HMRC has launched an investigation into thousands of high profile individuals who invested in film funds between 2002 and 2010. Following the decision of a tax tribunal in August this year, the wheels have now been set in motion to pursue a tax liability of over £434million.
London-based Ingenious Film Partnership (“Ingenious”) worked with banks across the UK raising investment for global films, including Avatar, Life of Pi and Die Hard 4. Representatives of Ingenious offered this investment opportunity to high net worth individuals, in particular, preying heavily on professional footballing personalities. Under the scheme, a wealthy investor would be offered the chance to invest while taking advantage of significant tax relief.
Typically, an investor could deposit about 30% of their own money into the fund. The remaining amount could be loaned to them and in theory, the total sum would be put towards the funding of a film. The value of each film significantly downplayed in the first year, on the basis that films were risky ventures, and this produced the higher rate of tax of that first year loss. The tax relief that then followed was usually equal to the cash investment that the investor had directly contributed, which could then be used to reduce tax owing on their other investments. The tribunal found that the schemes in fact funded only 30% of film productions, with the remaining money was simply shifted between accounts to give the illusion of trade.
There is no suggestion of criminality on the part of the investors at this stage, but HMRC has declared that they will now have to repay their tax liability on 100% of the amount that was invested, along with interest and legal costs. Current legislation allows HMRC to issue Accelerated Payment Notices (APNs) which demand a response from the taxpayer within 90 days, either disputing the APN, or paying the figure in full. Following this response, HMRC can either withdraw the APN after considering the reasons, or reaffirm the notice. Delayed payment following this period attracts further penalties of 5%, which in many cases, will lead to severe cash flow issues for hundreds of investors.
The litigation is far from over, with both Ingenious and HMRC considering onward appeals related to subsidiaries of Ingenious. Investors need to be mindful of new legislation coming into force in April 2017 intended to penalise “serial tax avoiders”. Affected investors should therefore seek to resolve disputes with HMRC as quickly and effectively as possible.