“Structure and taxation The business proposal provides the opportunity for an individual to engage in the global film industry on a sole trader basis. With assistance from Goldcrest Pictures, the individual will undertake a trade of purchasing and exploiting film distribution rights in defined territories and specific films. The financing of such transactions can potentially be leveraged by a limited recourse loan from a Goldcrest entity. Such a loan is expected to cover 78% of the transaction with the balance of 22% coming from the individual’s own funds … Should the individual choose to apply for a loan to cover 78% of the total transactions, it would be 5 years in term on a limited recourse basis. The loan would be secured by a security interest in the Sole Trader’s distribution rights with a commercial rate of interest. The interest and principal would be repayable from a percentage of revenues generated by the exploitation of the distribution rights. Based upon information provided by Goldcrest Pictures, the Sole Trader will decide to purchase certain territorial rights in defined films from Goldcrest Film Rights Limited. Goldcrest Pictures will then provide ongoing film advisory and administrative services to the Sole Trader covered by the up front fees payable and a performance related fee based on the Sole Trader’s exploitation receipts … The Sole Trader contracts to dispose of his rights to a Goldcrest Distributor in return for a pre agreed share of exploitation revenues which will be monitored by Goldcrest. It is a proportion of these revenues that will be used to repay the loan to Goldcrest Funding (expected to be 55-60% of revenues generated). Whilst the trade is carried on with a view to being a profitable venture, it is likely that a loss will arise in the first Accounting Period due to Generally Accepted Accounting Principles (“UK GAAP”). Under UK GAAP balance sheet assets represented by “work in progress” (for incomplete films) or “trading stock” (for completed but unsold films) must be valued in the accounts at the lower of: - Cost; and - Net realisable value. Due to the nature of the arrangements entered into to exploit the films, it is anticipated that the net realisable value of the assets will be substantially lower than cost as revenues from the exploitation of distribution rights will not yet be realised and will therefore be uncertain. The financial illustration in the enclosed Business Proposal assumes that the average net realisable value will be 12% of each asset’s acquisition price, although the net realisable value will vary from film to film and from territory to territory and may be higher or lower. The projected loss will be adjusted for tax purposes and, as a result, for a 40% taxpayer, a tax loss of approximately 34% of the 100% committed capital is expected to arise. The cashflow in the above scenario for someone committing total capital of£1 million would be:- Initial cash subscribed£220,000 Estimated net tax relief£343,556 Net initial cash benefit +£123,556 …”
“it would be unsafe to accept the Appellant’s assertions [about his activities before and after 2006/07] in the absence of any detailed examination of the evidence and consequently [we] found that we must deal with the transaction as a one-off transaction.”
“one cannot disregard evidence of similar activities because the tax consequences of those activities are under investigation. The tax consequences of a transaction do not determine its character; rather, it is the character of the transaction which determines its tax consequences.”
“7. Further and in any event, Mr Degorce says that the UT Decision on “trade” discloses errors of law.”
“Further and in any event, Mr Degorce says that the UT Decision on “trade” discloses errors of law.”
“4. In 2007/08 [Mr Degorce] entered into very similar transactions for the purchase of a further six films, also arranged by the Goldcrest Group. These transactions are the subject of a separate appeal which the [FTT] has yet to hear. Although the transactions he entered into in 2006/07 were loss making (his revenues were less than the price he paid), those he entered into in 2007/08 generated very substantial taxable profits (i.e. of substantially more than the price he paid).”
“(a) The primary goal as far as the individual participants were concerned was to generate income tax losses to shelter their taxable income for 2006 – 2007; (b) In respect of Paramount, the Scheme represented a means by which it could sell a limited share in the distribution proceeds of its films for what it considered to be a reasonable price for such a share; (c) As regards Goldcrest, the Scheme generated the income from the individual participants.”
