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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Films and sound recordings: old regime for films: avoidance: guaranteed income schemes

S103B, S103D, S115 Income Tax Act 2007

Anti-avoidance 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 four tax years 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 tax year.

Where these conditions apply, any trading losses sustained by the partner in any of those tax years can only be used against profits arising from the trade, unless those losses derive from qualifying film expenditure. The effect of this is that sideways loss relief is not available against an individual’s other general income and capital gains (see BIM85005) and the individual can only carry the losses forward against the deferred income arising from the partnership.

Terms and definitions

Partners affected are only those who are non-active partners. A non-active partner is someone who spends less than ten hours per week on average personally engaged in activities carried on for the purposes of the trade. The average is taken over the entire basis period for a tax year, except where that basis period is less than six months at the commencement or cessation of the trade, in which case the average is over the first or last six months respectively.

‘Film’ takes the same meaning as that in Sch1 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 any 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). Also included is any agreement entered into under the same arrangement as a relevant agreement. 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 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 trading expenditure and losses other than qualifying film expenditure.

Expenditure is qualifying film expenditure if it is:

  • expenditure deductible in computing the profits of the partnership under any of the reliefs under the old regime for films which applied to qualifying films (see BIM56010);
  • incidental expenditure which, although not deductible under any of those reliefs, is incurred in connection with the production or acquisition of a film for which a deduction is given under any of those reliefs.

Incidental expenditure is expenditure on management, administration or obtaining finance. The extent to which incidental expenditure is connected to the production or acquisition of a qualifying film is to be determined on a just and reasonable basis.