We are pleased to report that, contrary to some press coverage, the Tribunal has drawn a clear distinction between our film production partnerships and other film-related arrangements which have appeared before the courts over the last couple of years. In contrast with those cases, the Tribunal has found the Ingenious film partnerships to be trading and that those trades were conducted with a view to profit, although on a different basis to that which the partnerships argued before the Tribunal.
The argument that the partnerships were trading and were doing so with a view to profit is one which we have consistently maintained throughout both the enquiry process and litigation.
The purpose of this statement is to provide more detail about the Tribunal judgment. For investors and general readers alike, however, it should be clearly understood that, irrespective of this long-running and historic dispute with HMRC, the verdict of the Tribunal has no bearing whatsoever on any of our current business activities, whether they be EIS and Business Relief qualifying activities in media, or more widely in infrastructure and real estate.
The Tribunal concluded that none of the film partnerships were carrying on a trade with a view to profit on the bases argued by the partnerships. From our initial reading of the decision, this appears to be based on the Tribunal’s view that it was unrealistic, at the point of greenlighting (that is to say at the point of committing to produce each film), to hope that the films would be profitable. We strongly disagree, based upon the clear evidence that was presented to the Tribunal and the testimony of expert witnesses. The Tribunal itself concluded that there was at least a speculative hope of profit and that the films produced by the partnerships were capable of generating profits.
The Tribunal did however conclude that the partnerships were trading with a view to profit if production costs were restricted to 35% for Inside Track films and 30% for Ingenious Film Partners films, with taxable film income being restricted based on the same underlying principle – and that this approach to cost and income recognition should then form the basis for the preparation of the partnerships’ accounts.
We were therefore successful in pressing our case on a particularly important issue in front of the Tribunal, even though this success must be qualified in the manner described above.
In the case of Ingenious Games, we are extremely disappointed that the Tribunal concluded that the partnership was not trading and the partnership’s business was not conducted with a view to profit (on the basis that the partnership argued before the Tribunal). However, the partnership’s business was found to be conducted with a view to profit if game development costs were restricted to 30%, with taxable game income being restricted based on the same underlying principle. Again, we disagree.
In our opinion, certain of the Tribunal’s conclusions, as regards both our film partnerships and our games partnership, are based on a number of arbitrary and subjective interpretations and are unreasonable.
The broad impact of the adjustments made by the Tribunal is to reduce the trading losses allocated to investors and therefore reduce their ability to offset those losses against their tax liabilities in the relevant financial years. The precise impacts will take some time to process, given the volume of adjustments required on a film by film (or game by game), year by year basis. This process will also necessitate further discussion with HMRC, as directed by the Tribunal, which will inevitably take some time.
We are in the process of studying the detail of this very long and complex judgment (which runs to nearly 350 pages) and are actively considering the terms of an appeal. We have 56 days to start any appeal.
We will provide a more comprehensive update to investors once we have reviewed the fine detail of the judgment and determined the expected impact on partners’ tax returns, which will take several weeks.