Devil's Gate - no relief for deferred payments
The decision of the First Tier Tribunal in Alchemist (Devil's Gate) Film Partnership v Commissioners for HMRC has finally been released. The case relates to a partnership claiming film sale and
The decision of the First Tier Tribunal in Alchemist (Devil's Gate) Film Partnership v Commissioners for HMRC has finally been released. The case relates to a partnership claiming film sale and lease-back relief. It's of historical interest for current production, but forms a part of the ongoing litigation background for those who were involved in the film sale and leaseback area, whether as producer, promoter or investor.
The structure underlying Devil's Gate was a claim that relief was available for a "budget" which included £597K of actual costs incurred and up to a further £2,013K "contractually due out of all proceeds of exploitation of the Film..." These further costs were essentially contingent and payable only out of the proceeds of the film. The partnership's accounts recorded an expense of £1,223,132 in respect of "deferred cast and crew amounts". Perhaps importantly, there was no dispute that the £597K qualified for relief.
The partnership's claim in respect of the £1,223,132 of deferred cast and crew amounts failed for a number of reasons.
First, the tribunal found that the Partnership had never actually assumed the obligation to pay the deferred amounts. So there was an implementation failure before the technical issues were even considered. Oh dear.
Secondly, expenditure is recognised for the relevant sale and lease-back relief "as soon as there is an unconditional obligation to pay it". The tribunal found that there was no unconditional obligation to pay the deferred amounts until the relevant income was earned.
Thirdly, under UK GAAP it was not permissible to recognise the deferred cast and crew amounts in the period in which the film was made.
I hope that those associated with this structure will forgive me for saying that it appears, at least from the decision, to have been hopelessly flawed. I was in two minds whether to blog it at all, and the only reason for doing so is to distinguish the flawed elements of this structure from the standard sale and leaseback transactions which should in FFW's view qualify for the reliefs claimed. In the same way that there is no dispute that the £597K actually paid qualified for relief in the Devil's Gate case, there should be no dispute that the standard sale and leaseback transactions qualify for the reliefs claimed.
The structure underlying Devil's Gate was a claim that relief was available for a "budget" which included £597K of actual costs incurred and up to a further £2,013K "contractually due out of all proceeds of exploitation of the Film..." These further costs were essentially contingent and payable only out of the proceeds of the film. The partnership's accounts recorded an expense of £1,223,132 in respect of "deferred cast and crew amounts". Perhaps importantly, there was no dispute that the £597K qualified for relief.
The partnership's claim in respect of the £1,223,132 of deferred cast and crew amounts failed for a number of reasons.
First, the tribunal found that the Partnership had never actually assumed the obligation to pay the deferred amounts. So there was an implementation failure before the technical issues were even considered. Oh dear.
Secondly, expenditure is recognised for the relevant sale and lease-back relief "as soon as there is an unconditional obligation to pay it". The tribunal found that there was no unconditional obligation to pay the deferred amounts until the relevant income was earned.
Thirdly, under UK GAAP it was not permissible to recognise the deferred cast and crew amounts in the period in which the film was made.
I hope that those associated with this structure will forgive me for saying that it appears, at least from the decision, to have been hopelessly flawed. I was in two minds whether to blog it at all, and the only reason for doing so is to distinguish the flawed elements of this structure from the standard sale and leaseback transactions which should in FFW's view qualify for the reliefs claimed. In the same way that there is no dispute that the £597K actually paid qualified for relief in the Devil's Gate case, there should be no dispute that the standard sale and leaseback transactions qualify for the reliefs claimed.