INGENIOUS FILM PARTNERS and HMRC have both claimed to have won a victory in their long-running tax dispute in a ruling which could leave many investors considerably worse off financially.
The taxman has scored a partial win against the scheme, which HMRC claimed had been used to avoid tax.
The Ingenious Media Film partnerships were investment schemes designed to use specific accounting treatment for producing films to reduce investors’ personal tax liability – the investors included a number of celebrities.
HMRC had argued that in recent cases this constituted tax avoidance and that the investors should repay any tax relief claimed through investing in the schemes. Investors in the schemes contested this interpretation in the courts.
The Tribunal rules that the partnerships were trading with a view to making a profit. It found in the case of all three structures being considered (Inside Track Productions, Ingenious Film Partners 2, and Ingenious Games either they were not carrying on a trade, in the case of Ingenious Games, or not trading with a view to profit as determined on the Ingenious basis.
In the case of Ingenious Games therefore the appeal was not allowed and the tax claimed now falls due.
However, in the case Inside Track Productions, Ingenious Film Partners 2, the Tribunal found that if the expenditure was appropriately, in its view, restricted to 35% and 30% respectively then the structures could be treated as trading with a view to profit.
Investors in one of these structures would have put in either 35% or 30% respectively of your own cash. The aim was to get back 40% of the claim which could equate to £32. The investor was therefore meant to get most if not all of their cash contribution back through a tax claim.
Dawn Register, partner, BDO tax dispute resolution, said: “This does not appear to be an outright victory for either HMRC or Ingenious. Instead both sides are likely to be considering onward appeals and the final decision may in fact still be years away. Taxpayers wanting a ‘silver bullet’ answer to agree their tax affairs with HMRC, who have been waiting with bated breath, will clearly be disappointed. However, this decision could prove to be the basis of a settlement, although as a First Tier decision it does not create a legally binding precedent for other cases.”
The Tribunal’s decision effectively reduces the “return” through the tax claim to either £14 or £12. Therefore, if the investor was looking for the tax claim to cover their cash investment in the structure they have clearly not achieved this aim, Michael Avient, partner at UHY Hacker Young, said.
“Although in respect of two of the structures the taxpayers in part won this is likely to be of little comfort to those who invested,” he said.
“According to the Tribunal the quantification of the tax claims were fundamentally flawed and the expected returns to investors through tax have been significantly reduced.
“After interest on the tax now due it is likely that many investors will be very significantly out of pocket.
“Although they may not have outright won it is unlikely from a cash-flow perspective that significant amounts will need to be paid out and in fact there may well be a cash positive contribution to the government coffers.”
HMRC said: “Users of the Ingenious scheme were given the opportunity to settle on similar terms nearly four years ago and now face big bills for interest and legal fees on top of the £434m in unpaid tax resulting from the scheme.”