Hardy & Anor v Revenue and Customs (INCOME TAX/CORPORATION TAX : Losses) [2017] UKFTT 0754 (TC)

“The concepts of an unblinkered approach to the analysis of the facts and a realistic approach to the transaction derive at least in part from the speeches in Ransom v Higgs .” “It is necessary to stand back and look at the whole picture and having particular regard to what the taxpayer actually did, and ask whether it constituted a trade” 142. In the Court of Appeal’s decision in Samarkand Film Partnership No. 3 v Revenue and Customs Commissioners [2017] EWCA Civ 77 (which was given after the hearing but in relation to which both the parties had opportunity to comment on in post-hearing submissions), Henderson LJ endorsed the Court of Appeal’s approach in Eclipse . 143. Mr Southern, for the appellants, referred to the principles Millet J set out in the High Court’s decision in Ensign Tankers (Leasing) Ltd v Stokes (Inspector of Taxes) [1989] STC 705: ‘(1) In order to constitute a transaction in the nature of trade, the transaction in question must possess not only the outward badges of trade but also a genuine commercial purpose. (2) If the transaction is of a commercial nature and has a genuine commercial purpose, the presence of a collateral or ulterior purpose to obtain a tax advantage does not "denature" what is essentially a commercial transaction. If, however, the sole purpose of the transaction is to obtain a fiscal advantage, it is logically impossible to postulate the existence of any commercial purpose. (3) Where commercial and fiscal purposes are both present, questions of fact and degree may arise, and these are for the Commissioners. Nevertheless, the question is not which purpose was predominant, but whether the transaction can fairly be described as being in the nature of trade. (4) The purpose or object of the transaction must not be confused with the motive of the taxpayer in entering into it. The question is not why he was trading, but whether he was trading. If the sole purpose of the transaction is to obtain a fiscal advantage, it is logically impossible to postulate the existence of any commercial purpose. But it is perfectly possible to predicate a situation in which a taxpayer whose sole motive is the desire to obtain a fiscal advantage invests or becomes a sleeping partner with others in an ordinary trading activity carried on by them for a commercial purpose and with a view of profit. (5) The test is an objective one. In Newton v Commissioner of Taxation of Australia (1958) AC 450 at -165, Lord Denning said ... "The purpose of a contract, agreement or arrangement must be what it is intended to effect and that intention must be ascertained from its terms". The objective nature of the enquiry appears clearly from both the dividend-stripping case and the cases of intra-group transactions .... In each of these cases the purpose of the transaction was objectively ascertained by a detailed analysis of the terms and circumstances of the transaction itself without enquiry into the motive and subjective aspirations of those who effected it. (6) In considering the purpose of a transaction, its component parts must not be regarded separately but the transaction must be viewed as a whole. That part of the transaction which is alleged to constitute trading must not be viewed in isolation, but in the context of all the surrounding circumstances. But this must mean all relevant surrounding circumstances; that is to say, those which are capable of throwing light on the true nature of the transaction and of those aspects of it which are alleged to demonstrate a commercial purpose. (7) If the purpose or object of a transaction is to make a profit, it does not cease to be a commercial transaction merely because those who engage in it have obtained the necessary finance from persons who are more interested in achieving a fiscal advantage from their investment. Even where the trader is the creature of the financier, the two activities are distinct and the object of one is not necessarily the object of the other. (8) In FA and AB Limited v Lupton , Lord Morris said, 47 TC 580 at 620: "It is manifest that some transactions may be so effected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction. The result will be not that a trading transaction with unusual features is revealed but that there is an arrangement or scheme which cannot fairly be regarded as being a transaction [in the nature of trade]." In my judgment this is the true significance of a fiscal motive. Fiscal considerations naturally affect the taxpayer's evaluation of the financial risk and rewards of any proposed venture, and are often the decisive factor in persuading him to enter into it. First year allowances, enterprise zones, government grants and the like operate as financial inducements to businessmen to engage in commercial activities which would be financially unattractive or unacceptably speculative without them. Such motivations, even if paramount, do not alter the character of the activities in question. But while a fiscal motive, even an overriding fiscal motive, is irrelevant in itself, it becomes highly relevant if it affects, not just the shape or structure of the transaction, but its commerciality so that, in Lord Morris' words, "the shape and character of the transaction is no longer that of a trading transaction". But nothing less will do. (9) Accordingly, in my judgment, and adapting the words of Lord Simon in Thomson v Gurneville (17 TC 633 at 679), the question is whether, in the light of all relevant circumstances, the transaction is capable of being fairly regarded as a transaction in the nature of a trade, albeit one intended to secure a fiscal advantage or even conditioned in its form by such intention,' or is incapable of being fairly so regarded but is in truth a mere device to secure a fiscal advantage, albeit one given the trappings normally associated with trading transactions.' 144. Mr Yates submitted the above principles are not on point; they referred to the approach to be taken when there was a trade but that was then negated by an intent to avoid tax (dubbed the Lupton point). That was not relevant, to the prior question of whether or not there was a trade in the first place. However, given the agreed approach of the parties that the court or tribunal should stand back and strip the transactions down to their basics it is questionable, in my view, whether much turns on the question of whether and the extent to which Millet J’s principles are relevant. Read as a whole they are consistent with looking objectively at the activities and surrounding facts (and endorsed by Lord Templeman to the extent his judgment reminds us that actions speak louder than words (at pg743)). In my view the Lupton point as dealt with by Millet J in Ensign does not speak to the sort of two stage approach HMRC was advocating. The essential point that emerges from his discussion of fiscal motive is that there will be transactions motivated by tax which do not amount to a trade but that this is not because of the tax features per se but because the tax features are such that the activity is not trade-like. 145. As regards the question of how a transaction or set of transactions made up of individual steps should be analysed HMRC referred to the Upper Tribunal’s decision in Samarkand (at [86]) where the court endorsed the FTT’s approach of looking at what the partnership did and upheld its conclusion that the particular sale and lease-back transaction there did not amount to a trade even though constituent elements of the transaction e.g. a single purchase and leasing, or the purchase of a film with a view to its distribution or exploitation, were capable of amounting to a trade. Parties’ submissions 146. The appellants’ case is that they were investors in a scheme whose intentions were twofold: 1) to make profits by buying film rights and 2) if the films were not commercially successful to secure tax allowable losses. The intention was to make profits and the likelihood of profit was not so fanciful or negligible to be disregarded. Also if there was an intention to make profits but in fact losses were made the activity did not cease to be commercial because investors, assuming losses were tax allowable would be financially better off if the films failed rather than succeeded. The partnership carefully selected real commercial films distributed by proper studios with well-known stars and producers. The partnership’s success was entirely dependent on the commercial fortunes of the selected films. These were released by the film studio in the hope (usually disappointed) that every new film would prove to be a blockbuster. Any argument that it was somehow pre-determined or practically certain that the partnership would realise a loss was untenable given that until the films were released for public showing in cinemas no-one could foretell what their commercial success would be. Mr Southern submits the evidence of Mr Phillips and Mr Nicholas confirmed the films were good commercial films and that they were not destined to be obvious failures. Stripping down what happened to its basics the partnership was carrying on a financial trade in a kind of film performance derivative where the return depended on box office returns. The loan element of the transaction was real, it needed to be taken into account to establish budget cost, purchase price and return. It geared up both profits and losses. 147. HMRC argue no trade was carried on because: (1) matters were arranged without any regard to achieving a profit and/or with the intention of ensuring a financial loss to maximise investor returns after taking into account tax relief. The factual circumstances by which this occurred differed between Phase 1 and Phase 3 in that in Phase 1 the films were doomed to failure whereas in Phase 3 changes were made to the partnership’s documentation (the budget was inflated for tax purpose, the defined proceeds figures upon which the put and call triggers were based were changed such that even though Madea was commercially successful it resulted in a loss for the partnership – for instance by including an unusual distribution fee arrangement whereby at a certain cut-off of box office performance the fee would retrospectively reduce to 10%). (2) even if the partnership intended to achieve a profit through the exercise of the call option, looking to the essence of what the parties were actually doing, the exercise of the call would only have entitled the partnership to a 6% stream of profits. That was more akin to making an investment as opposed to trading. The insertion of a contingency (the extent of film success) made no difference to this analysis. This was a bet for future income rights. 148. HMRC also referred to the FTT’s decision in Brain Disorders Research Limited Partnership and Neil Hockin v HMRC [2015] UKFTT 325 (TC) and asked the tribunal to note a number of similarities with the present transactions concerning its findings in relation to: the marketing and reality of the scheme, the fees charged, the speculative prospects of royalties being akin to a bet, and the effect of the insertion of wholly non-commercial arrangements. 149. Following the hearing of the current appeals the Court of Appeal issued its decision on Samarkand and the Upper Tribunal issued a decision on Brain Disorders [2017] UKUT 176 (TCC) (which upheld the FTT’s decision). The parties provided further written submissions, HMRC arguing that the core reasoning that HMRC had drawn from the case-law remained intact. 150. In their written submissions HMRC refer in particular to the UT’s discussion in Brain Disorders concerning trade at [44] – [57]. In essence the UT upheld the FTT’s finding there was no trade. Analysing the purpose of the transactions it was to create a vehicle for losses with any income from royalties being icing on the cake. At [57] the UT held: “The essence of the FTT’s reasoning is that the research, though entirely genuine from BRC’s perspective, was, from the Partnership’s perspective, no more than the vehicle by which it was hoping to generate huge tax losses. It is inherent in the FTT’s conclusions, as the observations at [117] make clear, that the possible generation of royalties from the fruits of the research was a side issue: if any royalties did result they would be icing on the cake, but the Partnership and its members were in reality indifferent to the matter. We do not agree that the FTT focused on motive; as we read its decision, it analysed the purpose of the transactions rather than the purpose of the participants. In our judgment the FTT’s decision contains no error of approach and reaches a finding which was open to the tribunal on the evidence…” 151. The appellants suggest the case is of limited relevance to this appeal (a “loss on shares” case) highlighting that the facts involved a long-term programme of activity and fixed licence payments of 15 years rather than a series of short-term acquisitions and disposals. They also point to the fact that the Vanguard partnership did not have extraneous activities (namely an agreement with Contractor). It simply, they maintain, bought and sold film rights. Was the partnership trading? 152. HMRC have put their case that the partnership was not trading as two alternative arguments which in very basic terms can be tagged: 1) “deliberate loss/no regard to profit” and 2) “trade vs investment?”

