In his evidence to the Public Accounts Committee, Tim Levy, Director of Future Capital Partners, one of the two largest film investment companies that had grown up to enable investors to access statutory film relief, estimated that by 2002 the size of the market had grown to over £2bn per annum of expenditure. A written answer by the then Paymaster General Dawn Primarolo (and recorded in a Parliamentary briefing paper) showed that the tax cost of supporting the British film industry through statutory tax reliefs rose from £10m in 1997-98 to £560m in 2005-06. Because of the different things they are discussing, these two sets of figures are broadly consistent.
Clearly this was too much, and the legislative rowing back began in the 2002 Budget. That Budget introduced measures to “protect the tax base and root out tax avoidance.” That assertion proved a touch optimistic. The tax cost of statutory film reliefs virtually trebled in the following three years. But further legislative steps were taken and eventually, belatedly, the reliefs returned to the fiscal obscurity from which they had sprung.
A full account of the history of the legislative measures introduced by Parliament to “root out” tax avoidance and the responses by the various film investment companies to those measures is for the purist. It would reveal a shift on the part of those companies from accessing statutory film relief to statutory loss relief to statutory interest relief along with statutory capital allowances. It would also show ‘soft’ finance, assets being purchased at inflated values, all too generous commissions to IFAs, and other features tending to signal ‘bad’ tax avoidance.
There is much of interest in this account. If you want to draw the all-important line between ‘bad’ and ‘good’ tax avoidance – an ambitious exercise attempted by many but with little conspicuous success – you’ll find it in that account.
But that’s not an exercise for me. I have acted in (indeed, am acting in) most if not all of the film relief cases to come before the courts in recent times. Professionally, whilst they are on-going I cannot discuss them or their facts. And anyway, the story I want to tell is that of why it was that people engaged in transactions which are today badged as ‘bad’ tax avoidance. I don’t need to draw the line to tell the story.
But it is in the detail of that account that the truth lies. If there’s nothing wrong with good tax avoidance and everything wrong with bad tax avoidance, and you want to throw stones at the bad, you can only take sight if you have the facility to distinguish it from the other. And you would have had that facility without the benefit of the hindsight you now enjoy.
The features that are, now, typically identified by tribunals as ‘offensive’ were certainly not thought to be such at the time. In a previous post, I identified a number of common features of these arrangements which are today cited by tribunals, courts and commentators as signalling egregiously bad tax avoidance: the presence of borrowing to ‘ramp up’ the amount of tax relief available to the investor; the presence of guaranteed income streams to repay that borrowing; the fact that the structure of the arrangements together with the availability of the tax relief renders the commercial performance of the underlying film all but commercially irrelevant.
However, as I observed in that post, all of those features were said by Government at the time to be perfectly acceptable. All of those features are present in two cases in which I acted (Halcyon and Micro Fusion) in which the Court of Appeal said the arrangements succeeded. And none of those features was signalled or clearly signalled by the draftsman in his journey back from a more generous statutory relief regime to be especially offensive.
So, I return to my starting point. How is it that people found themselves engaged in transactions badged today as bad tax avoidance? Is their participation in those transactions a reliable indicator of poor moral fibre?
To conclude that it was, you would have to assume that an individual possessed the sophistication to draw the line between good and bad tax avoidance. You would have to assume that he was able to make the judgement despite the fact that each of Parliament, the courts and the Government were signalling to him at the time as acceptable features he now knows to be unacceptable. And you would have to assume he was able to make that judgment in the face of what his advisor was telling him.
Of course, you might just stand back and say, that’s all very well, but perhaps he should just have steered clear of the whole thing unless he was sure he was on the right side of the line. And perhaps that’s a fair judgment. Remember it next time you drive through an orange light.
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