Acquiring and sublicensing film rights not a "trade"

Still on the subject of UK tax and its impact on the creative industries, the Court of Appeal (Sir Terence Etherton (Chancellor) and Lords Justices Christopher Clarke and Vos) gave a ruling yesterday in Eclipse Film Partners No 35 LLP v HM Revenue and Customs [2015] EWCA Civ 95. In July 2012 the First-Tier Tribunal held, on the facts before it, that a partnership's activities in acquiring film rights and then sublicensing them to a distributor did not amount to carrying on a trade [see earlier IP Finance blogpost here]. This being so, the partnership's members were unable to obtain tax relief on interest paid on the borrowings which they had made in order to finance the partnership's activities under the Income and Corporation Taxes Act 1988 sections 353 and 362.

Film funding in Europe: a new Communication

If only ...

The European Commission has now adopted a new Communication on state aid for films and other audiovisual works, to replace the Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions on certain legal aspects relating to cinematographic and other audiovisual works (here).

The 2013 version updates the 2001 Cinema Communication by extending the scope of activities which it covers, introducing a higher maximum aid intensity level for cross-border productions and providing for the protection of and access to film heritage. A more digital-friendly, document, it also revises the rules relating to the imposition of territorial spending obligations, while continuing to allow such obligations to be imposed. The new Communication is now in force, having been published in the Official Journal.

Source: European Commission press release here.

Film finance not "trade", rules FTT

Decisions of the UK's First-Tier Tax Tribunal don't often get a mention on this blog, but Eclipse Film Partners No 35 LLP v Revenue & Customs [2012] UKFTT 270 (TC)  looked quite interesting, this being a lengthy decision of Judges Edward Sadler and John Walters QC of 20 April.


Eclipse, an investment partnership, was incorporated in October 2006 and comprised 289 members. According to its partnership deed, its business was the production, distribution, financing and exploitation of films. Eclipse struck a complex licensing agreement with Disney under which each member made substantial contributions of capital to pay the licence fee, stumping up some £50 million of their own cash and borrowing another £790 million under a 20-year facility. At the same time, the film rights were sub-licensed to a distributor, which agreed to pay annual specified sums over a 20-year period. Eclipse then entered into a marketing services agreement as a means of supervising the implementation of the distributor's release plans for the films, as well as a consultancy agreement relating to the future selection, acquisition and exploitation of films and film rights. 


In its first partnership return, Eclipse said it was carrying on a commercial trade of acquiring and exploiting film rights, although no profits had yet accrued. In reliance on the Income and Corporation Taxes Act 1988 sections 353 and 362, its members claimed tax relief in respect of the interest paid on their borrowings. 


The Commissioners for Customs and Revenue considered that there was no entitlement to tax relief because Eclipse was basically just a vehicle for speculative investment rather than a trade. Were they right?.

Dismissing Eclipse's appeal, the FTT explained that the burden was on Eclipse to establish that it was carrying on a trade, not for the Commissioners to disprove it.  The transactions and arrangements entered into by Eclipse were not a sham; indeed, they had legal effect according to their terms, and the fact that they were set up as a tax avoidance scheme did not automatically mean that they could not be trade.  The killer punch here, though, was that the way Eclipse's members financed their capital contributions and the extent to which they did so was extraneous to Eclipse's actual activities.


On these facts, said the FTT, the interdependent and coterminous licensing and distribution transactions entered into by Eclipse did not have the speculative aspect that could be expected of trading transactions. True, the sub-licence produced profit -- but the bulk of that profit was predetermined and could not be regarded as the speculative profit of a trading venture. Any additional profits which might materialise were clearly viewed as a bonus rather than a profit reasonably to be expected. In commercial terms, Eclipse did not have a "customer" but had merely been given the opportunity by Disney of participating in its licensing arrangements.

Film finance tax advisers face four-week trial, £22m claim

Accountancy Age reports that business advisers and auditors Baker Tilly are facing a negligence claim of around £22m in respect of advice given about the availability of tax relief on investments in film finance schemes. A total of 75 claimants have brought the claim, filed in the High Court in 2006, against Baker Tilly and IP-and-tax specialist Adrian Shipwright (Pump Court Tax Chambers). Following the breakdown of settlement negotiations the case is set to go to trial for four weeks at the end of June.

Film finance: four case studies from Spain

Variety has published an article by Emiliano de Pablos, "Spanish film finance case studies: funding changes impact diverse projects", which briefly highlights the funding bases of the following projects:

* Stephen Soderburgh's two-film "Che Guevara" biopic;
* "Asterix at the Olympic Games", from Ciudad de los Rebates;
* Mediapro's "Suso's Tower";
* Lisandro Alonso's "Liverpool".

The article makes some mention of exploitation rights, together with some of the sums involved.

Film finance faces a perfect storm

A depressing piece of analysis by Steven Zeitchik ("Industry braced for economic impact"), on Hollywood Reporter, predicts the perfect storm facing the film-financing world in the wake of the current economic downturn. He observes:

"... so-called single-picture financing -- which encompasses films ranging from the smallest indie to a $60 million star vehicle -- is going through its own turbulence. Projects that would have sailed through easily a year ago are stalled in development. Movies that are practically in preproduction are falling apart at the eleventh hour.

