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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Films and sound recordings: old regime for films: avoidance: overview

The film tax reliefs for qualifying films which were available before the introduction of the film production company regime (see BIM56010) provided generous incentives to encourage investment in qualifying British films. The reliefs gave a fixed and accelerated deduction for expenditure and were normally accessed through tax deferment schemes (principally sale and leaseback) which were economically equivalent to low interest loans to the investor - normally over a period of 15 years - and were usually largely risk free, independent of the success or failure of a film.

In such arrangements, the film reliefs allowed expenditure on the production or acquisition of a film to be deducted, in computing the profits and losses of a trade of exploitation of films, before income from exploitation of the film was received. This meant that early losses arose which could be used to shelter tax on other income and gains. That sheltered tax was then effectively repaid, through higher tax liabilities in later years, as income arose under the finance lease (or similar agreement). This could lead to tax deferral of up to 15 years for investing partners or banks.

The investment was usually funded by cash (of an amount proportionately less than the marginal tax rate of the investor) and a secured loan. The producer had to provide security for the loan - usually by making a balancing deposit. The producer was able to keep the difference, less arrangement and administration costs, between the security deposit and the amount paid for the film. The investor obtained a cash flow benefit after claiming loss relief, but had to pay tax on the income stream, which also had to be used to repay the loan - the net result being a deferral of tax, which was financially equivalent, from the investor’s perspective, to a low interest loan over the period of the lease or licence.

A large number of investment schemes were set up which used these reliefs legitimately in the way that they were intended but in parallel to this a very aggressive tax avoidance industry developed which devised a large number of artificial schemes based around expenditure on films.

Such schemes were counteracted by substantial amounts of anti-avoidance legislation. Following the repeal of the films regime much of that legislation no longer applies, but some of it continues to be relevant and is discussed in the following pages:

  • guaranteed income schemes - BIM56510;
  • individual exit schemes - BIM56515 onwards;
  • corporate exit schemes - BIM56560 onwards.

Not all of the anti-avoidance measures used to counter film schemes related explicitly to the film reliefs. There were also a number of anti-avoidance measures for partnerships which continue to have general application to all trades, albeit most of the avoidance schemes were film related. See BIM82600 onwards for coverage of these measures.

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 CTISA (Technical).