Capital allowances – Machinery or plant – Films – Expenditure on production of film
Re Alchemist (Devil's Gate) Film Partnership: First-tier Tribunal (Tax Chamber): 15 March 2013
On 7 November 2001, a partnership agreement was executed on 7 November 2001 (the partnership agreement). The members of the partnership were Alchemist Films Ltd, Merrymaker Ltd, and four named general partners, together 'The Alchemist (Devil's Gate) Film Partnership' (the taxpayer). The partnership agreement recorded that the taxpayer had been formed for the purpose of producing the film 'Devil’s Gate' (the film). It was agreed by clause 3.3 of the partnership agreement that the film should have a total budget of £2m including 'deferred revenue expenditure' of £1,402,700. The total capital actually introduced into the taxpayer by the general partners was £597,300.
Starting in late 2001, a company known as Alchemist Films (Devil’s Gate) Ltd (AFDG) entered into a number of 'production team contracts' with cast, crew and other service providers, each of which provided for a mixture of fixed payments and further sums. In all cases, the production team contract was between the individual member of the production team and AFDG, and in each case, the fixed amount was to be paid by instalments during the period for which he or she had been obliged to provide services. The further sums were expressed as pre-agreed amounts of 'net income, when fully received from the sales agent' subject to an overall limit applicable to each individual. The more significant members of the production team were to participate in a specific percentage of the 'producer’s profit'.
The 'deferred cast and crew amounts' belonged to the individual member (subject to AFDG’s obligation to account for NI and income tax) by stages, being as and when AFDG first received the relevant 'layer' of net income. The residue of the proceeds of exploitation of the Film was dealt with as producer’s profits and belonged to those who had agreed to share in that residue. AFDG was free to assign the benefit of any contractual undertaking in its favour. However, it could not, by assignment or otherwise, override the rights of the individual members of the production team to deferred cast and crew amounts, if any.
The rights to those amounts would have belonged to those individuals from the moment they had signed up and performed the services specified in their production team contracts with AFDG. On 20 March 2002, the taxpayer entered into a production and financing agreement (PFA) with AFDG, the effect of which was to transfer ownership of the completed film to the taxpayer and to grant it exclusive rights to exploit the film. Parts of the PFA dealt with matters that had already occurred by the date of signing. By then the various production team contracts between AFDG and the individual members of the cast and crew had been signed. Further, the services of the cast and crew, as required by the individual production team contracts with AFDG, had been performed and the individuals’ particular rights to payment of their deferred cast and crew amounts (if and when net income came through the exploitation pipeline) would therefore have become the property of those individuals.
Under the PFA, AFDG agreed to produce the film according to various specifications and deliver it to the taxpayer. The production of the film was to be 'the function and responsibility of [AFDG]', although the PFA provided that the taxpayer would be 'consulted' in relation to it. Under the PFA, AFDG was required to complete and deliver the film to the taxpayer by 5 April 2002. According to the 'budget figure' as defined in the PFA, the taxpayer agreed to pay up to £597,000, with the remaining 'budget' sums to be paid out of the film proceeds. However, the PFA was silent on the exploitation of the film. On 27 March 2002, based on indicated gross worldwide sales, it was concluded that there was a reasonable probability of sales of £2,578.061.
That, if achieved, would have covered the amounts required to meet the rights of the individual members of the cast and crew to most of the deferred cast and crew amounts. Work on the film continued after 5 April 2002, but the film was not released until late 2003. A copy of the taxpayer’s financial statements for the period ended 5 April 2002 (the financial statement) recorded a tangible fixed asset of £1,916,011. In its tax return for the year to 5 April 2002, the taxpayer claimed relief under s 48 of the Finance (No. 2) Act 1997 (the 1997 Act) for 'film production costs' of £1,916,011, comprising £1,223,132 by way of deferred cast and crew amounts. In March 2010, the Revenue and Customs Commissioners (the Revenue) issued a closure notice of its enquiry into the tax return for the year to 5 April 2002, reducing the taxpayer's loss to £597,300, being the amount actually contributed by the taxpayer.
The taxpayer appealed to the Upper Tribunal (Tax and Chancery Chamber) (the tribunal). The taxpayer argued that on its proper construction, the PFA had made the taxpayer liable to discharge by payment the rights of the individual members of the production team to their deferred cast and crew amounts. The taxpayer further argued that, in any event, there had been, as an absolute necessity, an implied term that the taxpayer would be responsible for discharging the deferral liabilities of AFDG. However, the Revenue contended that as a preliminary point, the taxpayer at no stage had ever undertaken, whether conditionally or otherwise, to pay any of the deferred cast and crew amounts. Instead, the relevant contracts with the individual members of the production team had been entered into by AFDG and not by the taxpayer and the obligation to discharge the rights of those individuals to their deferred cast and crew amounts remained with AFDG.
Against that background, it fell to be determined whether the partnership had incurred expenditure of £1,283,132, being the aggregate of the deferred cast and crew amounts in the tax year ending 5 April 2002. For that purpose, the taxpayer had to satisfy the tribunal that it had been under an 'unconditional obligation to pay' the deferred cast and crew amounts within the meaning of those words in section 5(1) of the Capital Allowances Act 2001 (the 2001 Act); and if so, the tribunal needed to be satisfied that the taxpayer had been required to pay the deferred cast and crew amounts within four months after that unconditional obligation had come into being for the purposes of section 5(5) of the 2001 Act. The appeal would be dismissed.
The Revenue's argument was to be preferred. Nothing had displaced the obligations in the production team contracts assumed by AFDG to account to the individual members of the production team for their shares of 'net income', namely the deferred cast and crew amounts, as and when exploitation proceeds came through the pipeline. Nor could the PFA be read as showing that the taxpayer had assumed those liabilities. There was no ambiguity in the PFA and no aberration in the language that called for a different interpretation. In particular, the read definition of 'budget figure' could not be read as in some way imposing an obligation on the taxpayer which had been specifically excluded in the main body of that agreement (for example in clause 3(1)(a)).
The words of exclusion in clause 3(1)(a) covered the deferred cast and crew amounts that (in right of their entitlements to remuneration in their respective production team contracts) would belong to the individual members of the production team as and when successful exploitation of the film took place; and AFDG would remain contractually bound to those individuals to account to them for their respective deferred cast and crew amounts. Further, no term could be implied into the PFA that passed the obligation in respect of the deferred cast and crew amounts to the taxpayer. No such implication was required to make the arrangements embodied in the PFA effective. Furthermore, the express terms of clause 3(1)(a) excluded, as 'contingent deferments', the taxpayer's responsibility for deferred cast and crew amounts. A term could not therefore be implied that contradicted clause 3(1)(a) (see ,  of the judgment).
The disputed amount of £1,223,132, representing the aggregate of the deferred cast and crew amounts, had not been 'capital expenditure' by the partnership on the production of the film for the purposes of the 1997 Act (see  of the judgment).