HM Revenue & Customs v Halcyon Films Llp

This appeal by the Commissioners for HM Revenue and Customs ("HMRC") raises a short point of law on the meaning and effect of section 101 of the Finance Act 2002. That was one of a number of related statutory provisions, now repealed, which at the relevant time governed tax relief for expenditure on the production and acquisition of British films. It is a second appeal within CPR 52. 13. Patten LJ gave permission to appeal on the grounds that it raises a point of law of sufficient importance, relevant to a number of other cases, and with a sufficient prospect of success to warrant a second appeal.

For the purpose of identifying and resolving the point of law in issue on this appeal, the factual context may be summarised very briefly. The Respondent, Halcyon Films LLP ("Halcyon"), acquires feature films from film distributors and leases them back. In its tax return for the year to 5 April 2004 it claimed a loss of £14, 021, 371. That loss principally comprised a deduction of £12, 183, 932 under section 42 of the Finance (No. 2) Act 1992 ("section 42"), representing relief on Halcyon's expenditure in the tax year on the acquisition of three films, entitled Asylum, Method and Samantha's Child.

Following an enquiry into Halcyon's return, on 18 January 2007 HMRC issued a closure notice, disallowing the claim to section 42 relief in its entirety. On 25 January 2007 Halcyon gave notice of appeal to the Special Commissioners. The appeal was heard over seven days from 18 to 26 February 2008 in conjunction with an appeal by Micro Fusion 2004-1 LLP ("Micro Fusion"), which raised different issues of principle as to the availability of section 42 relief.

On 30 June 2008 the Special Commissioners (Edward Sadler and John Clark) handed down separate judgments in respect of Micro Fusion and Halcyon. They allowed both Micro Fusion's and Halcyon's appeals. HMRC appealed in both cases. HMRC's appeals were heard together by Davis J. On 22 May 2009 he handed down a composite judgment in both appeals. He allowed HMRC's appeal in respect of Micro Fusion, but dismissed their appeal in respect of Halcyon.

We heard together HMRC's appeal from Davis J in respect of Halcyon and an appeal by Micro Fusion. This judgment is concerned only with the former.

Before the Special Commissioners there were four issues in dispute between HMRC and Halcyon. By the time of the hearing before Davis J there was only one. That issue was whether, on the agreed facts, s.101 of the Finance Act 2002 ("section 101") precluded Halcyon from claiming any relief under section 42. Davis J held that it did not. HMCR submit that he was wrong in that conclusion.

The resolution of that issue turns on the inter-relationship between section 42, section 48 of the Finance (No 2) Act 1997 ("section 48") and section 101. Each of those provisions was concerned with relieving expenditure on the production or acquisition of a "qualifying" film, as defined by section 43(1) of the Finance (No 2) Act 1992. That was a film which satisfied certain criteria and was certified by the Secretary of State as "a British film" for the purposes of schedule 1 to the Films Act 1985.

Davis J said in paragraph 16 of his judgment, and both sides accept, that the purpose behind section 42 was a desire to encourage investment in the British film industry by granting appropriate tax incentives. Section 42 enabled a person who had incurred production expenditure on a qualifying film, or who had incurred expenditure on acquiring a qualifying film, to write off that expenditure over a three year period. It was in the following terms, so far as relevant.

In a report published in 1996 the Advisory Committee on Film and Finance (the Middleton Committee) recommended to the Secretary of State for National Heritage that, among other things, the British film industry be assisted by permitting 100 per cent of production or acquisition expenditure to be written-off in the period or periods in which it was incurred. That recommendation was broadly implemented by section 48, but only in respect of small qualifying films. That section modified section 42 by providing, broadly speaking, that, in the case of a film with total production costs of £15 million or less, a person who had incurred expenditure on its production or acquisition could write-off that expenditure over a one year period rather than over three years. It was in the following terms, so far as relevant.

The Finance Act 2002 contained three provisions to restrict the availability of tax relief for expenditure on the production or acquisition of films, namely sections 99, 100 and 101. Section 99 restricted relief to films genuinely intended for theatrical release. So far as relevant, it was as follows.

Section 100 amended section 48 by, among other things, inserting a new sub-section (6A), excluding certain unpaid expenditure from production expenditure for the purpose of section 48. It was as follows, so far as relevant.

Section 101 was, the Judge said in paragraph 100 of his judgment and both parties agree, designed to counteract "double-dipping" or "multi-dipping". That was the practice of selling the same film twice or more to facilitate multiple claims to relief for expenditure on the acquisition of a film. Section 101 was intended to achieve that objective by restricting claims to acquisitions by the producer or directly from the producer, and in any event barring claims in relation to any acquisition other than the first. It was confined, however, to small films within section 48, that is to say qualifying films with total production expenditure of £15 million or less ("small films"). Section 101 was as follows, so far as relevant:

It is common ground that section 101 applied to Halcyon's claim for relief, which was the subject of the closure notice. Halcyon was not the producer of the three films in respect of which it claimed relief. Nor did it acquire them directly from the producer. Each film had a total production expenditure of less than £15 million, was completed after 2 July 1997, and was acquired for expenditure incurred during the tax year ending April 2004. It is common ground, therefore, that section 101 prevented a claim to 100 per cent first year relief pursuant to section 48. Halcyon maintains that section 101 did not prevent it claiming deductions over three years under section 42 instead. HMRC's case is that the effect of section 101 was to bar all claims to acquisition expenditure relief under section 42 in respect of a taxpayer such as Halcyon, which was neither the producer of a small film nor a purchaser from the producer. Both the Special Commissioners and the Judge agreed with Halcyon.