“this is most suitable for a film which does not recoup its costs or where Studio overheads delay recoupment for a considerable time…” 165. Mr Yates argues the e-mail “let the cat out of the bag” (a suggestion that was vehemently denied by Mr Nicholas) and submits Mr Nicholas’ explanation given in re-examination, that there was a typing error, was extremely unlikely. HMRC also say the explanation Mr Nicholas gave in his evidence that a request for unprofitable films did not “actually make sense”

“After first theatrical release of “Madea Goes to Jail” the Partnership would commission a further Film Revenues Report in order to assess the probable earnings performance of the Film Rights using actual release figures…If the Film had been a box office success, the Partnership should be able to sell the Film Rights at a profit. It is intended that the Film Revenues Report would be delivered and a sale arranged, shortly after release, but in any event within a period of 12 months from the date on which the Partnership acquires “Madea Goes to Jail”. 194. The picture painted is that there appears to have been some lee-way around when the post-release report was produced. But that flexibility was not used in a way consistent with someone interested in profit so as to enable the call option and therefore the possible profit scenario to emerge. There was also a surprising air of resignation in reaction to the lack of profit. There was none of the pushback or enquiry, or even dismay that might expected to be seen, as to why a film which had exceeded box office expectations nevertheless did not result in any kind of profit for the partnership. (That of itself does not in my view cause me to consider that losses were deliberately sought but is relevant to the question of whether the partnership was indifferent to profit, an issue which I come on to discuss shortly). Conclusion on deliberate loss: 195. In both Phases 1 and 3 there was, in my view, insufficient evidence to establish that losses were deliberately sought. The nature of the partnership’s activities 196. Mr Southern argues that what the partnership was doing constituted a financial trade. Films were bought with borrowed money and investors’ cash with a view to profitable resale. In effect the partnership was trading in a derivative of film rights. 197. Mr Yates says that once the arrangement is stripped down to its bare essentials it is not trading but a bet for some future income rights. In essence HMRC’s case is the partnership invested a sum in return for a stream of income (6% of “defined proceeds”). The partnership puts in 150 of real cash 80 of which went to Lakeshore 70 of which (increasing to 80 for Phase 3) went to Matrix. If the film did not meet the threshold the partnership lost all the money. It could not hold on to the film and wait and see the distribution agreements came through because a) that was not what was intended (from the Investment Memorandum) and b) because it was going to be forced to exercise the put option). If the call option was exercised the partnership got 135 back having invested 150. But in order to break even the defined proceeds needed to supply the extra 15 which might well be a gradual process taking a number of years (up to 10 years as understood by Mr Hardy and up to 30 years as assumed by the Salter reports). Putting this another way HMRC say the Partnership pays 8% of budget for a right to a 13.5% sum and a 6% income stream if the film hits Defined Proceeds of 113.5% of budget; or for a 3.5% payment to the investors (the shareholders in the partners) if it hits 75% of budget. This was akin to an investment (it made no difference, HMRC say, that the sum based on defined proceeds was not fixed). 198. Before considering the issue it is worth recording some preliminary points which are not in issue. Firstly there was not dispute that the various agreements were meant to, and did, interlock with each other and that therefore they are to be viewed as a composite transaction. The question which then arises is whether the composite transactions which were carried out amounted to a trade. Secondly there is no dispute that whatever the activity amounted to, it was not a trade in the films themselves – and the appellants does not seek to argue this. Once the films were purchased they would be dealt with in accordance with the put and call options either of which would inevitably be exercised because of the way the agreements operated together. The analysis (set out above at [125]) explains why it was inevitable that the put option would be exercised, and also that the distributor, if acting rationally would exercise the call option and further that the partners envisaged that either the put or call options would be exercised. The arrangement was not in these circumstances one of the separate acts of buying a film and then choosing to sell the film to turn a profit. It was buying a film subject to certain pre-determined obligations to pay amounts whereby puts and calls would be exercised in return for consideration. Any profit arose from the obligation to pay over 6% of the defined proceeds following exercise of the call option – not on the sale of the film. Nor was there any mention in the Information Memoranda of the films being retained for ongoing revenue and sold for a profit. It simply described that the consideration on exercise of the call option would be a fixed price and ongoing payments calculated as a percentage of revenues payable as and when film revenues were received. 199. Although the activity was not about buying and selling of films the question is whether it amounted to trading in film rights or a type of film derivative as the Mr Southern put it. Before deciding whether that was the case it is necessary to examine a variety of factors principally the nature of the activities undertaken. Formation of partnership and activities undertaken in relation to Phase 1 200. The partnership agreement was entered into on 4 June 2008. Mr Hardy applied to join on 21 July 2008 and his company Richmond Palace Ltd subscribed on 24 July 2008. In the Information Memoranda the business of the partnership was stated to be: “trading in intellectual property rights in films through buying and selling such rights as a commercial activity with a view to making profits from such activities.” 201. On 4 June 2008 the Partnership agreed a Consultancy and Administrative Services Agreement with MSF on 4 June 2008. MSF was required to assist the Executive Partner in sourcing suitable films among other administrative tasks. By the time the partnership had been formed there had already been various activities that had been carried out informing the negotiation of various agreements and in relation to film selection. 202. As to negotiation of the suite of agreements which governed the sale and purchase of films Mr Hardy’s evidence described how some of the key terms had previously been negotiated by MSF on behalf of the Enterprise partnership when it purchased Crank 2 from Lakeshore but that some of the figures had been renegotiated e.g. the 6% of defined proceeds had been increased from 5.5%. 203. The negotiation of agreements was not tailored to individual films as can be seen in relation to Phase 1 where although three different films were selected the option levels and triggers did not vary in percentage terms according to the particular films that were being bought. 204. As to the activity of film selection, Mr Hardy’s evidence described how a number of criteria were set regarding prospects of profit: genre, budget, talent, source materials, and advance distribution pre-sale agreements termed “minimum guarantee”

“137 The trading requirement (1) The trading requirement is that— (a) the company, ignoring any incidental purposes, exists wholly for the purpose of carrying on one or more qualifying trades, or…” 237. Subsection 7 sets out that “qualifying trade” has the meaning given by section 189 (extracted below at [249]). 238. HMRC argue there was no reason for the companies (referred to in this decision as the PartnerCos) to exist other than as a means to access the s131 loss relief and in fact all the investors in the partnership adopted the company route. Even if some attempt of seeking a possibility of profit existed, such purpose would be insufficient to deny relief as the purpose of seeking s131 relief could not be described as incidental. (As HMRC ask the tribunal to note, the issue in this part of the decision concerns the purpose of the existence of the company and is distinct from the issue on s16A TCGA (issue 9) below which concerns the purpose of the scheme). 239. Mr Hardy’s evidence was that the possibility of generating share loss relief was certainly not the main reason for investors participating in the structure. He mentioned the following reasons for using the companies: they made the structure more flexible as it allowed investors to participate or withdraw from the structure by simply subscribing for or selling their company shares. The companies also provided investors with limited liability (a feature Mr Moxon mentioned too). 240. Mr Moxon mentioned his fears of liability but accepted he had previously been involved in partnership arrangements without the use of a company and that the borrowing liability was his not the company’s. He could not articulate any particular liability he was concerned about. He mentioned ease of paperwork but as HMRC pointed out this was a concern of the partnership and not himself. 241. HMRC’s written submissions referred to the FTT’s analysis in Kerrison v HMRC [2017] UKFTT 322 (TC), a case which was decided after the hearing, submitting that the approach there supported HMRC’s interpretation of s137(1)(a). The facts of that case concerned a scheme (known as the Excalibur scheme) whereby a newly incorporated Isle of Man company (Broadgate) acquired a small UK retail trade (a flower shop business). Broadgate guaranteed the borrowing of another company which subscribed for a share in Broadgate and subsequently the appellant’s borrowing to repurchase shares the appellant had sold to the other company. Broadgate also capitalised a BVI subsidiary. The evidence included that from an employee (Mr Schofield – referred to by name in the extract below) of the scheme promoter. The passages HMRC refer to were in an obiter part of the decision on the question of whether Broadgate was a “qualifying trading company” under s293(2)(a) Income and Corporation Taxes Act 1988 which referred to “a company which exists wholly for the purpose of carrying on one or more qualifying trades…”

