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Ingenious Games and others v HMRC

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In Ingenious Games and others v HMRC [2019] UKUT 226 (26 July 2019), the UT held that the film LLPs had not been trading with a view to profit.

This was an appeal against two decisions of the FTT (released in 2016 and 2017, Tax Journal dated 23 August 2016 and 31 May 2017).

The appellants were members of film LLPs, whose activities included media consultancy and corporate finance, film and TV investment, etc. Those LLPs had incurred losses and the appellants claimed that these losses should be set against their other taxable income. HMRC had denied the claims.

The main issue was whether the LLPs had carried on a trade with a view to profit. The UT observed that when ‘account is taken of the reality of the insignificance of the LLPs’ ownership rights of the films, what is left is negotiation of and entry into a series of speculative investment in financial assets, and little serious ongoing involvement in the production of the films’. The UT added that whilst ‘the controlling minds professed a desire for profit’, there was no supporting evidence of such a purpose, for instance, a detailed financial analysis. Agreeing with the FTT, the UT also found that, in any event, the LLPs had borne only 30% of the relevant expenditure and so had only incurred 30% of it. The UT therefore upheld the FTT’s decision that the LLPs’ accounts were not GAAP compliant as they recorded the LLPs’ liability as 100%.

The UT also found that only 30% of the claimed expenditure had been incurred ‘wholly and exclusively’ (ITTOIA 2005 s 34) in relation to the LLPs’ involvement in the production of films and games. It noted that ‘the focus must be on the “reality” of the expenditure by the taxpayer, by reference to what asset has actually been acquired as a result of the expenditure’. The LLPs had only been obliged to contribute (and had only contributed) 30% under the relevant agreements.

Read the decision.

Why it matters: When deciding whether the LLPs were carrying on a trade with a view to profit (emphasis added), the UT noted: ‘A profit for an LLP would doubtless be welcome, but that does not mean that the business was conducted with a view to profit. Take the example of an amateur runner entering the London Marathon. Victory would doubtless be very welcome, but for most it would not be an aim.’ Collectively, the loss claims in dispute, including the loss claims made by the follower LLPs, amounted to over £1.6bn.

Also reported this week:

Issue: 1454
Categories: Cases