In a recent case, the Upper Tribunal (UT) delivered a decision in favour of HMRC to deny tax relief for partnership losses in Samarkand Film Partnership No 3 and others v Revenue and Customs Commissioners [2015] BTC 517.
The case involved two partnerships, Samarkand and Proteus. The partnerships had appealed HMRC’s decision to disallow losses claimed under the film acquisition relief provisions of the Income Tax (Trading and Other Income) Act 2005 (the “Act”) and for trading deductions relating to agent fees. At the initial hearing the First Tier Tribunal (FTT) considered the acquisition of film interests (one of which was in Oliver Twist) and subsequent lease back of those interests to the seller in return for a series of fixed and increasing rental payments over a 15 year period. The FTT held that these transactions were interdependent and formed a single composite transaction. Accordingly, the FTT held that the partnerships were not carrying on an adventure in the nature of trade, and therefore the partnership losses were denied.
The FTT went on to consider the facts of the case if the partnerships were to be considered as trading within the definition of the Act. The overall finding was that the purchase of the rental stream for more than their value showed a lack of commerciality and demonstrated that the partnerships did not have a serious interest to make profits. This was despite the accounting results of the film projects showing a profit; the FTT instead looked at the net present value of the arrangements. The FTT found that the benefits of the transaction were derived from the investors getting tax relief and the agents getting their fee, which did not amount to a financial benefit to the business of the partnership. Therefore, the partnership losses would still be denied. On appeal, the UT agreed with the FTT judgment.
Of further interest is the UT decision to dismiss the partnerships’ request for judicial review on the basis of HMRC’s alleged failure to adhere to its own Business Income Manual guidance. The UT confirmed that HMRC was within its rights not to apply the guidance where it made it expressly clear that it may choose not to apply such guidance if it appeared the relief provisions were being used to avoid tax rather than defer it. The UT found that it was reasonable for HMRC to consider these schemes may have amounted to tax avoidance.
This acts as a reminder that careful thought must be given to applying any HMRC guidance where it may be possible that HMRC may view the relevant transactions as amounting to tax avoidance. In these circumstances, taxpayers may not be able to rely on the relevant published guidance.
HMRC is currently demonstrating a drive to recover tax from taxpayers who are suspected of seeking tax advantages through tax avoidance schemes, a position which was supported by the ‘accelerated payment notice’ and ‘follower notice’ to pay provisions introduced in the Finance Act 2014.
We will continue to monitor this area of development and provide updates as they occur.