...

Most evidently, skittish equity investors who once thought nothing of dropping a few million into a project are becoming a lot tighter with their money, while the overall number of equity investors is starting to drop.

Almost as dramatic is the change in debt financing, the means by which much of a film's budget is covered. Money is either too expensive -- interest rates have soared from the neighborhood of 10% to 20% for many films -- or impossible to get in the first place.

To top it off, a barren foreign-sales market -- some call the recent Berlin market the worst in many years -- is dinging the financing world. Producers can't finance most pictures without foreign presales, and foreign presales help cover much of the debt in what's known as Gap/Supergap financing. If a project can't be presold and risk limited, financial institutions such as Aramid and Newbridge Partners who provided this funding become more reluctant to lend".

He gives the example of a typical $10 million film finance project, where $5 million may come from debt financing, $3 million from equity investors and the rest from state grants and tax rebates. The reluctance of equity investors to commit and the poor prospects for foreign sales make the funding exercise painfully difficult.

Artemis Eternal and the eliminated middle man

According to the Student Operated Press a group of international moviegoers has announced that it is are backing filmmaker Jessica Mae Stover's fundraising project for her motion picture Artemis Eternal; the group is reportedly inviting other film fans to do the same. According to this item:

"On the official site for the project, visitors can explore an interactive map of the development, track progress and impact production by contributing funds directly. By relying on contributors to promote the website, reach out to local press and even create press releases such as this one, Stover has cut out the middleman, and allied with the audience to break ground on a new formula for film finance, production and exhibition".

This venture is then explained in a manner which is as much historical and aesthetic as commercial in its content:

"Like medieval patrons, six major media conglomerates and a handful of matrixed millionaires control the ebb and flow of art and media.

In a move that it is part film, part movement, part philosophy - the audience funding 'Artemis Eternal' posits that throughout history patronage has only appeared to shelter artists outside of this system. "Art patronage tended to arise wherever a royal or imperial system and an aristocracy dominated a society and controlled a significant share of resources. Rulers, nobles, and very wealthy people used patronage of the arts to endorse their political ambitions, social positions, and prestige." Stover & Co.'s purist, modern twist on the outdated, elitist model of patronage opens the floor to everyone. Now the groundlings can commission a play from Shakespeare, not just the Queen: Something that would be impossible without the advent of the Internet.

Contributors are quick to chime in on message boards and Facebook, "There are a lot of people rooting for us. We've contributed $40,000 and only have another $60,000 to go. We're 40% there." Says another in e-mail, "Hundreds of millions of people are online and many will want to be a part of this. We're thinking our odds are pretty good, especially if the press will help us 'elevate' our story."

... Stover isn't glossing over the difficulties behind this new model she's found herself helming, "It's a stressful undertaking. I'm an able craftsman and willing to put myself, my ideas and my intellectual property out there, but fundraising is brutal no matter how good you are. I cannot succeed alone. We need help." This realistic and candid side to professional filmmaking has drawn aspiring artists, filmmakers and film fans who not only seek to understand the decline of movies and theaters, but to work toward improving the film experience; to contribute their hard-earned dollars to the film in hopes that other quality artists can use the model they're helping to trailblaze.

Stover continues, "It's like the end of the 'NeverEnding Story.' We need someone to name the project. To name me. Studios aren't going to do that, the press isn't going to do that. The audience is Bastian. We've really put our fate in their hands. They are the story."

"Even if we fail we win," says one commenter on the official site. Another adds, "This is more than one endeavor, it's a way of life and working together to conquer obstacles." The comments flow until someone encapsulates the spirit of the project tidily, "Only $1 to ride? Count me in. ThunderCats, ho!"".

Official Artemis Eternal website here
If you'd like to comment on this IP finance initiative, or on the "All Rights Reserved" notice, please post your comment below or send it by email here.

Film finance without risk to IP rights?

The Times Online today carries a brighty and cheery feature, '10 essential tasks for making your own movie', by Adam P. Davies and Nicol Wistreich, authors of The Film Finance Handbook – How to Fund Your Film (published by Netribution) and available here for £22.49 & p&p. The tenth essential task is

"Finding appropriate finance

... When your project is fully developed, you will be ready to look for “production finance”.

This comes from all sorts of sources, including banks, film funds, wealthy individuals, distributors, government bodies, cast and crew deferments, product placement, film institutes and your great-uncle Quentin. With the right knowledge and advice, it is immeasurably rewarding obtaining the funds needed to put your dream on the screen.

Of course, you could skip the whole process, shoot on a minimal budget, max-out your credit cards and screen your film online to the world. If you get enough attention, who knows how long before other opportunities present themselves? The most popular YouTubers pick up agents and make thousands of pounds from adverts alone".

The article doesn't mention the words "collateral", "securitisation" or "intellectual property rights". Are any readers of this weblog familiar with The Film Finance Handbook? If so, can they let us know what it says about the mortgaging of IP rights as a means of financing the production-to-distribution process?