“The rights acquired by Mr Degorce for each of the two films were also not identical – they differed in their territorial extent and duration – but essentially those he acquired entitled him to receive the bulk of the net profits … derived from the exploitation of the films within the relevant territorial and temporal limits. The remainder (2%) was payable to Goldcrest Pictures Limited …, which had entered into an agreement with Mr Degorce to provide him with certain advisory services, the consideration for which consisted of the 2% share plus an advance fee of£1.6 million .”
“In the Tax Acts, except in so far as the context otherwise requires - … “trade” includes every trade, manufacture, adventure or concern in the nature of trade.”
“… a loss … shall not be available for relief under section 380 unless it is shown that, for the year of assessment in which the loss is claimed to have been sustained, the trade was being carried on on a commercial basis and with a view to the realisation of profits in the trade …”
“For the purposes of subsection (1) above, the fact that a trade was being carried on at any time so as to afford a reasonable expectation of profit shall be conclusive evidence that it was then being carried on with a view to the realisation of profits”
“The profits of a trade must be calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in calculating profits for income tax purposes.”
“(a) expenses not incurred wholly and exclusively for the purposes of the trade, or (b) losses not connected with or arising out of the trade.”
“If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.”
“111. … It is necessary to stand back and look at the whole picture and, having particular regard to what the taxpayer actually did, ask whether it constituted a trade. 112. The Income Tax Acts have never defined trade or trading further than to provide that (in the words of TA 1988, s 832(1) which was applicable to the relevant tax year) trade includes every trade, manufacture, adventure or concern in the nature of trade. As an ordinary word in the English language “trade” has or has had a variety of meanings or shades of meaning. Its meaning in tax legislation is a matter of law. Whether or not a particular activity is a trade, within the meaning of the tax legislation, depends on the evaluation of the activity by the tribunal of fact. These propositions can be broken down into the following components. It is a matter of law whether some particular factual characteristic is capable of being an indication of trading activity. It is a matter of law whether a particular activity is capable of constituting a trade. Whether or not the particular activity in question constitutes a trade depends upon an evaluation of all the facts relating to it against the background of the applicable legal principles. To that extent the conclusion is one of fact, or, more accurately, it is an inference of fact from the primary facts found by the fact-finding tribunal. 113. It follows that the conclusion of the tribunal of fact as to whether the activity is or is not a trade can only be successfully challenged as a matter of law if the tribunal made an error of principle or if the only reasonable conclusion on the primary facts found is inconsistent with the tribunal’s conclusion. These propositions are well established in the case law … 114. In Marson v Morton[1986] STC 463 at 470-471,[1968] 1 WLR 1343 at 1348-1348 Sir Nicolas Browne-Wilkinson V-C set out a list of matters which have been regarded as a badge of trading in reported cases. He emphasised, however, that the list was not a comprehensive statement of all relevant matters nor was any one of them decisive in all cases. He said that the most they can do is to provide common sense guidance to the conclusion which is appropriate; and that in each case it is necessary to stand back and look at the whole picture and, having regard to the words of the statute, ask whether this was an adventure in the nature of trade … The cases by reference to which the list was compiled are not sufficiently analogous to the facts of the present case to make the list of value in these proceedings.”