“124. I agree with Mr Ghosh [ who was acting for HMRC ] that a key question to consider is the purpose or purposes for which Broadgate existed. In order to be a qualifying trading company Broadgate must either have existed wholly for the purpose of carrying on the flower shop business, or existed for that purpose (see the reference to “so exists”) together with other purposes capable of having no significant effect (other than incidentally) on the extent of its activities. 125. As explained at [62] above it was clear from Mr Schofield’s evidence that Broadgate was incorporated in order to carry out the Excalibur scheme. Athough the scheme involved as a necessary initial step the acquisition of a UK trade, I do not think that it would be right to conclude from this that Broadgate existed in any meaningful sense “for the purpose of carrying on one or more qualifying trades”. 242. In my view, irrespective of whether the partnership was carrying on a qualifying trade, it is clear that the PartnerCos, ignoring any incidental purpose, did not exist for the purpose of carrying on a qualifying trade. As with the company in Kerrison the companies existed to facilitate the use of a tax scheme, in this case one which involved the accessing of loss relief under s131 (there was no suggestion any other tax relief was to generate the 40% tax relief on loss assumed by the calculations in the presentations). As is apparent from Mr Moxon’s evidence investments in similar sorts of arrangements had previously been undertaken without any need for investing through a company and I do not find the factors put forward of ease of administration or concerns over limited liability to be plausible against that background. 243. It is telling in my view that the presentations to investors were premised on the use of a company to invest (described as a “special purpose company (“SPC”)) and that the illustrative tax calculations included in them which generated the most profit (i.e. the loss making scenarios) only made sense when s131 relief was accessed. Although the presentation and the investment memoranda did not in terms mandate the use of an SPC it was clearly envisaged that such an entity would be used – none of the illustrations covered what would happen if an investor chose not to use an SPC. There was no mention in the presentation of the advantages of limited liability (and while there was in the investment memoranda the presentations in my view provide a more reliable insight into how the arrangements were designed to operate in practice). If ease of administration and flexibility for the arrangements as a whole were a valid reason it might be expected that investors would be told they had to use an SPC as if some ended up not using such entities then it is difficult to see how the administration and flexibility benefits that were purportedly hoped for could sensibly be realised. 244. As HMRC allude to, a far more likely explanation is provided by the changes in tax legislation that occurred in 2007 (s103C ITA 2007 restricted sideways loss relief by individuals in partnership from March 2007 and further restrictions were put in place by para 21 of Schedule 22 Finance Act 2008 which was pre-announced in October 2007). 245. While in relation to Kerrison Mr Southern’s submission highlighted that besides operating a flower shop the relevant company also held investments of £155,224,131 whereas all that the PartnerCos did was to act as partners of the Vanguard Partnership, I am not persuaded this is a valid ground of distinction. The FTT in that case reached its decision by reference to the purpose for which the company existed not the activities it was carrying out. 246. I also cannot accept the appellants’ submission that the fact there was a fiscal purpose in using the company does not mean the company’s purpose was not to carry on the qualifying trade illustrated by the fact that many qualifying trade companies were set up following the 10% dividend tax rate change. Whether such companies exist wholly for the purpose of the qualifying trade will depend on evaluating the particular facts of and circumstances of each case. 247. In any event, even if the focus was on the activities of the company, as HMRC point out the PartnerCos were used to pay amounts that had nothing to do with the trade namely the ALCF fees and the IFA commissions and fees to Matrix for structuring all paid under the umbrella of Matrix’s consultancy fee charged to Vanguard No 1. 248. For the reasons above I conclude that even if I were wrong in my conclusion above that the partnership was not trading, the trading requirement in s137 was nevertheless not satisfied. The PartnerCos did not, ignoring any incidental purposes, exist for the purpose of carrying on one or more qualifying trades. (2) Whether, if the Vanguard 1 Partnership was carrying on a trade during either such period, such trade was conducted on a commercial basis and with a view to the realisation of profits within the meaning of s.189 of the Income Tax Act 2007. 249. Section 189 provides: “ 189 Meaning of “qualifying trade” (1) For the purposes of this Part, a trade is a qualifying trade if— (a) it is conducted on a commercial basis and with a view to the realisation of profits,…” 250. This issue is only relevant if I am wrong in my conclusion that the partnership was not trading. In that case the appellant submits, contrary to HMRC’s position that the trade was both conducted on a commercial basis and with a view to the realisation of profits. 251. The interaction between the two tests of commerciality and profitability was considered in the Court of Appeal’s decision in Samarkand v HMRC [2017] EWCA Civ 77 . In Henderson LJ’s judgment (at [88]) it was wrong to consider the tests as mutually exclusive. His view was that the tests “necessarily overlap to an extent which will vary from case to case”. 252. In terms of the case-law on the “commercial basis” test both parties agree with the points made by the Upper Tribunal (Nugee J as the then was and Judge Sinfield) in Samarkand that: (1) This is a partnership level not a partner level question [246] –[248]. (2) Those carrying on the activity must be seriously interested in profit and not simply concerned to cover costs or to do something interesting or engaging (a hobby art gallery, hobby farming) [251] – [256]. (3) A lack of organisation or a happy-go-lucky approach, though they might not exclude trading, would not satisfy the “on a commercial basis” test [258]. 253. As to (2) in the case of Seven Individuals v HMRC [2017] UKUT 132 (TCC) (which related to litigation between the “Icebreaker” partnerships and HMRC), Nugee J, in rejecting the argument that it was enough that a trade was sufficiently organised and that the trader hoped to make a profit explained that a trade run on commercial lines was: “…a trade run in the way that commercially-minded people run trades. Commercially-minded people are those with a serious interest in making a commercial success of the trade…”. 254. He was of the view (at [46] to [47]) that this was in effect what the UT had said in Samarkand and that such view had been endorsed by Henderson LJ on appeal of that decision to the Court of Appeal. He explained “the concept of a trade carried on on commercial lines has an objective element to it…”

“…When assessing whether a trade carried out on commercial lines, the likelihood of profit seems to me to be central to an assessment of its commerciality. The question is whether the trade is being carried on in a way that a person seriously interested in commercial success would carry it on. Such a person would be unlikely to regard a trade which had a remote possibility of a small profit as worth carrying on as a commercial venture, even though it could be said that there was a realistic possibility of profit”. 255. Mr Southern’s written submissions seek to distinguish what he depicts as an extension to the commercial basis test on the grounds the fact that the legislation in issue there (s384 ICTA 1988 / s66 ITA 2007) contained an objective element which referred to a reasonable expectation of profit in contrast to s189 ITA. I cannot accept that as a valid ground of distinction. The paragraphs he relies on ([35] and [49]) refer to the “with a view to realisation of profits” test being subjective, and in that sense presenting a lower threshold. However, the fact Nugee J viewed the likelihood of profit being central in no way stems from the legislative references to reasonable expectation of profit but because, as he set out, a person who was seriously interested in commercial success would not consider it worthwhile to carry on a trade which had a remote possibility of a small profit. To put that statement in context it should be noted that earlier on the judgment had mentioned, the UT’s endorsement in Samarkand of the view that “the serious interest in a profit is at the root of commerciality” and had also referred to the wider relevance of the statement in Wannell v Rothwell [1996] STC 450 to the serious trader who was seriously interested in profit. 256. As regards the commercial basis test the issues for the tribunal to consider are 1) whether the trade was carried on in away someone seriously interested in profit or commercial success would carry it on and 2) the likelihood and amount of profit (these factors will inevitably overlap for the reason Nugee J identifies above). Trade carried on in a way someone seriously interested in profit or commercial success would carry it on? 257. The appellants emphasise the partnership was run in a business like way – there was a selection process and some films were turned down in the process and it was entitled to use Salter and to rely on their reports. Films with good prospects were selected as per the evidence of Mr Philips and Mr Nicholas. There was a huge discrepancy between pre-release and post-release figures but that was only appreciable with the benefit of hindsight. The obvious fiscal motives of some partners should not be confused with the question of whether the partnership was trading on a commercial basis. 258. HMRC set out numerous factors discussed below, many of which I agree are not consistent with the partnership trading on a commercial basis below but also some which in my view are ambivalent or which do not necessarily have the significance HMRC suggests. In evaluating these features I reject the appellant’s generic point that these factors could only be appreciated with the benefit of hindsight. Each of them in my view were appreciably uncommercial features at the outset. Further there is nothing in the appellants’ point about it not being for HMRC (or by implication anyone else to judge what is commercial behaviour) – that is precisely what the relevant case-law envisages; looking at what and how the taxpayer did run the trade and considering whether the activities undertaken were consistent with the way someone seriously interested in profit would carry it out. 259. The following factors pointed out by HMRC appeared to me, as they submitted, inconsistent with the carrying on of business in way that someone seriously interested in profit would carry it out. As will be seen many of the factors are common to those underpinning the tribunal’s earlier view that the partnership was indifferent to the making of profit: (1) The Partnership always paid an 8% premium over the film’s production cost without considering whether it was an appropriate price to pay. The 108% was always to be used. Salter pre-release reports if they were thought of as relevant to film prospects had no effect on pricing ( Elegy had high budget / highest price but Salter gave it lowest prospects on itsHigh case). (2) The put and call options thresholds did not vary according to films realistic prospects. The call and put option thresholds, and consideration were payable all fixed by production cost as opposed to being considered in the context of the film’s realistic prospects. (Mr Phillips, in his expert