There was little of excitement in today’s Budget for the UK film industry. However, HMRC is continuing to target the UK film industry through the number of enquiries and litigation in relation to perceived film tax avoidance structures. Thus far, HMRC is not having much success. We were very pleased to see the recent Court of Appeal decisions in Halcyon and Microfusion, cases which the film industry was watching with interest. HMRC was challenging certain aspects of the old sale and leaseback structures which took advantage of the statutory film tax reliefs known as section 42 and section 48.
In Halcyon, the decision confirmed that it was possible to effectively double dip and obtain successive film acquisition relief under section 42 which entitled you to a 33.33% write off of such expenditure over the first three years. Such successive acquisition relief was not available pursuant to section 48 which provided a 100% first year write off for small budget films.
The Microfusion partnership was held to be carrying on a film exploitation trade and “film” was held not to be confined to the master negative but to also include the distribution rights. Further, the film did not constitute trading stock on the basis that the partnership only granted a limited term licence of the distribution rights which reverted to the partnership at the end of the term. We were always surprised that HMRC ran these cases.
It will be interesting to see whether HMRC decide to request leave to appeal to the Supreme Court. Although we are not convinced they have appropriate grounds to do so, HMRC is usually given the benefit of the doubt on such requests and granted permission.
A more detailed press release containing our thoughts on these decisions will be published later this week.