“… At the most basic level, it is now clear from Eclipse, if it was not clear before, that the question whether what the taxpayer actually did constitutes a trade has to be answered by standing back and looking at the whole picture: see [111]. Although it is a matter of law whether a particular activity is capable of constituting a trade, whether or not it does so in any given case “depends upon an evaluation of all the facts relating to it against the background of the applicable legal principles”: see [112]. It follows that it can never be appropriate to extract certain elements from the overall picture and treat them, viewed in isolation, as determinative of the issue. But that, in essence, is what Mr Furness [counsel for the taxpayers] is inviting us to do, when he says that the purchase and leaseback (or onward lease) of a film are inherently trading activities. There is no dispute that such activities are capable of forming part of a trade, and in many contexts the only reasonable conclusion would be that they did form part of a trade. But when the whole picture is examined, the conclusion will not necessarily be the same. The exercise which the FTT has to undertake is one of multi-factorial evaluation, and their conclusion can only be challenged as erroneous in point of law on Edwards v Bairstow grounds: see Eclipse at [113]. … 61. In the interests of clarity, it is important to distinguish between the evaluative exercise which the FTT has to perform, on the one hand, and the proposition that a taxpayer cannot be taxed by re-characterising what he has actually done as something else, on the other hand. Mr Furness submitted that the FTT were guilty of such a re-characterisation, but I am satisfied that they did not fall into an elementary error of this description. Their overall assessment of the commercial nature of the agreements as the payment of a lump sum in return for a series of six payments over 15 years … was not a crude conclusion based on an impermissible transformation of the taxpayers’ activities into an economic equivalent, but rather a way of expressing the ultimate inference of fact which they drew from the totality of the primary facts which they had found.”
“Finally, on legal principles, it is elementary that the mere fact that a taxpayer enters into a transaction or conducts some other activity with a view to obtaining a tax advantage is not of itself determinative of whether the taxpayer is carrying on a trade: Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes)[1992] STC 226 at 241,[1992] 1 AC 655 at 677 (Lord Templeman).”
“The production and exploitation of a film is a trading activity. The expenditure of capital for the purpose of producing and exploiting a commercial film is a trading purpose. By section 41 of the Act of 1971 capital expenditure for a trading purpose generates a first year allowance. The section is not concerned with the purpose of the transaction but with the purpose of the expenditure. It is true that Victory Partnership only engaged in the film trade for the fiscal purpose of obtaining a first year allowance but that does not alter the purpose of the expenditure.”
“(1) To consider the badges of trade, bearing in mind that such features, where present, are not necessarily determinative of the issue; (2) We bore in mind that even where an ulterior (even paramount) motive to obtain a tax advantage is present, this does not automatically “denature” a commercial transaction; (3) To determine the question of trade as a matter of law and thereafter consider whether, on the facts, a trade existed; (4) The test is an objective one; (5) That the transaction must be analysed as a whole and viewed in the context of its surrounding circumstances where that concept assists in determining the true nature of the transaction; (6) To ask ourselves “What did Mr Degorce actually do?””
“99. We found as a fact that there was no element of repetition in [the] Appellant’s transaction. We had no detailed evidence before us relating to Mr Degorce’s activities either pre or post 2006-2007. As regards those pre 2006-2007, there was no evidence to support the assertion on behalf of the Appellant that there existed a “deemed film trade” nor has any finding been made by a Court or Tribunal in that regard. Similarly, whilst we accepted that the Appellant had been involved in activities similar to that before us after the relevant period (2006-2007), we noted that those activities were subject of an enquiry by HMRC and again, no determination has been made on the issue of trade. In our view, it would be unsafe to accept the Appellant’s assertions in the absence of any detailed examination of the evidence and consequently found that we must deal with the transaction as a one-of transaction. 100. We accepted that Mr Degorce may well have explored opportunities in the film sector, but in our view the contemplation of any such activities is distinguishable from the reality of actually entering into such transactions. 101. We note that although in our view, the transaction must be regarded as a one-off this finding does not prevent it from being regarded as an adventure in the nature of trade.”
“did not intend to sell the potential income stream and therefore, in the absence of a customer, the transaction cannot be viewed as having been carried through in a way typical of trade.”
“Undoubtedly trading activity involves a counter-party of some description. We do not find it helpful, however, in a complex transaction such as the one with which we are concerned to seek to identify whether that counter-party is or is not properly characterised as a “customer”, as that word is used in ordinary speech.”
“In addition to advice provided by Goldcrest, Mr Degorce also took advice from Mr Petzel, Howard Kennedy Solicitors and HSBC Private Bank. An assistant was employed by Mr Degorce to assist in managing the trade.”