evidence, had thought this odd.) There was no enquiry into the likelihood of any of the low medium or high (highest) scenarios. (3) The lack of due diligence and enquiry into matters relevant to prospects of film e.g. advertising and release plans. The partnership failed to follow up on requested information. Even if they did not know about the limited release the appellants ought to have known about it. I also note that although the appellants’ case dismissed various pieces of information as “internet tittle-tattle” and say it would have been of little weight what is more telling is that there was no evidence that Matrix had made any attempt to establish through, what they at least might have viewed as more credible channels, what the screen release proposals were going to be. There was also a failure to check information being given to Salter and their methodology. On Madea there was no follow up on re-introduction of the participations. (4) The distribution agreements were uncommercial. They gave Lakeshore / Lionsgate complete control over what happened to the film, there was no recourse to Lakeshore, the fees were high at 40% (Mr Phillips said the usual range was 20-35%), the reducing fees inexplicably only applied if the call option was exercised. Mr Hardy thought there was a failure to update the distribution agreement which in itself would reveal uncommerciality in failing to keep on top of central transaction document For the reasons discussed above the retrospective 10% distribution fee arrangement does not have quite the significance HMRC put on it, but I agree with the submission that the distribution fees were high (35% in the case of Madea and 40% for the three Phase 1 films). (5) There was no attempt to model in the event of the call option being exercised as to the amount of defined proceeds and when such proceeds would be payable. (6) In relation to Madea , there was no attempt to verify production cost. Even if there was not a deliberate attempt to exaggerate the budget there was at least “deeply uncommercial indifference” to the accuracy of the figures given. As I have indicated above I do not agree that the budget was in fact lower but I agree it was strange there was not more scrutiny over it given the press report. Also even though the results came close to the threshold for exercising the call option there was no audit of the figures or attempt to delay the post-release reports. (7) It was also uncommercial not to check Salter’s methodology after films were failures. Following Phase 1 it is notable that given how crucial the Salter figures were to whether an option leading to profit was triggered there was no analysis unpick what had given rise to the mismatch between pre and post-release figures. Someone seeking profit in a structure which was dependent on the Salter outputs and their predictive accuracy would want to ensure the process by which the outputs were derived was as robust as possible. (8) The ALCF loan was uncommercial. I consider this point in more detail below at [303] onwards. It is submitted ALCF were being paid a fee for the “loan” money which had no commercial effect and that this was not commercial behaviour. Mr Southern pointed to various commercial reasons for the loan. HMRC argue that despite all the documentation referring to a loan it concerned an arrangement where no money moved to anyone. The loans were there to maximise the tax loss and they had no commercial relevance or reality. For the reasons explained in more detail below I agree; as evidenced by the use of deferred consideration in Phase 3 the loan was not a commercial part of the transaction. 260. However some of the other factors HMRC rely on are not significant in my view or are ambiguous. It was submitted the fee paid to Matrix was uncommercially high at 7% that it was what MSF had charged as standard and was and same as had been charged by them in other schemes that had been litigated before the FTT, but in the absence of any evidence as to what would be a commercial fee it is difficult for the tribunal to make a judgment on whether the rate was commercial. Whether or not the investment memoranda properly described the proposals also does not assist – a firm could be unwittingly deficient in its disclosure obligations to investors but still be acting on a commercial basis when carrying on the trade. HMRC also point to the fact the US dollar/ sterling exchange rate fixed, cost the partnership more than it needed to pay and submit it was really done to facilitate modelling so the scheme could proceed smoothly. Again this factor is ambiguous because I can see that there might be some benefit to commercial parties of certainty as compared with taking the risk of currency fluctuations. Similarly the point that Salter’s work was used in an entirely novel manner as a trigger for put and call options does not assist because in this section of the decision it must be assumed the composite transactions using put options and call options dependent on Salter’s outputs, were despite their novelty, considered to amount to a trade. 261. The appellants’ case places much store by the reliability and professionalism of Salter but in doing so they seek to meet an argument that HMRC does not make. HMRC’s case does not at any point suggest that the Salter reports did anything but apply their expertise to the information that was provided to them. In relation to the appellants’ arguments that it was not the case that the films were doomed from the outset, HMRC’s case was not that the films were destined to be flops because of their genre, script or cast but because of predictive attributes such as screen release. As well illustrated by Madea, where the screen release figure was not an issue, the concern was the arrangements were inherently uncommercial not because of the film itself because of the structure into which the film was plugged. That structure was not one someone seriously in profit would have deployed. Likelihood and amount of profit 262. The appellant submits the possibility of profit was sufficiently realistic to constitute a trade carried on a commercial basis. 263. The appellants highlight that the Salter reports indicated significant amounts of profit that might be achieved in the high scenario. While the parties differ in their views on the precise level of profit that could be achieved (as can be seen from the annex this depends on what particular elements are taken account of in the ROE calculation (see [33] and Annex)). Crucially these reports do not assist at all on the question of prospects of success for the simple reason that they do not say or even purport to say anything about the likelihood of such a scenario being reached. Viewing the evidence in the round the probability of the films achieving the high scenario was unrealistic. The fact a significant amount of profit is possible is irrelevant if the probability of that possibility occurring is unrealistic. The actual likelihood of achieving any kind of significant profit (so as to justify the high risks involved) was low. 264. For all the reasons discussed earlier (the small number of screens, the small distributors (phase 1), the high distribution fees and inclusion of participations, the failure to audit, or to flex the post-release report dates (phase 3)) the likelihood of the call option being exercised and therefore of any profit being achieved was low. If a call option was triggered it was still uncertain as to whether the 6% amount of defined proceeds would actually exceed the other costs so as to result in a profit. While it is self-evidently true that because the 6% of defined proceeds was uncapped the income that could be achieved from a profitable film could potentially be worth a lot of money, the possibility of a large profit is meaningless in the absence of a realistic assessment of the likelihood of profit. 265. In his written submissions Mr Southern argues it should also be taken account of that Parliament has recognised that creative industries are special and a general lack of profitability must be weighed against the outside chance of substantial profits in a minority of projects. He also submits that the investors’ risk reduction through tax relief cannot be ignored. There was however insufficient evidence before the tribunal to make findings of fact that there was in fact an even outside chance of substantial profits. There is nothing in the statutory provisions which indicates that Parliament wished the commercial basis test to be interpreted more liberally to take account of tax reliefs in certain areas. Even if it were correct for the test in s189 ITA 2007 to vary to take account of tax reliefs so as to encourage investing in the creative industries it is not clear why this would necessarily extend to the trading in derivative products based on film performance which the appellants maintain they were carrying on. Conclusion on commercial basis test 266. For the reasons above I conclude that even if the partnership was trading it was not trading on a commercial basis (1) because it was not carried out in a way which someone seriously interested in profit would carry it out and (2) because of the low likelihood of profit and the uncertainty, if any profit were achieved, that such profit, would be of sufficient amount to justify the low likelihood of it materialising in the first place. With a view to realisation of profit? 267. It follows from the analysis above (at [229] onwards) that the partnership and the appellants were indifferent to making a profit that the test of “with a view to realisation of profit” is not satisfied. Although there might in principle be cases where the purpose of the relevant person is to realise profit despite the fact that the activities which are carried on in a way that someone seriously interested in profit would carry them on, the current case is not one of those. In addition the low likelihood of profit and the uncertainty that those would be significant even if achieved, features which would put off someone who was seriously interested in profit, suggest that the activity was undertaken for reasons other than realisation of profit. 268. I therefore conclude that even if I were wrong on the issue of trading, any trade would, in any event, not meet either the commercial basis or the “with a view to the realisation of profits” tests in s189. (3) Whether the PartnerCos (Richmond Palace Limited and Daivat 2 Limited) satisfied the trading requirement in s137 of the Income Tax Act 2007 on the date and for the period required under s134. 269. Insofar as the partnership is held to be trading for the relevant period of ownership of the PartnerCos by Mr Hardy and Mr Moxon, HMRC do not dispute that the PartnerCos would also be treated as so trading. (4) Whether the PartnerCos satisfied the control and independence requirements in s139 of the Income Tax Act 2007 on the date and for the period required under s134. 