London Tax Tribunal to Evaluate U.K. Film Investment Vehicles

David Beckham - P 2014
Evan Agostini/Invision/AP

David Beckham - P 2014

The tax authority says Ingenious vehicles, used on such productions as 'Avatar,' allowed British celebrities such as David Beckham to reduce their tax bill

A tax tribunal process in London kicked off Monday that will decide whether film investment vehicles used on such Hollywood productions as Avatar, which reduced the tax bills of high net-worth British taxpayers, including celebrities, served as tax-avoidance schemes amid the government's push to close tax loopholes.

The U.K. tax authority, Her Majesty's Revenue Revenue and Customs, has targeted users of suspected tax avoidance schemes, including ones run by Ingenious Media, part of financial services firm Ingenious Group, which offers a range of "alternative investment opportunities." Ingenious called for the tax tribunal to establish whether the partnerships it operates have been run for profit.

Ingenious has previously said it "remains confident of the outcome." A spokesman for the company declined to comment on Monday. A spokesman for the HMRC also declined to comment.

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British investors in Ingenious investment vehicles tied to major movies, including Hollywood productions, are affected. David Beckham and other famous British soccer players, Bob Geldof, Guy Ritchie, Peter Gabriel, musical maestro Andrew Lloyd Webber and others were previously mentioned by The Independent and The Sunday Times as investors in Ingenious vehicles. The HMRC and Ingenious don't comment on individual names. 

The tribunal could take weeks or even go well into 2015, according to observers. The decision is then likely to be appealed, many say.

Investors in Ingenious film partnerships could claim tax relief as the initial costs of films led to early losses that investors could offset against other income, reducing their tax bill.

"The film partnerships run by Ingenious Media have already generated over £1 billion ($1.69 billion) in taxable income for the U.K. Treasury, with more to come over the lifetime of the films they funded," Ingenious said in a statement earlier this year. "They helped to bring movies including Avatar, The Best Exotic Marigold Hotel, The Girl With a Pearl Earring, Vera Drake, Shaun of the Dead, Hot Fuzz and Hotel Rwanda to the screen and are clearly run for profit."

Added the company: "Film is a high-risk business with no certainty of profit, and this is why successive governments around the world have provided fiscal incentives for the film industry. Ingenious Media's track record in finding profitable films is several times better than the industry average and all bar one of the 65 films it produced have achieved a theatrical release, with all of the films released generating taxable income for the partnerships."

Ingenious has also said that the HMRC confirmed that its partnerships were "designed in accordance with government tax policy" before they were launched.

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The tribunal's goal is to establish whether the Ingenious vehicles were run for profit or simply served as a tax shelter that took advantage of a tax loophole, as the HMRC argues. If they are found to have been run with a view to a profit, the investors in those partnerships will be able to keep the tax savings or get back payments made under a so-called accelerated payments regime, which called on people to pay taxes the HMRC deemed they owed even before the tribunal process started.

Ingenious recently wrote to its investors about the advance tax payments issues and an HMRC offer of settlements, which some media reports have said may reduce tax bills by 40 percent. The Independent said the firm wrote to 1,300 past and current investors.
"The company felt it was responsible to point out both the possible adverse impact of the new rules on them and HMRC's offer of settlement," the firm said at the time. But, it added: "The intention of this letter was simply to inform investors of their options and not to encourage a particular course of action."

Ingenious has continued its work in film and TV production, offering several vehicles. Its website lists a vehicle that allows people to invest in "unquoted companies creating and producing high-quality films, television programs and/or video games for worldwide markets." It adds that investment companies have been responsible for producing content for such companies as Lionsgate, Warner Bros, HBO, Universal, Wild Bunch and Sony Pictures.

The site says that the targeted tax-free returns are 8 to 18 percent per year but emphasizes that those figures "are illustrative only and are based on a number of assumptions" and that the targeted returns "may not be a reliable indicator of future performance."

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In 2010, Ingenious Media struck a deal with Fox Searchlight to finance and distribute up to three British films a year in a move that the firm at the time said "could give a shot in the arm to the U.K. film industry following the demise of the U.K. Film Council."

Most celebrities have remained mum on the issue. But a Beckham spokesman told The Independent earlier this year that the retired soccer player has never avoided taxes. He said, "the Beckhams have always paid their taxes in full and have never been involved in aggressive tax avoidance schemes," adding, "They have also been longtime supporters of the creative industries and made a number of successful investments over the years."

Lloyd Webber told The Sunday Times this year that he was told he could be “almost philanthropic" by investing in the British film industry and promoting U.K. films. “At no time did I consider it solely a tax scheme.”

The HMRC has said that it wins about 80 percent of the tax avoidance cases heard in court. In December, a tribunal ruled that a vehicle called Eclipse 35, which was marketed as a tax-efficient way to invest in the film industry, did not deliver the tax relief it claimed it did.

The HMRC's powers only apply in the U.K., with one expert emphasizing that any decisions in the case would affect only U.K. taxpayers.