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HMRC v Ingenious - score draw in first round

05 September 2016

The much anticipated First Tier Tribunal judgement in HMRC’s action against a number of media investment arrangements promoted by Ingenious does not appear to be an outright victory for either HMRC or Ingenious ([2016] UKFTT 521 (TC)).

The case encompassed three investment arrangements, Ingenious Games LLP (IGames), Inside Track Productions LLP (ITP), 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 media 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.

However, for the loss claims to be allowed, the partnerships had to be trading with a view to a profit. Here, the FTT concluded that none of the LLPs were carrying on a trade ‘with a view to profit’ if the "profit" is to be determined on the basis set out by Ingenious. However, it ruled that if "profit" is understood to be determined on the 30:30 basis (ie ignoring the assigned income/expenditure from the borrowing complex structure) then the businesses were conducted in such a way as to afford a realistic possibility of a profit.

The FTT also said that although the partnerships did not incur expenditure equal to 100% of the budget of the film or game, ITP incurred 35% and IFP2 and IG incurred 30% so these percentages were incurred wholly and exclusively for the purposes of their trade. Without having seen the computations, it is difficult to be precise, but in (very broad) terms, it is looking likely that, if the decision stands, ITP and IFP2 participants will be able to obtain relief by reference to the amount of their own funds that they contributed to the partnerships. However, IGames participants will not obtain any tax relief because it was not ‘trading’. All in all, it is a complex decision with the judgement spanning 342 pages!

Where next?

Investors wanting a ‘silver bullet’ answer to agree their tax affairs with HMRC will clearly be disappointed. The First Tier decision does not create a legally binding precedent for other cases although it could prove to offer the basis of a negotiated settlement with HMRC.

Both sides are likely to be considering onward appeals and the final decision may in fact still be years away. The ITP and IFP2 appeals are adjourned for the parties to agree the computations or apply for another hearing.

In the meantime, investors will need to consider the relative costs of continuing the dispute or settling with HMRC. HMRC has already issued Accelerated Payment Notices (APNs) to investors in these partnerships and most other Ingenious arrangements so, if investors have not paid the tax demanded, late payment interest is running on the full amount.

Participants in what HMRC deems to be ‘avoidance schemes’ also need to be mindful of the timing of new legislation in April 2017, which may label them ‘serial avoiders’ and bring with it nasty new penalties and restrictions (including ‘naming and shaming’ of the individual). The regime’s title is deceptive because the Serial Avoiders Regime can apply even if someone only participated in one scheme.

Whether or not an investing partner has received an APN and paid the amount demanded, this does not settle the dispute with HMRC and it may be necessary to withdraw from the arrangement and repay any tax refunds previously claimed with interest to HMRC. If this is negotiated with HMRC before April 2017, the investing partner can avoid falling within the Serial Avoiders Regime. Of course, if there is a final partial win for the partnerships in the appeal courts, then partners who have withdrawn would not secure any of the tax benefits from such a victory.  Either course of action carries potential risks, benefits and variable costs.

As always, resolving such issues is a personal decision for the individual and there can never be a one size fits all solution. We would advise anyone involved in such schemes to seek professional advice on all options immediately.

See our Avoidance Review service brochure.