270. The relevant section (with the particular subsection in issue emphasised) provides as follows: “139 The control and independence requirement (1) The control element of the requirement is that— (a) the company must not control (whether on its own or together with any person connected with it) any company which is not a qualifying subsidiary of the company, and (b) no arrangements must be in existence by virtue of which the company could fail to meet paragraph (a) (whether at a time during the continuous period that is relevant for the purposes of section 134(3) or otherwise). (2) The independence element of the requirement is that— (a) the company must not — (i) be a 51% subsidiary of another company, or (ii) be under the control of another company (or of another company and any other person connected with that other company), without being a 51% subsidiary of that other company , and (b) no arrangements must be in existence by virtue of which the company could fail to meet paragraph (a) (whether at a time during the continuous period that is relevant for the purposes of section 134(3) or otherwise). (3) This section is subject to section 145(3). (4) In this section— “arrangements” includes any scheme, agreement or understanding, whether or not legally enforceable, “control”, in subsection (1)(a), is to be read in accordance with sections 450 and 451 of CTA 2010, “qualifying subsidiary” is to be read in accordance with section 191.” 271. The issue here is whether the PartnerCos were under the control of Matrix. For the purposes of subsection 2 “control” had the meaning contained in s995 of ITA 2007. The concept of control over the affairs of a company, as the parties agree, is to be understood in the light of the Court of Appeal’s judgment in Steele (Inspector of Taxes) v EVC [1996] STC 785; it entails control over the general meetings of shareholders. HMRC acknowledge by reference to UBS & Anor v HMRC [2016] UKSC 13 that close coordination is not enough. HMRC acknowledge that formally, Mr Hardy and Mr Moxon as sole shareholders had respective control of the PartnerCos; they argue however that the documents of the scheme taken together reveal that such control lay elsewhere with the Executive Partner (MSF Vanguard No 1 IC –(an incorporated cell of MSF Partnership Services ICC, an incorporated cell company incorporated in Jersey) and a Matrix owned entity) which was, under the terms of the Partnership Agreement granted unfettered powers in relation to all matters concerning the “Business” of the partnership and the “Transaction Documents”. 272. HMRC submit the interlocking agreements essentially strangled the ability on anyone apart from Matrix to realistically exercise control over the companies. The Nominee Agreement further confirmed the unfettered powers of the Executive Partner. HMRC say the PartnerCo’s only activities entailed being passive members of a partnership subject to the direction and control of the Executive Partner; there was no realistic possibility that the PartnerCos would do anything other than “follow the script” set out by Matrix and the Executive Partner who shared common directors with the PartnerCos as well. Unless Matrix said so, the partnership could not do anything other than enter into the transaction documents. There were not going to be any general meetings, everything was going to be conducted in accordance with the Executive Partner’s wishes. In relation to Mr Moxon, the Power of Attorney he gave to a Matrix employee authorised the employee to take out a Partner Loan in his name and to exercise all the rights exerciseable as a shareholder. The 120 day non-revocation period was, HMRC suggest, anticipated to cover all of the scheme transactions. It gave power of control over shareholders’ meetings to another company. 273. The appellants’ case is that as regards Richmond Palace Ltd. the company was under the control of Mr Hardy either as shareholder or through his involvement with Matrix. No-one other than Mr Hardy had the power over the company at the general meeting. As regards Daivat 2 Ltd, it is submitted that Mr Moxon was an active, knowledgeable and interested investor. He authorised the way in which the Partnership was organised and run, and the role of the Partnership Company within it, thereby retaining and exercising control. While there was a power of attorney this was for a limited period. The fact employees had power did not mean the company (as referred to in the legislation) had control. Discussion 274. As Mr Southern’s skeleton argument reminds the tribunal, the statutory question is not whether the Vanguard Partnership was under the control of Matrix because of the role played by the Executive Partner but whether the PartnerCos, Richmond Palace Ltd and Daivat 2 Limited, were under its control. 275. I note that while it is correct that the provisions of the Partnership agreement and the Nominee agreement which HMRC highlighted give the Executive Partner a starring role in the activities of the Partnership and regulate the PartnerCos relationship between it and the Partnership and others in relation to the activities of the partnership, there is nothing I have identified which specifically regulates the affairs of the PartnerCos. Neither the partnership agreement nor the nominee agreement curtailed what the PartnerCo could do in relation to anything it wished to pursue outside of the partnership (the fact it did not decide to, and there was no suggestion that it would pursue other activities strike me as irrelevant). At least in relation to Richmond Palace Ltd therefore, there was nothing in the documentary provisions I was referred to, which ceded control of its affairs generally to another company. To the extent the PartnerCo was following a script, then that was something it was choosing to do in relation to its role as a partner in the Vanguard partnership. 276. I therefore conclude that in relation to Richmond Palace Limited the independence requirement was satisfied. 277. As regards Daivat 2 Limited the question arises as to what, if any, difference it makes that Mr Moxon gave a power of attorney which was irrevocable for 120 days. While it is submitted on the appellant’s behalf that he authorised the way in which the partnership was organised and run and thereby retained control I do not there is anything in this argument. The provisions of the statute clearly envisage control being derived through mechanisms other than through formal ownership and that being the case, by definition control that would otherwise have lain with the company under consideration would have had to have been ceded with the company’s authorisation. In any case the power of attorney here was irrevocable at least for period of time. I also do not think there is anything in the fact the power was given to employees of a Matrix company rather than to a company (the attorney appointed was Robert Charlton and failing him Mr Hardy). It is clear from the drafting of the power, its title (“Power of Attorney in respect of the Vanguard No. 1 Partnership”) and its recitals that it was given to the individuals not personally but as agents of a Matrix corporate entity involved in structuring the partnership arrangements and activities. However a more promising argument for the appellants rests in the scope of the power. Although for instance it contains a provision (paragraph 2) which is drafted in wide terms (providing the attorney with full power and authority to exercise any rights exercisable by Mr Moxon as a shareholder) the title, recitals and list of specific matters which follow the general power all point towards the power being intended for the specific purposes of participating in the Vanguard partnership and its activities. The power of attorney regulated the affairs of the company vis à vis the partnership but it did not regulate its affairs for all purposes. For similar reasons therefore as in respect of Richmond Palace Ltd. I therefore conclude that Daivat 2 Ltd was, despite the power of attorney, not controlled by another company and that the independence requirement of the statute was satisfied. (5) Whether the Appellants’ disposals of their shares in Richmond Palace Limited and Daivat 2 Limited were bargains at arm’s length for purposes of s131(3) of the Income Tax Act 2007. 278. Section 131(3) provides: “131 Share loss relief (1) An individual is eligible for relief under this Chapter (“share loss relief”) if— (a) the individual incurs an allowable loss for capital gains tax purposes on the disposal of any shares in any tax year (“the year of the loss”), and (b) the shares are qualifying shares. This is subject to subsections (3) and (4) and section 136(2). … (3) Subsection (1) applies only if the disposal of the shares is— (a) by way of a bargain made at arm's length,” 279. Both parties agree the relevant definition is as set out in Mansworth v Jelley [2002] STC 1013 (which dealt with the 1979 Act predecessor to the TCGA1992 but with the same wording) but they disagree as to its application. The appellants maintain that both sides were acting in their own interests and with benefits on both sides. 280. Construing the words “by way of bargain made at arm’s length”

“…the phrase “bargain at arm’s length” stipulates a particular type of transaction. The formula of words connotes more than a transaction: it connotes a transaction between two parties with separate and distinct interests who have agreed terms (actually or inferentially) with a mind solely to his own respective interests.” 281. The appellants submit that, given the disposals were transactions for consideration between unconnected parties, it may be inferred that they were bargains at arm’s length. Mr Hardy’s witness statement says the shares were sold for the best price available because that was the sum to which the PartnerCo was entitled under the Partnership Agreement following the exercise of the Put Options and the share sale price was determined on that basis. Mr Southern emphasised the TCGA section was very much designed to operate in the area of gifts. He maintained the transaction was a perfectly commercial one – the acquisition by Lakeshore and Matrix, of outstanding shares. It was the means by which the studio reacquired full control of the films at the same time as getting rid of all the security interests attached to the shares. 282. Mr Yates argues the parties were following a pre-ordained script whereby it was inevitable or at least very likely that the appellants were to invest and then lose money on the eventual sale rather than entering into a bargain at arm’s length. The investor knew that they would also have their loan written off. Further the price made no sense; they were buying it for an equivalent amount of cash without taking account of the cost of incurring stamp duty. 283. HMRC also argue that the way in which the agreements worked (as set out previously at [129]), no genuine third party purchaser would acquire a PartnerCo. Discussion 284. In Phase 1, the purchase was by MPSL and Lakeshore FilmCo LLC. In Phase 3 the purchase was by Bailigay Ltd, a subsidiary of Lionsgate. Although Mr Hardy’s evidence maintained that each shareholder assessed the commercial merits of the disposal of the shares at that time, as HMRC point out, this was not correct as Mr Moxon accepted that he did not negotiate the sale of the shares at all but asked Matrix what everyone else was doing. 