HMRC internal manual

Business Income Manual

BIM56560 - Films and sound recordings: old regime for films: avoidance: corporate exit schemes: how schemes work

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S66-S71 Finance Act 2005 (applicable where films relief under Finance (No 2) Act 1992 was claimed)

The main way in which the film tax relief for qualifying British films (see BIM56010) was accessed is through tax deferral arrangements, such as sale and lease back, by groups of companies (usually banks) or by partnerships of wealthy individuals. See BIM56505.

The film reliefs and sale and finance leaseback arrangements, in effect, allowed a bank to obtain a tax deduction for the money it lent. However, staying within the structure meant that the bank also would have to pay tax on the capital repayments of the loan (that is, the ‘capital’ element of the finance lease rentals).

The bank could not simply give up the income stream as it would want to have its loan repaid, and to continue receiving interest on the outstanding balance. Exit schemes were therefore devised under which the subsidiary with the potential liability was sold out of the banking group. This would not work unless the subsidiary could be sold to another company that could shelter its income from tax. There are some groups of companies which have substantial unused losses, and where those losses are expected to continue to arise each year for the foreseeable future. Such a group would be able to use group relief to shelter the subsidiary’s finance leasing profits from tax - thus enabling the subsidiary to continue to pay the bank the full amount of interest and capital on its loan.

There is legislation to counter such schemes which works by imposing a de-grouping charge on the company that leaves the group. Note that the legislation applies only where the relief was obtained under the old regime for films and is repealed along with that regime (see BIM56010).

Although we have not seen any other exit structures than the one described above, it might be possible for the group to dispose of its finance lease and loan liabilities in some other way, such as transferring the licence into the UK branch of a non-resident group company, or a company incorporated offshore and resident here by management and control, or by disposing of the finance lease at undervalue. To prevent any attempt to devise exit structures such as these, the legislation also ensures that any exits in that form will give rise to an exit charge.

The legislation is described in more detail at BIM56565 onwards.