The Gala Film Partners, LLP v The Commissioners for HMRC
[2023] UKFTT 699 (TC)
Chris Hoyle v The Commissioners for HMRC
26 November 2024
[2024] UKFTT 1060 (TC)
First-tier Tribunal
Three people invested in film partnerships, got tax breaks they shouldn't have, and later sold their shares. The taxman tried to take back the original tax breaks plus more using a special anti-avoidance law. The court ruled the taxman couldn't do this, because the original tax breaks were based on a mistake. The court also said there were no further tax implications from selling the shares themselves.
Key Facts
- •Appeal concerning income tax and capital gains tax on sums received from the sale of Capital Accounts in LLPs.
- •LLPs invested in and leased film rights, claiming film tax relief (FTR).
- •Appellants exited the structure via arrangements in 2013.
- •HMRC sought to impose tax under Chapter 5, ITA 2007 (anti-avoidance provisions).
- •Samarkand case established film leasing wasn't a trading activity, thus invalidating the initial FTR claims.
- •Exit arrangements involved two stages: sale of Capital Accounts and sale of residual interests.
- •HMRC argued Chapter 5 applied regardless of whether the LLPs were trading, based on a purposive interpretation.
- •Appellants argued Chapter 5 didn't apply because the LLPs weren't trading, and that even if it did, no material tax charge arose.
Legal Principles
Purposive construction of tax legislation.
UBS AG v HMRC [2016] UKSC 13; Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684; Craven v White [1989] AC 389; Trustees of the Morrison 2000 Maintenance Trust and others v HMRC [2019] STC 400.
Definition of 'trade' for tax purposes.
ICTA s 832(1); Eclipse Film Partners (No 35) LLP v HMRC [2015] STC 1429; Samarkand Film Partnership No. 3 & Others v Revenue And Customs [2017] STC 926.
Application of anti-avoidance provisions (Chapter 5, ITA 2007).
ITA 2007 Chapter 5; ss 797, 798, 799, 800, 801.
Interpretation of 'relevant disposal' and 'exit event'.
ITA 2007 ss 797, 799; Shop Direct Group v HMRC [2016] UKSC 7; Maureen Hepburn v HMRC (TC02837) [2013] UKFTT 445 (TC); Reid’s Trustees v CIR 14 TC 512.
Capital Gains Tax (CGT) regime and transparency of LLPs.
TCGA 1992 s 59A; Memec v IRC [1998] STC; IRC v Gray [1994] STC; Lindley & Banks on Partnership 20th Ed.
Doctrine of res judicata does not apply to successive tax years.
Carvill v Inland Revenue Commissioners (No 2) [2002] STC 1167.
Statutory interpretation – avoiding distortion of language.
R (AA Sudan) v Secretary of State for the Home Department [2017] 1 WLR 2894.
Outcomes
Appeal allowed.
Chapter 5, ITA 2007, does not apply because the LLPs were not carrying on a trade at the relevant time. Even if Chapter 5 were applicable, the sale of the Capital Accounts does not constitute a relevant disposal under the legislation's plain meaning.
No capital gains tax charge.
Because the LLPs were transparent for tax purposes, the members cannot be treated as disposing of their capital interest in the LLP and being liable to capital gains tax.