285. There was no evidence of a negotiation happening between the buyer(s) and seller of the shares. It was known from the outset that the shares would be bought. The share purchase by entities linked to the producer was clearly pre-ordained. A sale was crucial to the working of the scheme and getting share loss relief – it could not be left to chance as to whether there would be a purchaser and what terms they would pay. It was inconceivable investors would be left holding shares in a private limited company. Each of the scenarios set out in the investor presentation envisaged a purchaser and stated the amount, which in the put option scenarios corresponded to the exercise price of the relevant partnership put option. There were for instance no disclaimers indicating that the purchase amount might depend on what was negotiated. 286. I agree therefore that the parties were following a pre-ordained script. One way or the other the shares in the PartnerCos were going to be sold, most likely at a loss. Where, as in this case the parties operate according to a script any separate or distinct interests they might have had were overtaken by their common interest in following the script. A “deal” had to be reached and there was no room for a bargain in any meaningful sense to be struck. The “offending” feature is not so much that there was a plan (as a plan could have built into it a step which contemplated arm’s length negotiations), but that the plan assumed a sale and purchase for a particular sum. It did not leave room for two parties with separate and distinct interests to negotiate. The stamp duty difficulties ([117] and [129] above) militate against a conclusion that a bargain had been struck after each party had considered its respective interests. 287. The appellants refers to the FTT’s decision in Kerrison (which was issued 19 April 2017) noting that there the tribunal had found that the disposal of shares had been by way of bargain made at arm’s length because the vendor and purchaser were unconnected and each was acting in its own interest (at [131]- [135] of its decision). 288. The position in Kerrison can readily be distinguished however in my view (it should also be noted its discussion on that point was not necessary for its decision). In contrast to the facts of Kerrison there is no evidence here as to what the purchaser’s interests were. In Kerrison the purchasing company (Brae) required a formal valuation and knew it would get a premium on value because of the put. By contrast there was no valuation here and for the reasons HMRC explain (see [129] above) there was could be no premium in a purchaser acquiring a PartnerCo. Against this backdrop there was no meaningful negotiation that could take place or room to strike a bargain by a person acting in his or her own interest. Even if the particular circumstances of the purchaser’s links to the studio (the sub-participator) are considered (i.e. that they had an interest in reducing a debt owed), the debt reduction meant the shares in the company were worth correspondingly less and there would still be the matter of stamp duty to fund. 289. Although Mr Southern argued the share sale transaction made perfect sense commercially, maintaining that it was the means by which the studio regained full control over the film, that submission does not reflect what happened. The studio regained the film when the partnership exercised the put option as it would inevitably do in circumstances where the threshold was met. 290. While the purchasers were not connected with the vendors in the legal sense of being under common ownership, they were however participants of the same set of pre-planned transactions. In such circumstances, even if there was a bargain there is no reason that to accept that it must be inferred by dint of lack of common ownership that the bargain was at arm’s length. I note in passing that such a conclusion is not out of keeping with the Upper Tribunal’s view in Brain Disorders (in a decision issued on 8 May 2017 after Kerrison which was issued on 19 April 2017) (at [41]) that the suggestion that a transaction was one at arm’s length and which occurred as a device within a tax avoidance scheme was “fanciful”. 291. I therefore conclude that the appellants’ disposals of shares in the PartnerCos were not at arm’s length for the purposes of s131(3). (6) Whether section 17 of the Taxation of Chargeable Gains Act 1992 applied to the Appellants’ subscription for shares in Richmond Palace Limited and Daivat 2 Limited such that their acquisition cost was lower than the amount of any subscription. Law 292. Section 17 provides: 17 Disposals and acquisitions treated as made at market value (1) Subject to the provisions of this Act, a person's acquisition or disposal of an asset shall for the purposes of this Act be deemed to be for a consideration equal to the market value of the asset— (a) where he acquires or, as the case may be, disposes of the asset otherwise than by way of a bargain made at arm's length, and in particular where he acquires or disposes of it by way of gift or on a transfer into settlement by a settlor or by way of distribution from a company in respect of shares in the company, or (b) where he acquires or, as the case may be, disposes of the asset wholly or partly for a consideration that cannot be valued, or in connection with his own or another's loss of office or employment or diminution of emoluments, or otherwise in consideration for or recognition of his or another's services or past services in any office or employment or of any other service rendered or to be rendered by him or another. (2) Subsection (1) shall not apply to the acquisition of an asset if— (a) there is no corresponding disposal of it, and (b) there is no consideration in money or money's worth or the consideration is of an amount or value lower than the market value of the asset.” 293. HMRC argue that if the investors (Mr Hardy and Mr Moxon) acquired their shares in circumstances where it was always part of the arrangement that the shares would, in a very short time, be sold at a loss it follows that their acquisition was not 1) a bargain or 2) one which was at arm’s length, and in those circumstances the true market value of the shares needs to be imposed – this was the value the shares were ultimately disposed of. (HMRC explained this was a technically discrete point from the s131 relief point – that was relevant to income tax whereas this point was relevant to whether there was a capital loss.) 294. It was not clear what positive arguments the appellants made by way of response. No specific oral submissions were made on the point. While their skeleton noted the market value rule was disapplied where a) there was no corresponding disposal of the asset and b) where there was no consideration in money or money’s worth or the consideration was lower than the value of the asset and furthermore that on a subscription for shares an asset is acquired with no corresponding disposal within 17(2)(a) the appellants also accepted that the acquisition cost was not lower than the market value of the asset acquired. That meant the s17(2) disapplication of the market value rule did not apply. 295. In any case for similar reasons as apply to the preceding issue, it appears clear that the acquisition was not a bargain let alone a bargain at arm’s length. The subscription for shares was part of a scheme to facilitate the access to the loss relief provisions of s131. That the partnership would make losses, although not guaranteed was highly likely. The PartnerCos were following a script, and had the same interest in following through the steps of the scheme which involved subscription for shares for a pre-determined amount– in such circumstances it was not so much the fact that the shares would shortly be sold for a loss but the fact that because both parties were following through a scheme, there were no separate or distinct interests at play. To the extent the appellants’ response seeks to makes the point that it was not pre-ordained that there would be a loss then this is irrelevant to the fact that the PartnerCos were not acting as parties with separate and distinct interests. 296. I therefore agree s17 means the acquisition cost was lower than what was paid at subscription. (7) In the event that Issue (6) is answered in the negative whether, when considering the expenditure of the Appellants on subscribing for their shares in Richmond Palace Limited and Daivat 2 Limited, for the purposes of s38 of the Taxation of Chargeable Gains Act 1992, one can ignore any expenditure attributable to any “loan” from ALCF. 297. Given the conclusion I have reached above it is not necessary to address the full level of detail of the submissions made but I will set out my findings of fact and conclusions on this issue in case they become relevant following any appeal. 298. Section 38 provides: “38 Acquisition and disposal costs etc. (1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to— (a) the amount or value of the consideration, in money or money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the asset, together with the incidental costs to him of the acquisition… or, …” 299. Mr Southern referred to various House of Lords / Supreme Court decisions in which the issue of circular loans arose noting there were two where the loans were considered to work, MacNiven (Inspector of Taxes) v Westmoreland Investment Ltd [2001] STC 237 concerning the question of whether a subsidiary had made a payment of interest and Barclays Mercantile Finance Ltd v Mawson [2005] STC 1 concerning the question of the amount of expenditure incurred for the purposes of capital allowances and two ( Ensign Tankers (Leasing) Ltd. v Stokes [1992] STC 226 and TowerMCashback LLP v R&C Commissioners [2011] STC 1143 where such loans were not considered to work. The appellants’ point in essence is that circular loans do not matter if the transaction which is thereby effected comes within the terms of the taxing statute; the substitution of the studio (Lakeshore in Phase 1 and Lionsgate in Phase 3) for ALCF as creditor did not alter the nature of the loans as regards the debtor. 300. Mr Yates, for HMRC, points out that none of the authorities the appellant refers to relate to the statutory construction of the capital gains tax provisions in issue here. Their purpose is the computation of gains and losses and it is clear from the authorities in particular Ramsay [1] that the provision is concerned with is economic reality, real losses incurred to set against disposal of the shares. He referred to Lord Wilberforce’s judgment at [326]: “The capital gains tax was created to operate in the real world, not that of make believe…. it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function.” 301. The loan element was not a real loss; it reduced according to the share proceeds amount when looking at the transaction as a whole and never had to be repaid. It was unreal for appellant to say having expended £170k he had actually lost £1.15 million. He knew from the outset he did not have to repay the loan. 302. HMRC say the tribunal should ignore the circular “loan”

