BIM56675 - Film and audio products: avoidance: corporate exit schemes: the exit charge

A chargeable event ( BIM56670) will give rise to an exit charge on the film rights company ( BIM56660) at the time of the exit event. There are two types of exit charge which can arise depending on whether the film rights company:

• ceases to be a member of a group (exit event X) or ceases to be within the charge to CT (exit event Y); or
• disposes of guaranteed rights to income (BIM56665) at undervalue.

In both cases the exit charge is designed to remove the tax advantage which would otherwise arise from the exit event.

Exit charge for exit events X or Y

Where exit event X or Y occurs, the film rights company is deemed to have received, immediately before the exit event, an amount of income, chargeable to CT, from its film trade equal to the ‘chargeable amount’, where:

• the chargeable amount is the value, immediately before the exit event, of the rights to guaranteed income (see BIM56680) under the guaranteed income agreement; and
• its film trade is its trade which consists of or includes the exploitation of films or the receipt of income derived from films.

For the meaning of guaranteed income and guaranteed income agreement see BIM56665.

The deemed trading income is additional to any other income received by the film rights company.

In order not to disadvantage the new owners of the film rights company, where the film rights company remains within the charge to CT (that is, where the exit event is of type X) the film rights company is deemed to have an additional trading loss of its film trade brought forward under ICTA88/S393 (see CTM04100) equal to the chargeable amount.

This deemed loss is treated as having been brought forward to the accounting period in which the exit event takes place, but may only be set off against income which:

• derives directly from the rights to guaranteed income under the guaranteed income agreement, and
• is brought into account by the film rights company for its film trade after the exit event,
• in particular, may not be set off against the income (the chargeable amount) which the film rights company is treated as having received by virtue of the exit event.

The deemed loss is in addition to any other trading losses brought forward by the film rights company.

Exit charge for exit event Z

The film rights company is treated for CT purposes as receiving, immediately before the exit event, an additional amount of income from the relevant trade equal to the difference between:

• the value of the disposed rights (that is the rights to guaranteed income under the guaranteed income agreement that have been disposed of) immediately before the disposal (see BIM56680), less
• the amount of the consideration for the disposal which the film rights company receives, and brings into account as taxable income of its film trade at the time of the disposal (see BIM56670).

This charge is then balanced by deeming that the person (the ‘ third party’) that has acquired the rights to guaranteed income has a trading loss brought forward. Specifically:

• where the third party is chargeable to CT, it is treated as having a loss of its trade brought forward under ICTA88/S393, to the accounting period in which it acquires those rights, and
• where the third party is within the charge to IT, he is treated as having a loss of his trade brought forward under ICTA88/S385 (see BIM75500), to the year of assessment in which he acquires those rights, but
• in both cases, those deemed losses can only be set against income which derives directly from the rights acquired by the third party.

In both of these cases the amount of the deemed loss brought forward is equal to the additional amount of income that the film rights company is deemed to have received. These deemed losses are in addition to any other losses brought forward by the third party.