No trade, no tax relief for film sale-and-leaseback partners

In the United Kingdom an Upper Tribunal has dismissed an appeal against the decision of the First-Tier Tribunal that partnerships engaged in film sale-and-leaseback arrangements were not trading, and dismissed an application for judicial review of Her Majesty's Revenue Commissioners' decision to depart from its guidance on those arrangements. Accordingly, the individual partners were not entitled to tax relief for the partnerships' losses. The First-Tier Tribunal had been justified on finding, on the facts, that the sale-and-leaseback was a single, composite non-trading transaction (payment of a lump sum in return for an income stream).

The case is question is Samarkand Film Partnership No 3 and others v HMRC [2015] UKUT 0211 (TCC), a 206 paragraph decision of Nugee J and Judge Sinfield. The bottom line on this decision is this:

• Each specific transaction should be examined on its own merits since the fact that it is of a type that might, in other cases, have constituted trading is irrelevant.
• The trading requirement must be considered by reference to the partnership's business alone. Partners' borrowings and desired tax reliefs are irrelevant.
• An interest in making a real, commercial profit (taking into account the time value of money) is at the root of commerciality for trade loss relief.

The Upper Tribunal was however divided on what the expenditure might be attributed to when valueless film rights were acquired, but concluded that the question must be determined by reference to the taxpayer's object in spending the money rather than from inferences derived from the value of the rights.