“(1) If loss relief under section 573 of the Taxes Act or Chapter 6 of Part 4 of ITA 2007 (“share loss relief”) is obtained in respect of a loss or any part of a loss, no deduction is to be made in respect of the loss or (as the case may be) the part under this Act. (2) If a claim is made for share loss relief in respect of a loss accruing on the disposal of shares, section 30 has effect in relation to the disposal as if for the references in subsections (1)(b) and (5) to a tax-free benefit there were substituted references to any benefit whether tax-free or not. (3) All such adjustments of corporation tax on chargeable gains or capital gains tax are to be made, whether by way of assessment or by way of discharge or repayment of tax, as may be required in consequence of– (a) share loss relief being obtained in respect of an allowable loss, or (b) such relief not being obtained in respect of the whole or part of such a loss in respect of which a claim is made.” 313. The operative part of s125A for the purposes of these appeals is therefore s125A(2) which requires s30 to be read as follows: “(1) This section has effect as respects the disposal of an asset if a scheme has been effected or arrangements have been made (whether before or after the disposal) whereby— (a) the value of the asset or a relevant asset has been materially reduced, and (b) any benefit has been or will be conferred— (i) on the person making the disposal or a person with whom he is connected, or (ii) subject to subsection (4) below, on any other person. … (3) For the purposes of subsection (1)(b) above a benefit is conferred on a person if he becomes entitled to any money or money's worth or the value of any asset in which he has an interest is increased or he is wholly or partly relieved from any liability to which he is subject; … (5) Where this section has effect in relation to any disposal, any allowable loss or chargeable gain accruing on the disposal shall be calculated as if the consideration for the disposal were increased by such amount as is just and reasonable having regard to the scheme or arrangements and the benefit in question.” 314. HMRC argue that to the extent the ALCF loans had any substance, the release from the loans was a benefit under the above provisions. The scheme or arrangement was that the burden of the ALCF “loan” was waived as part of the arrangements involving the sale of the shares in the PartnerCos. Mr Hardy and Mr Moxon were relieved from their liability to the ALCF loan (clause 2 of the Deed of Release entered into on 22 November 2008 (Mr Hardy) and 2 April 2009 (Mr Moxon) and the side letters of 21 November 2008 and 19 February 2009. A benefit was therefore conferred within the meaning of s30(1) and consequently the disposal consideration ought to be increased by an amount equivalent to this. HMRC run this argument in the alternative to Issue 7 (they do not propose to deny a deduction under s38 but then also increase any disposal consideration). 315. Given our conclusion above on issue 7 (s38) it is not therefore necessary to reach a conclusion on this issue. If I were wrong however in my conclusion on Issue 7 (which itself only becomes relevant if I were wrong on issue 6) then there is nothing in my view to suggest HMRC’s argument above would not succeed or that there is anything in the appellant’s argument to the contrary. It is important to note the issue is only relevant in the event it is accepted the loan was one which created a real liability on the part of the borrower. The question then is not whether, as Mr Southern’s argument suggests, being released from a non-recourse obligation to pay is a benefit but whether the scheme that had been effected or the arrangements that were made (which must be taken to include such a real liability) had conferred, or would confer any benefit. The answer to that question is that waiver of such a real liability on the borrower clearly would confer a benefit. (9) Whether any alleged capital losses of the Appellants in respect of their disposals of shares in Richmond Palace Limited and Daivat 2 Limited were outside the definition of “allowable loss” as a result of s.16A of the Taxation of Chargeable Gains Act 1992. 316. The relevant statutory provisions are as follows: “(1) For the purposes of this Act, “allowable loss” does not include a loss accruing to a person if– (a) it accrues to the person directly or indirectly in consequence of, or otherwise in connection with, any arrangements, and (b) the main purpose, or one of the main purposes, of the arrangements is to secure a tax advantage. (2) For the purposes of subsection (1)– “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable), and “tax advantage” means– (a) relief or increased relief from tax, (b) repayment or increased repayment of tax, (c) the avoidance or reduction of a charge to tax or an assessment to tax, or (d) the avoidance of a possible assessment to tax, and for the purposes of this definition “tax” means capital gains tax, corporation tax or income tax. (3) For the purposes of subsection (1) it does not matter– (a) whether the loss accrues at a time when there are no chargeable gains from which it could otherwise have been deducted, or (b) whether the tax advantage is secured for the person to whom the loss accrues or for any other person.” 317. The test is therefore whether there was a main purpose of the arrangements to secure a tax advantage. 318. As to how that test is to be approached, Mr Yates’ submission on behalf of HMRC was that a finding of the intention of the individual investors is not a pre-requisite to the tribunal being able to reach a conclusion as to whether the arrangements themselves had a main purpose of securing a tax advantage if the tribunal were otherwise able to reach such a conclusion from the objective facts of the arrangement (i.e. the manner it was structured and marketed). He refers to the guidance the Chancellor gave in in Snell v HMRC [2007] STC 1279 in relation to the similar wording of another anti-avoidance provision in TCGA 1992, s137 TCGA 1992 (emphasis added): “[27] These submissions are challenged by counsel for the Revenue. He points out that there are the two issues of fact I have summarised in para [13] above. He observes that the purpose of Mr Snell is relevant to the identification of the elements of the scheme or arrangements. Once the scheme or arrangements have been identified then it must be ascertained whether their main purpose is the avoidance of a liability to capital gains tax. The purpose of Mr Snell may be relevant to the latter question if it is not self-evident from the nature of the scheme or arrangements themselves. In neither case, so he submits, is it necessary that the purpose of Mr Snell should be final and unalterable. [28] I prefer the submissions for the Revenue. The ordinary meaning of the word 'scheme' is 'a plan of action devised in order to attain some end'. Similarly an arrangement is 'a structure or combination of things for a purpose', see for both meanings the Shorter Oxford English Dictionary…” 319. Relying on Addy v IRC [1975] STC 601 at 610 Mr Yates submitted it was sufficient if those who designed the arrangement had a purpose of securing a tax advantage. ( Addy dealt with the test in transactions in securities legislation which was concerned with whether transactions “were carried out” for a main object to enable tax advantages to be obtained.) 320. Mr Southern submitted it was important to acknowledge that business is always shaped for the form best suited to keep down taxes. He emphasised that a transaction was no less a transaction with a commercial purpose even if there was another transaction the taxpayer could have entered into (but did not) which would have resulted in more tax being payable. 321. As to what was meant by a main object he referred to Lightman J’s observation in IRC v Trustees of the Sema Group Pension Scheme [2002] STC 276 at [53]: ‘Obviously if the tax advantage is mere “icing on the cake” it will not constitute a main object. Nor will it necessarily do so merely because it is a feature of the transaction or a relevant factor in the decision to buy or sell. The statutory criterion is that the tax advantage shall be more than relevant or indeed an object; it must be a main object. The question whether it is so is a question of fact for the commissioners [fact-finding appeal tribunal] in every case.’ 322. This depiction of objects which did not meet the test was echoed in the Special Commissioner’s decision in Snell which having considered the House of Lords judgment in CIR v Brebner 43 TC 705 (and the proposition there that a tax advantage that was ancillary to a main object was not a main object), at [22] paraphrased something which was ancillary as being “purely incidental and of little importance compared with the other object or objects”. 323. As to the relevance of a commercial reason being present, while the appellants argue that s16A cannot apply if the scheme was entered into both to make a commercial return and in the large allowable tax loss, as HMRC point out this submission was rejected the Court of Appeal’s decision in Revenue and Customs Commrs v Lloyds TSB [2014] EWCA Civ 1062 . That case concerned capital allowance anti-avoidance provision. The court was of the view that it was not enough for the appellant to say that there was a commercial reason; it had to be shown there was no main purpose of tax avoidance. Discussion 324. It follows from the case-law discussed above that the appellant must show that obtaining a tax advantage was not one of the main objects of the arrangements and that the tribunal should assess this by reference to the objective facts. An alternative way of approaching the issue is that if the appellants can show that tax was an incidental purpose or was “icing on the cake” then that will show the obtaining of a tax advantage was not a main object. 325. Mr Southern’s essential argument is that there was no pre-planned scheme to make a loss –the partnership planned for success. If the film transactions were unsuccessful then certainly the investors hoped to obtain tax relief on their losses but this was a fall-back and not a main purpose of the transaction. If the plan was to make profits then the consequences of a loss were not relevant in deciding what the main purpose of the transaction was. The appellants submit that if the arrangements were essentially commercial then it would not be correct to characterise them as a tax-driven scheme. They also suggest that the issue is largely the same question of whether the partnership was trading. 326. HMRC highlight that the insertion of contingency and alternative of being able to sell shares at a gain does not stop there being a main tax purpose. They argue that even if, contrary to their case on trading, there was still some realistic “hope” of a commercial profit, the main purpose was of securing a tax advantage. Further if what would actually happen could not be predicted, how could it not then be said that obtaining a tax advantage was not just as much a main a purpose as that of commercial gain? Even if there was no scheme to make a loss, making a profit was less likely as illustrated by Madea which was a successful film but one where the partnership still made a loss. HMRC also refer to the analysis above that the loan served no commercial function but was only there to ramp up losses. 327. In my judgment Mr Southern’s characterisation of the partnership being one which planned for profits is simply not borne out by the arrangements that were in place, and the purpose indicated by them. Many of the factors which relevant to my conclusion that, if there was a trade, it was not one that was carried on on a commercial basis or with a view to realisation of profit are equally relevant to explaining why the arrangements were not for a commercial reason but motivated by tax reasons. 