It used to be that the costs of producing a film – or acquiring a completed film – would be matched over time against the income that came in from the film after it had been made. This meant that it could take a long time for a taxpayer to get relief on his investment in the film industry.

 

To change this and encourage investment, in 1992 the UK introduced a tax relief (called Section 42 relief after the legislation that introduced it) which allowed expenditure on producing or acquiring British films to be written off over a much shorter period of only three years. 

 

This was followed in 1997 by what was called Section 48 relief which allowed for immediate tax relief for expenditure upon completion or acquisition of a British film, where total expenditure on the film was £15 million or less.  Both of these reliefs required the films to be qualifying British films and so this helped to support the British film industry.

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Unfortunately, whilst the reliefs did result in an expansion in the British film industry, they were also seen by tax planners as something that could be easily exploited to get tax relief. In the years following the introduction of the film reliefs, that exploitation was increased dramatically by promoters of film tax schemes, who pushed the boundaries beyond what was considered acceptable. The film tax scheme industry grew so massively that the Government was forced, eventually, to respond by introducing anti avoidance legislation to bring a stop to what was perceived as abuse of the system. 

 

To put this in some kind of context, in 1997-98 the total tax cost of providing film relief in the UK was £10m. By 2005-06 the tax cost of these reliefs had increased exponentially to £560m.  

 

When the government brought an end to Section 42/48 relief, this was not the end of the story. The promoters of the tax-avoidance schemes tweaked their offerings to keep ahead of the changes and continued to sell film tax schemes. There was a wide range to the many types of film schemes sold and they are referred to by a variety of different descriptions such as “sale and leaseback”, “active and non-active partners”, “sole trader”, “interest relief schemes” and “corporate tax schemes” amongst others.

 

HMRC has used various means to counteract these schemes. In some cases, they have changed the legislation. In others they have had to take the scheme to the tax Courts to argue that the legislation cannot be used to achieve the results that the tax avoidance scheme claims. Over the past few years, HMRC have taken several cases to the tax courts, and in the majority of cases HMRC have won the argument. 

The more notable wins for HMRC include specific film schemes such as Eclipse 35, Proteus & Samarkand and Ingenious Film Partners (although some of these cases are being appealed to the higher Courts).  

 

Fast forward to 2016 and the UK Government still tries to support the creative industries through various tax reliefs, one of which is film tax relief. However, to try and deter what the Government perceives to be unacceptably abusive tax avoidance, it has also brought in more and more legislation. This includes the Accelerated Payment Notice (APN) and Follower Notice (FN) regimes 

 

in 2014 which allow HMRC to demand payment of the tax it considers is owing from taxpayers even before the matter has been finally settled in the Courts, as well as recent legislative provisions which include measures such as naming and shaming serial tax avoiders – due to come into effect 6 April 2017.

 

While there are many taxpayers who have invested in film tax schemes to support British films – just as the Government originally intended – in some cases the taxpayers may have done so in the mistaken belief that these schemes were approved by HMRC. But with the introduction of the APN and FN legislation, the tide has irreversibly turned. HMRC are under increasing pressure to deter tax avoidance, leaving many innocent film scheme investors with the prospect of having to pay back the tax relief they claimed many years ago. There are still tax avoidance schemes and ‘tax mitigation schemes’ available in the market, and there are still promoters who will try to convince taxpayers that there are easy ways to reduce or completely do away with your tax bill, but the experiences of the past few years make most people very wary of ‘investing’ in such planning.

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If you would like further details or advice on film schemes or anything else mentioned in this article, please call Mazars LLP on 0207 063 4639 or 0161 831 1312.