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HMRC internal manual

Business Income Manual

Films and sound recordings: old regime for films: avoidance: individual exit schemes: exit events

S797(2), S798 Income Tax Act 2007

For the purposes of the exit charge (see BIM56520), ‘exit event’ is a defined term. It does not require that the individual ceases carrying on the trade from which the losses arose, or that he ceases to be a partner in a partnership, but can include either of these. An exit event can also occur after a person has ceased trading.

An exit event occurs when any of the following happens:

  • The individual receives any non-taxable consideration for a disposal of his rights to profits arising from the trade. See BIM56530 for what is meant by a disposal. This applies whether or not the individual also receives any taxable consideration for the disposal.
  • The losses claimed in respect of film related losses (see BIM56010) become greater than the individual’s capital contribution to the trade (see BIM56540). This can occur when a claim to loss relief is made or through a decrease in the capital contribution.
  • There is an increase in the amount by which the losses claimed exceed the individual’s capital contribution to the trade.

The losses claimed are the total of all film related losses from the trade for which relief against general income (sideways relief) or against chargeable gains (see BIM85005) has been claimed.

Non-taxable consideration

This is defined as any consideration received by the individual which (apart from this exit charge) is not chargeable to Income Tax on the individual. Therefore it will include any consideration which would otherwise be chargeable to Capital Gains Tax, as well as any consideration which is not subject to any tax.

Consideration is not otherwise defined and therefore includes any form of consideration received by or on behalf of the individual. It can include money or money’s worth, including the payment or assumption of a liability of an individual. For example, this might include meeting the individual’s liability under a loan taken out to contribute capital to a partnership or trade.

However, it should be remembered that under the general rules applicable to all master versions of films to which the old regime for films applies (see BIM56010), any sums received from the disposal either of the master version of a film, or of any rights in it, are deemed to be revenue receipts of the trade. This applies even if that disposal is part of a larger disposal, for example if a partnership sells its trade and all its trading assets to another person.

The consideration must be received in respect of the disposal of rights to profits arising from the trade. It is not limited to profits arising from exploitation of films. Normally it will be apparent from the facts of the case whether a sum is received in consideration for a disposal of rights to profits from the trade. The definition of capital contribution, and in particular reimbursement of a capital contribution (see BIM56540), are designed to make it impossible to exit with a tax advantage by ensuring that any amount received which it is argued is not consideration is nonetheless caught as a reduction in the amount of an individual’s capital contribution. Any case where an individual:

  • has disposed of his rights, and
  • has received consideration, and
  • it is argued that none of the exit events above apply,

should be referred to CTISA (Technical).

There is no cap on the amount of consideration taxable under the exit charge (see BIM56535).

The amount of consideration received by an individual is the gross amount received for the disposal. Any amounts deducted from the consideration in respect of any person agreeing to or facilitating an exit event should be added back. In most exit schemes, exiting individuals (usually partners) are required to pay a fee to facilitate their exit. This may be deducted from the amount of consideration received - but should be added back when computing the amount of consideration to be taken into account in computing the exit charge.