“Given the value of the transaction, we found it unlikely that had Mr Degorce intended to rely on Mr Petzel’s advice in any meaningful way, he would have been content to proceed on the limited documentation provided to Mr Petzel and an analysis which contained errors which were clear. We concluded that the only real understanding Mr Degorce had of the scheme at the time he entered into it and soon thereafter was in respect of the tax implications.”
“When we asked ourselves “what was Mr Degorce trading” we concluded that his activities were, in reality, focused on the close of the financial year and that his activity was limited to obtaining fixed receipts as prescribed by the Agreement signed which cannot be deemed as “trade”
“First, they were satisfied that there was no element of repetition which might support the conclusion that the transactions represented the continuation or extension of an existing trade or the start of a trade to be continued in later years. Second, they found it significant that the purchase and the assignment were executed simultaneously; and, they said, a purchase of film rights for (in round figures)£20 million followed by their immediate sale at a loss of£19 million could not be viewed as the purchase and independent sale of an asset. The conclusion to be drawn from that factor was that the transactions were inextricably linked and were entered into without regard to the true value of the rights. Third, the F-tT concluded that the evidence showed that it was immaterial what asset Mr Degorce acquired: realistically viewed, the transactions amounted to nothing more than the payment of a lump sum in return for a potential income stream which he did not intend to sell, and they were undertaken as a means of generating tax relief.”
“… any trade there might have been was “denatured” by the fact that the sole purpose of the scheme, and therefore the sole purpose of Mr Degorce’s participation therein, was to shelter his taxable income, so that the “shape and character of the transaction was not in reality that of a trading transaction”.”
“It is manifest that some transactions may be so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction.”
“67. Mr Maugham points out that there was, in fact, extensive evidence before the F-tT of Mr Degorce’s activities in the acquisition and disposal of film rights both before and after 2006-07. HMRC themselves have referred in their statement of case to his participation in similar transactions on three occasions. The evidence showed that he had, in addition to this transaction, purchased interests in films in 2005-06, as a member of two LLPs; that from February 2007 he had been engaged in extensive discussions with Mr Petzel about possible purchases of film rights; that he had actively researched the market over a significant period; and that he had purchased rights in several films later in 2007, in 2008 and in 2009. Thus this was merely one of a series of similar transactions by which Mr Degorce had acquired rights in films, some of which had been successful while others had not; he knew that they were transactions of a speculative nature but a trade is no less a trade for being speculative. On the contrary, as Sales J said in Eclipse Film Partners (No. 35) LLP v Revenue and Customs Commissioners[2014] STC 1114 at [78], the speculative character of a transaction may be “strongly indicative” of trading. If one were to examine his position for the tax years 2005-06, 2006-07 and 2007-08 together, it would become clear that while his income from other activities amounted to about£44 million , Mr Degorce had spent as much as£74 million on film rights. If his purpose was solely to shelter his income from tax he had gone too far by£30 million . The difference between his taxable income and his expense is, says Mr Maugham, far more consistent with his being an active trader in film rights than with his having no purpose other than tax avoidance. 68. Mr Maugham submits that had the F-tT properly considered that evidence, together with what the Vice- Chancellor said in Marson v Morton, they would have been driven to conclude, at the least, that what Mr Degorce did was capable of amounting to trade. They should then have gone on to decide whether, as a matter of fact, it did amount to trade. Instead, they simply treated the purchase and sale as component parts of a different, composite, transaction and failed to consider properly what was their true nature. That was a consequence of their failure to consider critical facts, many of which were unchallenged. That failure led in turn to the F-tT’s making findings of fact which could not be supported. 