2023 Feb 10
The revenue issued discovery assessments under section 29 of the Taxes Management Act 1970 in respect of income tax which it contended was due on certain “Minimum Annual Payments”, or “MAPs”, arising as part of a tax avoidance scheme for the exploitation of film rights in which the taxpayer had participated, on the basis that the MAPs which were paid under a distribution agreement amounted to income to which the taxpayer was entitled on which income tax was due, regardless of the fact that other aspects of the scheme were ineffective to achieve the intended outcome. The scheme involved a film studio selling the distribution rights to a film to a rights company. The film rights company then sold or licensed the film rights to investors, including the taxpayer, who would then ostensibly be trading in the buying, selling and exploitation of film rights. The taxpayer was required to contribute to the cost of the film distribution rights by way of a loan from the rights company lender. The terms of the sale of the film rights would be for a share of profits supported by MAPs sufficient to meet the interest obligations under the loan. A registration agreement provided that the taxpayer agreed that they would be required to enter into security arrangements with the lender pursuant to which the taxpayer would grant in favour of the lender a charge and an assignment of, its right, title and interest in part or all of the sale proceeds payable to it from exploitation of the film rights acquired. The taxpayer would sell the film rights in return for a share of the revenues arising from the exploitation of the film rights and use a proportion of the sale proceeds to repay the loan and would retain approximately 45% of the revenues, leaving the taxpayer with a trading profit. In respect of the tax benefits, it was anticipated that the loss resulting from the fees and expenditure on the film rights acquisition would be available for sideways loss relief and that the interest on the loan would be deductible. The First-tier Tribunal dismissed the taxpayer’s appeal against the discovery assessments. The Upper Tribunal upheld that decision. The taxpayer appealed on the ground that he was not liable for income tax on the MAPs, either because the MAPs were not income to which he was entitled under section 611 of the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”), or because the MAPs were not income from the business of exploiting films (under section 609) of that Act.
On the taxpayer’s appeal—
Held, appeal dismissed. The purpose of section 611 was to subject to income tax any income from a non-trade film business. On a purposive reading of that section, focus had to be on the particular transaction under which the distribution arose, and not on the connected transactions considered as a composite whole. In construing section 611, the following points were to be made: (i) The concept of receipt was different from the concept of entitlement, as a matter of ordinary language. A person who was entitled to a payment from a third party might not in fact receive the money; and the person who received the money might not be the person who was entitled to do so as against the third party. It was accordingly clear that the class of persons intended to be caught by section 611 was wider than simply those who received income. It was therefore no answer to a charge under section 611 to say that a person did not receive the income. The further question was whether they were entitled to the income even though they did not receive it. (ii) It was possible that more than one person would potentially come within the ambit of section 611. That was not antithetical to the purpose of the legislation. Given the context of Chapter 3 of ITTOIA which was aimed at tax avoidance schemes involving the exploitation of films or sound recordings, and the purpose of the provision, it was not surprising to find the net cast wide in that way. That did not risk “arbitrary double taxation” although in some cases the revenue might be put to an election as to which taxpayer should be pursued for the tax. (iii) The words “receiving or entitled to” in section 611 did not carry any special meaning, specific to the statute or invite a narrow technical approach to be adopted to the question of entitlement. They were words of ordinary usage and should be given their ordinary meaning and were not intended to import the domestic law concept of beneficial interest or entitlement. Section 611 did not refer to “beneficial entitlement”, which it could have done if that meaning had been intended. The words in the statute were not defined and fell to be construed and applied according to their ordinary, non-technical meaning. A realistic appraisal of the commercial reality or substance of the arrangements in light of the words of the statute, properly construed, was required. The word “belongs” was not to be used as a substitute for “entitled”. When such an approach was taken to the interpretation of the section, it was clear that a person could be held accountable to tax on payments which had been made to a third party, if that person benefitted from those payment. The reality of the arrangements under the scheme in the present case were that the taxpayer derived a clear benefit from the MAPs, each time they were paid while the loan remained outstanding, sufficient to mean that the taxpayer retained an interest and benefit in the MAPs and remained “entitled to” the MAPs for the purposes of section 611 applying the ordinary meaning of those words. The taxpayer had not completely alienated his rights in the MAPs so as no longer to be entitled to them. It followed that for the purposes of section 609, the MAPs were income from the business of exploiting films (paras 51–56, 62, 74–76, 79, 80, 84, 87–93, 108, 109, 110).
Rupert Baldry KC (instructed by Greenwoods Legal LLP) for the taxpayer.
Aparna Nathan KC (instructed by Solicitor, Revenue and Customs) for the revenue.