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Thousands of investors who have pumped billions of pounds into film finance schemes face an anxious wait to find out whether a recent court decision signals the end of lucrative tax breaks.
Confidence in aggressive film finance schemes has been shattered after HM Revenue & Customs won a landmark case against a billion-pound tax-avoidance scheme last month, leaving investors in similar schemes wondering whether they will receive the millions of pounds of tax relief that motivated them to invest in the schemes in the first place.
Last month a tax tribunal decided that investors in the Eclipse 35 film scheme will not be entitled to tax relief, estimated to total £117m, because the scheme was set up with the sole or principal intention of avoiding tax and was not genuinely trading.
Under the Eclipse 35 scheme, investors, which included celebrities such as Sir Alex Ferguson, put in a total of £50m. A further £790m was borrowed from Barclays. Eclipse 35 then bought two films from Disney for £500m, which were immediately leased back for around £1bn, which was to be repaid over a period of 20 years. Eclipse 35 also immediately claimed £117m in tax relief on the interest that would be paid on the loans over the next 20 years. Had it succeeded, the scheme would have netted £404,000 tax relief per investor, for an original investment of £173,000.
The court said investors were not entitled to any tax relief at all because the sole or principal aim of the scheme was tax relief, and that it was not involved in a genuine trading activity.
Simon Gough, partner at law firm DLA Piper, said: "Investors in Eclipse 35 will now be paying tax over 20 years on the licence income they receive from Disney. A lot of people will have invested when the tax rate was 40pc. They will now be paying income tax on the reverting income at 50pc. Some may well end up out of pocket." (AtW's comment: well that's investment risks innit? If it was sure gain it would not be real investment...)
Experts said that while the Eclipse 35 scheme was one of the most aggressive schemes around, the judgment against it would embolden HMRC to challenge other film finance schemes.
John Whiting, policy director of the Chartered Institute of Taxation, said there were no hard and fast rules as to which film schemes would be permitted, although the aim of the scheme would be an important factor. "You have to ask whether you are in an investment that might or might not give you a return, or in a tax-driven scheme seeking to give you a return purely through tax relief that appears guaranteed," said Mr Whiting.
"At one end of the spectrum are film schemes that are wholly artificial, not trading and geared to create tax relief above all else for the investor. At the other is those that are using the money genuinely to make films. HM Revenue & Customs will be buoyed by this decision and we can expect its attention to move to schemes further down the spectrum."
Thousands of high earners, including celebrities such as Jeremy Paxman, Anne Robinson and Wayne Rooney, have invested in film finance schemes over the past decade. Most of these schemes were entered into between 2004 and 2007, when Gordon Brown attempted to stimulate the UK film industry. Schemes typically run for 15 or 20 years, meaning many investors may find they end up paying more income tax than expected for many years into the future.
Mr Gough said: "Those who are already in schemes will have to play a waiting game. Some are still under inquiry and they may have to wait some time to find out where they stand."
One film finance company not prepared to wait for HMRC is Ingenious Media, which has put cash into films such as Shaun of the Dead, Hot Fuzz and Night at the Museum. Its 2003/2004 Inside Track fund, which invested millions in projects such as Avatar, has been under investigation by HMRC for years over its use of a tax structure called "sideways loss relief".
Under these schemes, for each £100 the investor put in, a further £200 would be borrowed from other investors. When the fund then spent the £300 on the project, the investor could claim a tax loss of £300 against their other earnings.
James Clayton, chief executive of Ingenious Media, argues his company's schemes are legal and is taking steps to determine once and for all whether the courts agree. "We have got bored of waiting for HMRC to decide our case so in January of this year we took the step of referring the matter to the tax tribunal for an adjudication. We expect a hearing within the next 18 months," said Mr Clayton.
HMRC has been targeting loss-offsets for years. In 2008 it restricted "sideways relief" on film partnerships to £25,000, unless you worked more than 10 hours a week for the partnership.