69. As to this, the evidence the F-tT failed to take into account included that relating to the advice Mr Degorce took, to his understanding that he could withdraw from the transaction if his lawyers advised against it, to his decision not to rely on the information provided by Goldcrest but to seek a valuation from Mr Petzel, and to the fact of negotiations about the precise nature of the rights to be acquired and the price to be paid. They also ignored the evidence that Mr Degorce had been discussing with HSBC, since March 2007, the possibility that he might set up a film business, with staff, that he had sought advice from Mr Petzel about film investment in a general sense, both before and after these transactions took place, that his later purchases were made in order to broaden his portfolio, with the aim of spreading his risk while improving his prospects of making a positive return, that he had in fact achieved returns on some of the films in which he had acquired rights, that there had been serious negotiations about the price to be paid for the rights in other films, that on one occasion he had refused to invest in a substitute film but had demanded (and received) a return of his money, and that he had sought advice from recognised industry experts rather than from lawyers and others unversed in the film industry. Those, says Mr Maugham, were all indications that Mr Degorce was engaged in a serious trading venture of which this transaction was merely a part. 70. Instead, the F-tT found that some of the advice he received was not wholly independent and that he had not taken any steps to ensure that he did receive independent advice, that he had not received any advice at all on the deal structure, that the nature of the assets in which he was trading was unimportant to him, that there was no evidence that he contemplated withdrawing when he was told that Star Trek was no longer available when it fact it was clear that withdrawal was a real possibility, that Mr Petzel’s input was of little value, that there was no true negotiation of either prices or rights, and that there was no evidence of how he assessed commerciality or could be satisfied that the price he paid for the rights was commercial. All of these findings, says Mr Maugham, are contrary to the evidence or unsupported by it. The consequence of their incorrect findings on these points was that the F-tT’s approach to the main question before them, namely whether Mr Degorce was trading, was fatally undermined.”
“Mr Maugham emphasises, as a further indication that what Mr Degorce did was in the nature of trade … that, unlike other schemes of a similar basic nature, the Goldcrest scheme did not provide for its users a guaranteed income stream designed to pay off the borrowing or simply return the capital paid out. Everything Mr Degorce was to receive was, Mr Maugham points out, entirely dependent on the success of the films – if they were unsuccessful, or only moderately successful, as in this case, he would receive nothing as all the proceeds were taken by the production studio. It was only when a film was truly successful that the production studio’s prior claim became satisfied and there was a surplus for a person in Mr Degorce’s position. Mr Maugham offered the example of the well-known film Twilight, which Mr Degorce had helped to finance, and which had produced considerable profits in which Mr Degorce had shared to the extent of nearly£20 million .”
“89. Mr Maugham’s argument based on Mr Degorce’s claimed repetition of trading in film rights has to be considered against the background of the question to be asked in this case, which is not whether Mr Degorce was trading in film rights in a general sense, but whether the transactions into which he entered in the tax year 2006-07 amounted to trading. It is conspicuous that in his tax return for 2006-07 Mr Degorce stated that his trading activity began on2 April 2007 , the date on which he committed himself to the scheme. It is true that he had been a member of two partnerships in 2005-06, and that those partnerships had undertaken transactions relating to intellectual property rights in films, but even if (which HMRC dispute) the partnerships were trading, being a member of a partnership and undertaking trade on one’s own account are quite different things, and the F-tT were entitled to take the view that what Mr Degorce did in 2006-07 did not represent the continuation of an existing trading activity. What is perhaps more important still is that there was no repetition within this scheme; once the rights had been bought and assigned, anything which might have been regarded as a trading activity ceased.”
“Appellate courts have been repeatedly warned, by recent cases at the highest level, not to interfere with findings of fact by trial judges, unless compelled to do so. This applies not only to findings of primary fact, but also the evaluation of those facts and to inferences to be drawn from them.”
