Published in August 2016, the Tribunal decision was claimed by both sides as a victory. The past nine months have been spent trying to understand the implications of the original judgement, which is highly complex in both tax and accounting terms. Also at 343 pages long, it is a lengthy and heavy read.
The original case encompassed three investment arrangements; Ingenious Games LLP (IGames), Inside Track Productions LLP (ITP) and Ingenious Film Partners 2 LLP (IFP2). Investing partners contributed both their own capital and borrowed capital to the partnerships.
Initial partnership losses were claimed against the investor’s other taxable income and, over time, income from the investments flowed back to the partners. The partnerships were involved in some well-known and successful films but HMRC still argued that the partnerships were not trading with "a view to a profit". The FTT ruled that both ITP and IFP2 were trading, although it found that IGames was not.
The May 2017 supplementary decision now confirms that the case is lost by Ingenious. However it is clear from the judges’ summing up that it is far from straight forward and has developed in a way that none of the investors could have originally predicted. The decision is said to have been reached “with misgivings and reluctance”. The court ruling does adopt HMRC’s stance that “the rights were capital in nature” and basically results in no tax relief being due to investors.
With high profile investors on board, Ingenious has become something of the flagship film scheme case. The feeling among many investors in film schemes across the board, plus wider tax arrangements, is that if Ingenious loses there will be something of a domino effect with HMRC then able to defeat many other so-called "tax avoidance schemes". However it is highly likely that Ingenious will appeal the First Tier decision, which could lead to further years of litigation.
Since 6 April 2017, the Serial Tax Avoidance Regime (STAR) is now in operation, which brings further risk for investors in historical arrangements that HMRC deem to be "tax avoidance". Despite its name, the regime can apply if a taxpayer participates in only one avoidance arrangement.
In particular, investors will need to be extremely careful if they participate in any new tax planning which could be regarded by HMRC as a tax avoidance arrangement. Then a warning period can be triggered and draconian measures applied such as "naming & shaming" people in the public domain and restricting claims to some tax reliefs.
What should investors do?
Investors are therefore in a precarious position and have a key decision to make; they can admit defeat now and look to settle with HMRC, or they can partake in future tax appeals to higher courts. It should be noted that the First Tier decision does not create a legally binding precedent for other cases.
Some investors will have effectively made payment to HMRC of the additional tax due or partly due under the Accelerated Payment Notices (APN) issued by HMRC since Finance Act 2014.
However it is important to understand that payment of an APN does not settle the dispute or open tax enquiry that an individual has with HMRC. Settling now with HMRC would include making a full and final agreement and withdrawing from any onward appeal. If there is an eventual win for the partnerships in the appeal courts, then partners who have withdrawn would not secure any of the benefits from such a victory. Therefore either cause of action carries potential risks, benefits and variable costs.
Many investors will need to consider their own personal circumstances in terms of their appetite for risk, incurring further costs and ability to pay HMRC. The only point that is clear, is that there can never be a one size fits all solution. We would advise anyone involved in such film schemes or any other historical tax avoidance arrangement to seek professional advice on all options immediately.
Dawn Register, tax dispute resolution partner, BDO