HMRC goes to the movies to foil film funding loopholes

A Fistful of Dollars turned into Armageddon for some of the UK’s biggest celebrity investors after HMRC hit a leading film investment company with an enquiry into tax losses generated by its blockbuster hits.

The stakes are incredibly high here. Ingenious Media generates more than a billion pounds of taxable revenue – and the taxman wants to make sure everything is above board.

HMRC has taken issue with the level of tax losses claimed by investors after making investments in films.Investors put in their own cash and borrow off the film investment company to boost their stake. The investment company then matches the investor’s total stake. However, investors have reportedly been claiming reliefs on the full amount invested by the two parties.

But advisers have ventured that HMRC is mounting a late attack after missing the 12-month enquiry window to launch challenges to people’s recent tax returns. “They can only look into old tax returns by claiming they were negligently drawn up,” said one adviser.

Investors have been contacted by the taxman, which is warning they will have to pay outstanding tax if HMRC finds fault, but Ingenious is insisting its celebrity partners will not be stumping up cash.

The tax bill would be “most likely zero,” said James Clayton, chief executive of Ingenious Investments, the division which invests cash into films including Avatar and the upcoming remake of 80s TV hit The A-Team. “This is because any losses denied [by the taxman] would be carried forward and offset against subsequent taxable income.”

Whether or not films were made in the US or the UK a significant proportion of the worldwide receipts including those of Avatar are taxed in the UK, Clayton insisted.

Ingenious Media says it is facing a “handful” of HMRC enquiries but stressed its partnerships had always been found to operate in the proper manner.

However, Ingenious has sent a letter to investors in efforts to soothe their nerves. It said: “We are… completely confident that HMRC will agree that our film businesses are carried out on a commercial basis with a view to profit, not least because we know the actual profitability and likely profitability of a number of our films.”

Clayton said the division positively encourages HMRC’s attention, but the focus has not led the business to consider moving abroad.

“Certainly not. There is nothing unusual or untoward here. We are just getting on with our job – investing in creative businesses – whilst HMRC are getting on with theirs,” said Clayton.

HMRC said: “The loopholes which allowed the tax relief to be abused with no benefit to the film industry have been closed. If we find evidence of abuse we will take steps to put things right.”

In our view

Ingenious Investments says it has had many partnerships which have been subject to enquiries but has “never” had an enquiry that has not been successfully closed. With HMRC grilling companies more than ever about their tax affairs, their confidence faces further tests from the taxman.

Further reading:

Ingenious strikes back on film tax issues