“94. We recognise that there are, as Mr Maugham argues and Mr Gibbon accepts, various parts of the F-tT’s decision which can be criticised, and we have ourselves found their reasoning difficult to follow in some respects. In particular, we are willing to agree with Mr Maugham that what the F-tT said at [99] … reveals an error of approach: one cannot disregard evidence of similar activities because the tax consequences of those activities are under investigation. The tax consequences of a transaction do not determine its character; rather, it is the character of the transaction which determines its tax consequences. 95. However, it is not enough simply to attack the approach. Mr Maugham must in addition demonstrate that, had the F-tT approached this part of the evidence correctly, their doing so would, or at least might, have affected the outcome. Mr Maugham’s argument seems to elevate the first badge of trade from an indicator, something which may tend to support one conclusion rather than another, into a discrete test. As we understand what the Vice-Chancellor said, this badge, by distinguishing between a one-off transaction on the one hand and repeated transactions of a similar character on the other, is aimed at identifying, respectively, the person who engages in one purchase and sale with no intention of entering into a course of trading and the person whose objective is to trade in the commodity over the longer term. Repetition therefore points to the greater likelihood that the person concerned falls into the latter category; but it does not answer the question whether the activity, repeated or not, is capable of amounting to a trading activity. If, on proper analysis, the transactions into which Mr Degorce entered led to the acquisition of an income stream the fact of repetition does not convert what he did into something else.”
“96. The core question is whether there was material before the F-tT from which they could properly conclude that Mr Degorce was not trading in film rights, but that he merely acquired a contingent, or potential, income stream. The F-tT’s approach, when shorn of detail, was to undertake the task they had set themselves, namely examine what Mr Degorce did, in entering into a set of pre-arranged contracts which were designed to, and did, follow one another in a very quick sequence. It was, in particular, clear before he entered into the first of the transactions that at the end of them, minutes later, he would be left only with the income stream. No other outcome was possible: the whole set of contracts assumed (simplifying a little) that a Paramount company would sell rights to a Goldcrest company, which would sell them to the user, in this case Mr Degorce, who would do nothing with them but assign them to another Goldcrest company which would in turn assign them back to a different Paramount company. Once the start button was pressed, all the transactions fell into place automatically, with only one possible result. 97. It was not an arrangement which left Mr Degorce with the freedom to retain the rights, assign them elsewhere for cash, or assign part of the rights while retaining the remainder. Not only he but all of the other participants in the Goldcrest scheme – that is, the Goldcrest and Paramount companies – entered into the series of transactions knowing that they could have only one outcome, which in Mr Degorce’s case was the right to a potential income stream. Once one focuses on the core question it becomes clear that even if the F-tT were wrong in one or more of the lesser findings they made on the way to their overall conclusion, that overall conclusion was supported by the evidence. It does not matter, in answering the core question, whether Mr Degorce did or did not take advice, or did or did not negotiate, since advice and negotiation do not transform the purchase of an asset, as an income stream is, into a trading activity. They were not included by the Vice-Chancellor in his list of the badges of trade and in our view rightly so. They are as likely, perhaps even more likely, to feature in a person’s decision to buy an asset as they are in his decision whether or not to trade in a particular commodity. 98. It is true that the overall exercise was speculative, in the sense that it was unknown whether, and if so to what extent, Mr Degorce would receive income from the exploitation of the rights; but there was no element of speculation in the transactions themselves, which were undertaken on a pre-determined basis with, as we have said, a pre-determined outcome.”
“It does not seem to us that the informed observer, standing back from the detail, would necessarily conclude that what Mr Degorce did amounted to a trading activity or, to align the proposition more closely to the question before us, that it could be said that the informed observer’s conclusion that this was not trading could be regarded as perverse.”
“Section 12(2) of the 2007 Act confers a broad discretion upon the UT if it decides that there is an error of law in the FTT’s decision.”
“Mr Maugham must in addition demonstrate that, had the F-tT approached this part of the evidence correctly, their doing so would, or at least might, have affected the outcome.”
“It does not seem to us that the informed observer, standing back from the detail, would necessarily conclude that what Mr Degorce did amounted to a trading activity or, to align the proposition more closely to the question before us, that it could be said that the informed observer’s conclusion that this was not trading could be regarded as perverse.”