But the Government has been looking more favourably on the Enterprise Investment Scheme (EIS) structures often used by film schemes, increasing the tax relief on EISs from 20pc to 30pc from April 2011 and from this April upping the amount you can save in them from £500,000 to £1m a year.
EIS investments, which can be in any industry, not just film, give freedom from CGT if the shares are held for three years. Losses can be set off against other capital gains and no inheritance tax is payable if they have been held for two years at the time of death.
But just because a film scheme is within an EIS structure does not mean it is guaranteed to be free from HMRC scrutiny. That said, tax advisers say film schemes where there is a level of risk and where return is related to the performance of the assets invested in are likely to satisfy the Revenue.
Nicola Horlick, chief executive of Derby Street Films, runs EIS funds investing in film scripts that sit at the other end of the spectrum from Eclipse 35. She said: "We are completely different to Eclipse 35 and those other film schemes where you have to get a barrister's opinion before you invest. We invest in the film at the very outset, providing development capital for new projects."
While EIS schemes are here to stay, more aggressive film finance structures could soon become a thing of the past as the Government brings in an overarching cap on tax relief next year.
Jason Butler, certified financial planner at Bloomsbury Financial Planning, said: "Arguably of greater concern for film schemes is the implications of the cap on taxable reliefs set to come in next April, when the total relief you can claim each year will be capped at 25pc of taxable income, or £50,000, depending on whichever is the higher."
This cap, which has attracted most attention in relation to its ramifications for charitable giving, would have limited the amount of interest relief available under the Eclipse 35 scheme for the payments on the Barclays loans. There is, ironically, a "buy now while stocks last" opportunity for the next year, at a time when confidence in film finance structures is at an all-time low.
Mr Gough said: "Those thinking about doing new ones will only be able to get uncapped tax relief for another year. But the risk of film schemes in the current environment has increased to the extent that they are only attractive to those people prepared to take on a risk of Revenue intervention and only to do transactions they believe will stand scrutiny."
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Source: Film investment could lose tax breaks - Telegraph
Thousands of investors who have pumped billions of pounds into film finance schemes face an anxious wait to find out whether a recent court decision signals the end of lucrative tax breaks.
Confidence in aggressive film finance schemes has been shattered after HM Revenue & Customs won a landmark case against a billion-pound tax-avoidance scheme last month, leaving investors in similar schemes wondering whether they will receive the millions of pounds of tax relief that motivated them to invest in the schemes in the first place.
Last month a tax tribunal decided that investors in the Eclipse 35 film scheme will not be entitled to tax relief, estimated to total £117m, because the scheme was set up with the sole or principal intention of avoiding tax and was not genuinely trading.
Under the Eclipse 35 scheme, investors, which included celebrities such as Sir Alex Ferguson, put in a total of £50m. A further £790m was borrowed from Barclays. Eclipse 35 then bought two films from Disney for £500m, which were immediately leased back for around £1bn, which was to be repaid over a period of 20 years. Eclipse 35 also immediately claimed £117m in tax relief on the interest that would be paid on the loans over the next 20 years. Had it succeeded, the scheme would have netted £404,000 tax relief per investor, for an original investment of £173,000.
The court said investors were not entitled to any tax relief at all because the sole or principal aim of the scheme was tax relief, and that it was not involved in a genuine trading activity.
Simon Gough, partner at law firm DLA Piper, said: "Investors in Eclipse 35 will now be paying tax over 20 years on the licence income they receive from Disney. A lot of people will have invested when the tax rate was 40pc. They will now be paying income tax on the reverting income at 50pc. Some may well end up out of pocket." (AtW's comment: well that's investment risks innit? If it was sure gain it would not be real investment...)
Experts said that while the Eclipse 35 scheme was one of the most aggressive schemes around, the judgment against it would embolden HMRC to challenge other film finance schemes.
John Whiting, policy director of the Chartered Institute of Taxation, said there were no hard and fast rules as to which film schemes would be permitted, although the aim of the scheme would be an important factor. "You have to ask whether you are in an investment that might or might not give you a return, or in a tax-driven scheme seeking to give you a return purely through tax relief that appears guaranteed," said Mr Whiting.
