Denis Healey once said that the difference between tax avoidance and tax evasion is the width of a prison cell. The case of R v Richard Driscoll and Others pushed the boundaries of tax avoidance to breaking point.
The case concerned film tax credit relief and resulted in a defeat for HMRC, as the jury acquitted the defendant. The defence successfully argued that they had merely taken advantage of a tax loophole created by the Finance Act 2006 and the Corporation Tax Act 2009.
The 2006 act attempted to ‘shut down’ previous film tax relief schemes (sale and leaseback etc) that had been open to abuse.
The new tax relief was designed to subsidise the British film industry by allowing a film production company to claim back up to 25% of a film’s eligible core production costs. Those core production costs were subject to a number of qualifying conditions, in particular:
- the core production costs must be ‘used and consumed’ in the UK;
- the relief is calculated upon the cost of actually producing the film; and
- connected companies were able to transact so long as they operated at
- ‘arm’s length’ and charged each other open market value.
The caseThe case concerned the making of a British horror comedy called Eldorado, starring among others Peter O’Toole (pictured), Daryl Hannah, Michael Madsen and Rik Mayall. Richard Driscoll, who directed and also starred in the film, owned his own functioning film studio in Cornwall. He was approached by investors to produce a series of films, the first of which was Eldorado.
A claim for film tax credit was submitted to HMRC for £1.7m, based on a total film budget cost of £11m and a total core production cost of £9m.
The prosecution (HMRC) alleged that the film cost significantly less than £9m to make, that the costs had been grossly inflated, and that a fraud had been committed.
The defence conceded that the claim was far greater than the actual costs, mainly because Driscoll owned his own studio and so was able to produce films for less money. The film actually cost about £1.5m to make. However, the defence argued that it could legitimately submit a film tax credit claim based on ‘open market value’ rather than the actual cost. He used a series of connected company transactions to inflate the costs.
This is best illustrated with three examples. The first concerns the cost of computer-generated imagery.Eldorado was the first British-made modern film in 3D. Driscoll outsourced most of the work to a company in Bulgaria which undertook the CGI for £35,000 – a fraction of the cost had it been done in the UK. The CGI work was then ‘finished off’ in Cornwall, getting around the issue of where the costs had been ‘used and consumed’. Driscoll’s own company then charged the special purpose vehicle production company, which would ultimately make the claim for FTC, a fee of about £1m. To the prosecution this looked like a grossly inflated charge and a fraud.
However, during the defence case we introduced evidence from an expert witness to show that the CGI price charged to the production company was in fact ‘the going rate’ had it been sourced in the UK. Caught unawares, the prosecution called their own expert. In cross-examination, the prosecution expert conceded that the fee charged was actually below the market rate. The second example concerns the cost of the studio.
Driscoll had his own fully functional studio with green screen facilities. Driscoll therefore charged the production company a fee of around £1m for hire of the studios. It, of course, cost Driscoll next to nothing, as he owned the studio. Again it was argued by the defence that that the fee of £1m was comparable with market rates in the UK. Again the defence called evidence to show that had the production company used Elstree Studios, it would have cost almost £2m.
The third example concerns the cost of the actors. Driscoll had ‘connections’ and was owed favours by the stars’ agents. So he was able to secure their services for a heavily discounted rate. By using ‘connected companies’, a significant mark-up was charged to the SPV production company, which then submitted the costs as part of the film tax credit claim.Expert evidence regarding the cost of securing talent was again employed successfully.
The Revenue found it difficult to deal with the defence interpretation of the legislative framework. The head of the film tax unit in Manchester gave evidence. During cross-examination, it became apparent that the unit was hugely under-resourced and the team that dealt with multi-million-pound tax relief claims (amounting to £800m a year) was staffed by only three people. The Revenue conceded that the legislation and its own guidance allowed claims to be made based on costs generated between connected companies, so long as the costs were referable to market value.
As the trial unfolded, the prosecution case, based on an FTC claim that had looked hugely inflated and dishonest at the outset, began to unravel. Notwithstanding that the jury convicted Driscoll of a separate VAT fraud [for which he was jailed for three years on 1 July], the not guilty verdict on the allegation of film tax credit fraud was an unwelcome reality check for the Revenue.
Simon Bickler QC and James Lake, barristers at St Pauls Chambers in Leeds, represented Richard Driscoll, instructed by Cohen Cramer