later.

This definition is intentionally widely drawn: it does not imply certainty, but merely that arrangements have been put in place which are designed to ensure that the individual will receive at minimum, a specified amount of income. Normally in a tax deferral arrangement, such as a sale and leaseback, a minimum income is required in order to obtain and underwrite a loan from a bank. A good test of whether an agreement is designed to secure an amount of income is whether it is possible to calculate the minimum amount of income that will be received with a reasonable degree of accuracy. Alternatively, an agreement should be taken to guarantee an amount of income where payments are linked to bank interest rates: that is, where minimum income is set at a variable but sufficient level to ensure a person can meet interest on a loan.

It should be noted that the legislation does not specify a minimum amount of guaranteed income for the provisions to apply. Where any amount of income from the trade is guaranteed to the partner under a relevant agreement, the restrictions apply to all non-exempt trading expenditure and losses.

Commencement

These restrictions apply to:

• all partners joining a partnership on or after 26 March 2004, and
• individuals who were partners before and on 26 March 2004, in respect of losses derived from expenditure incurred on or after that date.

See BIM56575 for an explanation of what is meant by losses derived from expenditure incurred.