"At one end of the spectrum are film schemes that are wholly artificial, not trading and geared to create tax relief above all else for the investor. At the other is those that are using the money genuinely to make films. HM Revenue & Customs will be buoyed by this decision and we can expect its attention to move to schemes further down the spectrum."
Thousands of high earners, including celebrities such as Jeremy Paxman, Anne Robinson and Wayne Rooney, have invested in film finance schemes over the past decade. Most of these schemes were entered into between 2004 and 2007, when Gordon Brown attempted to stimulate the UK film industry. Schemes typically run for 15 or 20 years, meaning many investors may find they end up paying more income tax than expected for many years into the future.
Mr Gough said: "Those who are already in schemes will have to play a waiting game. Some are still under inquiry and they may have to wait some time to find out where they stand."
One film finance company not prepared to wait for HMRC is Ingenious Media, which has put cash into films such as Shaun of the Dead, Hot Fuzz and Night at the Museum. Its 2003/2004 Inside Track fund, which invested millions in projects such as Avatar, has been under investigation by HMRC for years over its use of a tax structure called "sideways loss relief".
Under these schemes, for each £100 the investor put in, a further £200 would be borrowed from other investors. When the fund then spent the £300 on the project, the investor could claim a tax loss of £300 against their other earnings.
James Clayton, chief executive of Ingenious Media, argues his company's schemes are legal and is taking steps to determine once and for all whether the courts agree. "We have got bored of waiting for HMRC to decide our case so in January of this year we took the step of referring the matter to the tax tribunal for an adjudication. We expect a hearing within the next 18 months," said Mr Clayton.
HMRC has been targeting loss-offsets for years. In 2008 it restricted "sideways relief" on film partnerships to £25,000, unless you worked more than 10 hours a week for the partnership.
But the Government has been looking more favourably on the Enterprise Investment Scheme (EIS) structures often used by film schemes, increasing the tax relief on EISs from 20pc to 30pc from April 2011 and from this April upping the amount you can save in them from £500,000 to £1m a year.
EIS investments, which can be in any industry, not just film, give freedom from CGT if the shares are held for three years. Losses can be set off against other capital gains and no inheritance tax is payable if they have been held for two years at the time of death.
But just because a film scheme is within an EIS structure does not mean it is guaranteed to be free from HMRC scrutiny. That said, tax advisers say film schemes where there is a level of risk and where return is related to the performance of the assets invested in are likely to satisfy the Revenue.
Nicola Horlick, chief executive of Derby Street Films, runs EIS funds investing in film scripts that sit at the other end of the spectrum from Eclipse 35. She said: "We are completely different to Eclipse 35 and those other film schemes where you have to get a barrister's opinion before you invest. We invest in the film at the very outset, providing development capital for new projects."
While EIS schemes are here to stay, more aggressive film finance structures could soon become a thing of the past as the Government brings in an overarching cap on tax relief next year.
Jason Butler, certified financial planner at Bloomsbury Financial Planning, said: "Arguably of greater concern for film schemes is the implications of the cap on taxable reliefs set to come in next April, when the total relief you can claim each year will be capped at 25pc of taxable income, or £50,000, depending on whichever is the higher."
This cap, which has attracted most attention in relation to its ramifications for charitable giving, would have limited the amount of interest relief available under the Eclipse 35 scheme for the payments on the Barclays loans. There is, ironically, a "buy now while stocks last" opportunity for the next year, at a time when confidence in film finance structures is at an all-time low.
Mr Gough said: "Those thinking about doing new ones will only be able to get uncapped tax relief for another year. But the risk of film schemes in the current environment has increased to the extent that they are only attractive to those people prepared to take on a risk of Revenue intervention and only to do transactions they believe will stand scrutiny."
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Source: Film investment could lose tax breaks - Telegraph
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