Ingenious court case: what lies ahead

Ingenious v HMRC, the case which begins at the Competition Tribunal in Bloomsbury Place London today, marks the culmination of almost a decade of wrangling between the blue chip British media investment company and the Revenue. 

Newspapers have been intrigued by the case because of the celebrity investors involved. David Beckham, Gary Lineker, Jeremy Paxman, Wayne Rooney, David Gower and politician Andrew Mitchell are among the names linked to either Ingenious funds Inside Track or Ingenious Film Partners.

The case is expected to last well into December. It will then take months for a decision to be handed down and whichever side loses is likely to appeal. According to the “Agreed Hearing Timetable” issued in advance of the trial, those being called will include Ingenious founder and CEO Patrick McKenna [pictured] and Ingenious Director Duncan Reid as well as such “expert witnesses” as Jonathan Olsberg and Angus Finney.

In the run up to the trial, there have been allegations of HMRC putting pressure on investors.

HMRC has been wielding new powers granted to it under the Finance Act 2014 to issue “accelerated payment notices” (APNs) to investors in the schemes. This asks them to pay the money that the Revenue thinks they owe in advance. (If the case goes in the investors’ favour, they will be repaid with interest.) A common complaint is these APNs work on a “guilty until proved innocent” basis rather than the other way round.

The Revenue has also offered “settlement opportunity for participants in tax avoidance schemes.”

“Where people decline the settlement opportunity, we will increase the pace of our investigations and accelerate disputes into litigation,” HMRC states. The opportunity to take advantage of this was due to run out on Oct 31.

It is understood that various well known names have already settled primarily because (as one source puts it), “they don’t want their name in the papers.”

“People are being pushed into settlements because I think that’s the Revenue’s strategy. If they get all those settlements, the result of the cases become less important anyway,” the source states.

Economy boosting or tax avoidance?

Each side’s position has long been clear.

Ingenious Media argues that its film partnerships “have already generated over £1bn in taxable income for the UK Treasury, with more to come over the lifetime of the films they funded”. The company helped bring to the screen such films as Avatar, The Best Exotic Marigold Hotel, The Girl With A Pearl Earring, Vera Drake, Shaun of the Dead and Hot Fuzz. Its partnerships were “clearly run for profit”.

HMRC contends that the partnerships were tax avoidance schemes.

All bar one of the 65 films Ingenious produced through the Ingenious partnerships were given theatrical releases. All of the films generated taxable income for the partnerships.

Relations between Ingenious and the Revenue were once cordial. Ingenious, alongside others, advised on the design of the film tax relief system that was introduced in 2007.

In the wake of the economic downturn of 2008, these relations deteriorated sharply. There was a stormy Public Accounts Committee meeting on tax avoidance in 2012. A newspaper investigation by The Times in the summer of 2012 cited HMRC sources suggesting that film tax schemes had “enabled investors to avoid at least £5 billion in tax”.

Ingenious, which is estimated to have spent £11m on legal fees during its disputes with HMRC, is crying foul and is suggesting it is being penalised by rules that have been changed “retrospectively”.

In a statement it released to the specialist trade press, the company claims that it “took its plans for the Ingenious Film Partners (IFP) production partnerships to the two most senior HMRC officials in its film unit and received their tacit approval and encouragement. Contemporaneous notes of this meeting were made and provided to HMRC”.

The company also points out that, in December 2006, HMRC made a tax repayment to IFP 2 investors “after a six-month review of the partnership following a first trading year loss caused by the necessary accounting write down of film production expenditure before income was generated. That demonstrates they were satisfied with the way the partnership operated”.

The statement claims that there has now been “a major change of position by the government driven by a rather crude attempt to generate cash for the Exchequer” and that this has been done in “a wholly unfair and unjust manner”.

HMRC, Ingenious contends, “has failed to distinguish between commercial businesses and tax avoidance schemes and has, without proper consideration, deemed all film arrangements to be tax avoidance schemes”.

“If you look at the Ingenious case, I do think that they had a genuine trade there,” comments Dave Morrison, a partner at accountants Nyman Libson Paul. “To my mind, you need businesses like Ingenious to fund the creative sector and to fund entrepreneurs.” He draws a sharp distinction between schemes based around “tax deferral” and those that were designed to facilitate tax avoidance.

Others put a different gloss on the dispute. “Everybody knows that the Ingenious schemes were primarily set up as a tax avoidance structure,” states one well placed source. “The fact that it has helped the film industry and got a lot of films made in the UK is a positive side effect but everyone knows that the key impetus was to save rich people tax.”

Ingenious “remains confident” that the court case will go its way. The Daily Telegraph last week reported Ingenious Chairman Peter Shawyer saying he was “confident of success” in the tribunal. 

Whatever the outcome of the case, Ingenious looks set to continue in investing in British films through its EIS-based schemes (which come pre-cleared by the Revenue.) Recent films the company has backed have included Pride and Mr. Turner.