328. As regards both Phases 1 and 3, the effective application of a template set of put and call option percentage thresholds, which did not vary according to the prospects of the particular film that was picked, signalled an indifference to making a profit. 329. As HMRC point out given the probabilities, and relative uncertainty of rewards it was unreal to depict the tax loss scenario as ancillary or incidental. This was not a situation where even if the chances of making a profit were small they would necessarily be worth it because of the size of the profits. The level of profit in the only profit making scenario –in the event a call option was triggered – was uncertain both in amount and timing. 330. It is also correct that far more attention was given to tax considerations e.g. going to specialist tax counsel, e-mails referencing underlying tax concerns (for instance that at [84]) than looking at the commercial prospects of the films. As regards the presentation materials to investors these are telling in two respects. First in that the loss-making scenarios were more numerous and were depicted as profit-making from the investors’ point of view rather than as a mitigant or fall-back as suggested. Second, the materials appear designed to appeal exclusively to investors who it was assumed would have income against which to set losses off against. Furthermore, for the reasons already discussed the loan arrangements, which involved a lot of thought and effort in devising, given they needed a complex set of agreements and persuading a bank to put its name to them, served no other purpose other than to ramp up losses. As illustrated in Madea there was no reason why any shortfall in funds could not have been addressed by the kind of deferred consideration arrangement that was used for that phase. The inclusion of the loan was woven into the actual arrangements (see the analysis of the documents at [124] onwards) but served no commercial function other than to secure a tax advantage. The facts in relation to the transactions are inconsistent with tax being an incidental purpose. 331. As to the appellants’ argument that losses were not guaranteed there is no merit in this. It only needs to be considered that profits do not need to be guaranteed in order for profit to be a main object – similarly losses do not need to be guaranteed for a loss to be a main object. The fact losses were not guaranteed is not therefore inconsistent with a main objective being the tax advantage of loss relief. 332. I therefore conclude s16A is satisfied. Obtaining a tax advantage was one of the main objects of the arrangements. 333. The above is sufficient to dispose of this issue but were it necessary to consider Mr Hardy’s and Mr Moxon’s subjective purposes it was not credible, that either entered into the scheme with the object of making a profit (ignoring the effect of loss relief) for all the factors which led me to conclude that the partnership was indifferent to profit and that it was not trading with a view to realisation of profit. Mr Hardy and Mr Moxon were both sophisticated and financially savvy business persons. The low probability of success and uncertain return, the structuring of the put and call arrangements and fees such that profit was unlikely even if a film achieved box office success all point towards profit not being their objective. Rather, as is clear from the presentation materials, their object was securing a tax advantage in the shape of obtaining loss relief. (10) Whether HMRC is entitled to challenge the Appellants’ claims to share loss relief pursuant to an enquiry under section 9A of the Taxes Management Act 1970 or whether HMRC was only entitled to challenge the Appellants’ claims to share loss relief pursuant to an enquiry under Schedule 1A to the Taxes Management Act 1970? 334. This issue arises out of the fact that HMRC opened their enquiry into Mr Hardy’s 2008-9 return. The appellants’ case is that if they wanted to challenge his claim under s131 ITA 2007 for loss relief HMRC should have opened an enquiry under Schedule 1A. They did not do this and are now out of time to do so. HMRC disagree, they submit that a s9A enquiry into the 2008-9 return was a permissible means of challenging Mr Hardy’s claim. Facts 335. Mr Hardy’s 2007-8 return referred to the following, which Mr Southern argued was a stand-alone carry back claim: "Unquoted Shares or Securities Description: Richmond Palace Ltd. I disposed of my shareholding in Richmond Palace Ltd on 5 August 2008. I realised a loss on my shares in this unquoted trading company of £1,153,717. I hereby claim this loss against my other income from the year of 2007/08." 336. Mr Hardy’s tax return for 2008-9 in box 4 stated the figure of 1,153,717 which was the loss he sought to carry back to the previous year. 337. In relation to Mr Moxon such evidence as there was (an HMRC letter dated 10 January 2013) referred to a repayment claim in box 14 relating to a loss in 2007-8 but there was no evidence that Mr Moxon made any claim on the face of his 2007-8 return in relation to his 2008-9 losses. Statutory provisions 338. Under section 8 TMA 1970 a person may be required by a notice given to him by HMRC to make and deliver a return. Section 9 requires a return under s8 to include a self-assessment and s9A empowers HMRC to enquire into returns as follows: “9A. Power to enquire into returns (1) An officer of the Board may enquire into – (a) the return on the basis of which a person's self-assessment was made under section 9 of this Act, or (b) any amendment of that return on the basis of which that assessment has been amended by that person, or (c) any claim or election included in the return (by amendment or otherwise) if, before the end of the period mentioned in subsection (2) below, he gives notice in writing to that person of his intention to do so.” 339. Schedule 1A deals with claims not included in returns, with provisions defining claims (paragraph 1), who the claim should be made to and the form (paragraph 2), amendments to claims (paragraph 3), the giving effect to claims and amendments (paragraph 4) and at paragraph 5 provides for a power to enquire into a claim within certain time limits. 340. Schedule 1B to TMA deals with claims for relief involving two or more years. Paragraph 2 provides: “2(1) This paragraph applies where a person makes a claim requiring relief for a loss incurred or treated as incurred, or a payment made, in one year of assessment ("the later year") to be given in an earlier year of assessment ("the earlier year"). (2) Section 42(2) of this Act shall not apply in relation to the claim. (3) The claim shall relate to the later year. ... (6) Effect shall be given to the claim in relation to the later year, whether by repayment or set off, or by an increase in the aggregate amount given by section 59B(1)(b) of this Act, or otherwise. ...". 341. Section 42 which is referred to in 2(2) above deals with the procedure for making claims and at subsection 2 provide where relevant that where notice has been given to file returns under specified sections of the TMA (which include s8): “a claim shall not at any time be made otherwise then by being included in a return under that section if it could, at that or any subsequent time, be made by being so included”. 342. Section 42(11) provides: “Schedule 1A to this Act shall apply as respects any claim or election which -- (a) is made otherwise than by being included in a return under section 8, 8A or 12AA of this Act, ... (11A) Schedule 1B to this Act shall have effect as respects certain claims for relief involving two or more years of assessment ..." Case law and parties’ arguments: 343. Mr Southern submits TMA 1970 makes a binary distinction between claims “included” in a return (s9A) and stand-alone claims (Sch 1A) which are not so included and that each has its own distinct enquiry procedure. He highlights s8(1) TMA, s8(1AA) and s9 contain the crucial words “included in the return” which suggests there are certain claims which are not included in a return. Further S42(2) and (11) TMA – again envisages that not all claims can be included in a return. Under s42(11) where claims are made “otherwise than being included in a return under…” then Schedule 1A applies. Under Section 11A Schedule 1B applies in respect of “claims for relief involving two or more years of assessment”

“25. The tax return form contains other requests, such as information about student loan repayments (page TR2), the transfer of the unused part of a taxpayer's blind person's allowance (page TR3) or claims for losses in the following tax year (box 3 on page Ai3) which do not affect the income tax chargeable in the tax year which the return form addresses. The word "return" may have a wider meaning in other contexts within TMA. But, in my view, in the context of sections 8(1), 9, 9A and 42(11)(a) of the TMA, a "return" refers to the information in the tax return form which is submitted for "the purpose of establishing the amounts in which a person is chargeable to income tax and capital gains tax" for the relevant year of assessment and "the amount payable by him by way of income tax for that year" (section 8(1) TMA). 26.In this case, the figures in box 14 on page CG1 and in box 3 on page Ai3 were supplemented by the explanations which Mr Cotter gave of his claim in the boxes requesting "any other information" and "additional information" in the tax return. Those explanations alerted the Revenue to the nature of the claim for relief. It concluded, correctly, that the claim under section 128 of ITA in respect of losses incurred in 2008/09 did not alter the tax chargeable or payable in relation to 2007/08. The Revenue was accordingly entitled and indeed obliged to use Schedule 1A of TMA as the vehicle for its enquiry into the claim (section 42(11)(a)). 27. Matters would have been different if the taxpayer had calculated his liability to income and capital gains tax by requesting and completing the tax calculation summary pages of the tax return. In such circumstances the Revenue would have his assessment that, as a result of the claim, specific sums or no sums were due as the tax chargeable and payable for 2007/08. Such information and self assessment would in my view fall within a "return" under section 9A of TMA as it would be the taxpayer's assessment of his liability in respect of the relevant tax year. The Revenue could not go behind the taxpayer's self assessment without either amending the tax return (section 9ZB of TMA) or instituting an enquiry under section 9A of TMA.”

“Thus, the correct procedure for making a Schedule 1B claim is either to make it in the return for the loss-making year in question (the Year 2 return), or to make an earlier (or indeed later) Schedule 1A standalone claim, which is then, subsequently, nonetheless required to be included in the return for the later year.” 354. Gloster LJ agreed with the characterisation of Sales J in the High Court that the claims in the appellants’ Year 1 returns to use partnership losses in later periods were “inchoate”