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Wholly and exclusively: duality of, or non-trade, purpose: loans/advances to others: by film writer to company to produce a film

S34 Income Tax (Trading and Other Income) Act 2005

Artistic director’s loans to film-company used to ‘showcase’ his talent

For companies chargeable to Corporation Tax, the tax treatment of loans and advances is now governed exclusively by the loan relationships regime in Parts 5 and 6 Corporation Tax Act 2009. Detailed guidance is at CFM30000. The guidance below only applies to other categories of taxpayer.

It is essentially a question of fact whether a particular transaction or activity falls within the taxpayer’s trade profession or vocation. Expenditure on matters that fall outside is not allowable.

In the case of Lunt v Wellesley [1945] 27 TC 78, Mr Wellesley was a film writer who decided to set up as an artistic producer. An artistic film producer was described by the Commissioners as a person: ‘who conceives the type of picture to be made, acquires a story or sometimes writes a story, engages a cast, with power to dismiss them if need be, and supervises the designs of the scenes and costumes, and so on; and that in doing this it is his creative conception which appears on the screen.’

Mr Wellesley acquired the rights to a novel, ‘The general goes too far’, and dramatised it for filming. To produce the film, Mr Wellesley established a company of which he was one of the two directors. Once it was known that Mr Wellesley had commenced work on the project failure to complete would have been disastrous to his prestige and prospects in the film industry. The capital of the company being insufficient to allow completion of the project, Mr Wellesley made various unsecured interest free advances to the company and also guaranteed its bank overdraft. The film was ultimately produced at a loss to the company and Mr Wellesley not only failed to recover the advances that he had made to the company but he was also called upon to pay up under the guarantee to the bank.

The court found that there was sufficient evidence to uphold the Commissioners’ decision that the sums expended by Mr Wellesley were wholly and exclusively for the purpose of his profession and were not on capital account.

MacNaghten J explained the court’s reasons for believing the expenditure to satisfy the wholly and exclusively test. The judge drew an analogy with a professional musician who, wishing to favourably impress critics, hires a concert hall and puts on a performance to which paying customers are also admitted. The judge thought it clear that any profit from the venture would be taxable and so any loss should be allowable. MacNaghten J thought the expenditure produced results that were all too transitory for the expenditure to be considered capital.

For detailed guidance on the capital/revenue divide see BIM35000 onwards.

Note that if such irrecoverable loans and/or payments made under guarantee are not found to be wholly and exclusively for the purposes of the trade, Capital Gains Relief may be available (see CG65900 onwards).

The part of MacNaghten J’s judgment on which the above guidance is based is set out below:

`Ignorant of the intricacies of the film industry, I may be making a mistake in thinking that the present case is analogous to that of a professional musician who gives a recital at the Wigmore Hall, or, bolder still, at the Albert Hall, and goes to great expense in arranging for such recital, and gives that recital for the purpose for which the Respondent here said he set about to produce the film “The High Command.” The musician hopes that the critics will be favourably impressed by his performance. I am assuming a case where a charge is made to persons other than the critics for coming in, and the recital resulted in a profit. In those circumstances I apprehend the Inspector of Taxes would demur very much if the professional musician proposed to exclude any profit made by the recital. If that is so, and the recital instead of producing a profit resulted in a financial loss, I do not see how it could be said that the loss that the musician incurred was not a loss to be included in the computation of the profits for that year. So, here, the artistic film producer advanced money in order that his talent as an artistic film producer might become known to the public, or at least to the trade, and lost it. That disposes of the first point raised in this case, namely, were these sums amounting to £1,500 and the guarantee to the bank of £1,253 moneys wholly and exclusively expended by the Respondent for the purposes of his profession. The General Commissioners have answered that question in the affirmative. I think there was ample evidence to support their finding of fact….

…I think there is some difficulty in saying that this money was employed as capital in the Respondent’s profession of artistic film producer. Mr Hills [counsel for the Crown], in reply, put it, I think, rather more attractively by suggesting, if it did not come within the actual words of [what is now S29 Income Tax (Trading and Other Income) Act 2005], apart altogether from that Rule, it ought to be looked upon as a capital payment or acquiring a capital asset.

Whether a sum is capital or not must depend upon the particular facts of the case. What does the Respondent get by the expenditure of this money? In this transitory world nothing is permanent, but, of all the fleeting objects before our eyes, what the Respondent was getting seems to me to be almost the most transitory. He was to produce a film which the trade would consider showed that he was a talented artistic producer of films, so that the trade, impressed with his merits as an artistic producer, would be disposed to employ him. The money was expended for that, to gain the good opinion of the trade. To describe it as capital in the business of an artistic film producer seems to me to be a misuse of language, however widely the word be understood.’