The reasoning of the Special Commissioners, leading to their decision that section 101 did not preclude Halcyon's entitlement to relief for its acquisition expenditure over three years under section 42, was as follows. Section 48(3) makes clear that section 48 does not apply to acquisition expenditure within section 42(3) in excess of the total production expenditure. Section 48(3), (4) and (5) ensure that such excess expenditure is brought back within section 42. In that way section 48 preserves the deductibility of certain expenditure under section 42 in respect of small films where that expenditure does not qualify under section 48. That is properly to be regarded as illustrative of a general principle that expenditure which for any reason fails to qualify as deductible pursuant to section 48 automatically reverts to being deductible under section 42. The deductibility relief under section 48 is not separate from that under section 42, but is a modified version of the basic section 42 regime. The effect of section 101 is to treat acquisition expenditure relating to "non-original" acquisitions as falling outside the special section 42 regime provided by section 48, with the same consequence as the failure of one of the three conditions in section 48(2): the expenditure falls back into, or remains within, the basic section 42 regime.

The Judge's reasoning leading to his dismissal of HMRC's appeal was as follows. It is hard to see an entirely convincing rationale or purpose for the conclusion advanced by HMRC that, where section 101 applies, not only is there lost the possibility of claiming the more generous phasing of relief by reference to section 48 but also the possibility of claiming the relatively less generous relief by reference to section 42. No admissible evidence was adduced to identify an intention to treat so differently in that way relief on "non-original" acquisitions of small films and of large films. The fundamental point is that HMRC's submissions do not accord with the statutory language. If those submissions are correct, the heading of section 101 would more appropriately have said "Removal of relief.." rather than "Restriction of relief...". More importantly, it is clear that by using the phrase "[r]elief under section 48" in section 101(1) the draftsman was intending to refer to the circumstances whereby a taxpayer came within the ambit of section 48 and was entitled to claim extended relief accordingly. This is confirmed by the terms of section 99, where the draftsman was plainly proceeding on the basis that "relief" under section 48 was not to be taken as being relief under section 42, and by the descriptive wording in brackets in section 99(1) showing the draftsman's understanding of section 42 and section 48. It is also consistent with the descriptive wording in section 100. It follows that section 101 does not, where its restriction applies, have the effect of precluding the taxpayer from reverting to reliance on the less generous relief provisions of section 42 taken on their own.

HMRC contend that both the Special Commissioners and the Judge were wrong in their analysis and conclusion. HMRC's arguments, skilfully and effectively elaborated in oral submissions by Ms Ingrid Simler QC before us, were as follows.

HMRC's starting point, which is common ground, is that section 48 did not create a free-standing relief in respect of small films. In Ms Simler's words, section 48 was parasitic on section 42. Even after the enactment of section 48, it was section 42 which conferred the relief, but as modified by section 48. Nor was the modification by section 48 optional. Section 48 (1) provided that the modified regime "shall have effect" in cases within section 48. Accordingly, in relation to expenditure within section 48, the taxpayer had no right to elect for relief under the unmodified section 42, for example if for any reason the taxpayer would have preferred to write-off the expenditure over three years rather than one.

Turning then to section 101 itself, HMRC contend as follows. The draftsman has plainly said in section 101(1) that acquisition relief under section 48 is barred completely save in relation to an acquisition by the producer, or directly from the producer. If Parliament had intended, as Halcyon argues, merely to curtail the ambit of the expenditure within section 48, it would have done so expressly, most obviously by supplementing section 48(2) or (3). Instead, both the heading to section 101 and the text of sub-section (1) of the section were expressly framed as curtailing the relief itself rather than the extent of the qualifying expenditure. Bearing in mind that section 48 did not itself confer a free-standing relief, but operated by way of a compulsory modified regime under section 42 for all cases within section 48, it is clear that the intention of the draftsman was that, in cases within section 48, there should be no section 42 relief on "non-original" acquisitions.

HMRC advance the following specific criticisms of the Judge's reasoning. He did not deal at all with HMRC's argument which I have rehearsed in paragraph 18 above.

HMRC also reject the analysis of the Special Commissioners that section 48(3), (4) and (5) are illustrative of a general principle that expenditure which fails to qualify as deductible pursuant to section 48 automatically reverts to being deductible under section 42. Ms Simler submitted that no such general principle could be derived from those provisions because the excess expenditure with which those sub-sections were concerned was outside section 48, and for that reason fell within section 42.

Notwithstanding those careful and attractive submissions, I consider that the conclusion of both the Special Commissioners and the Judge was correct: acquisition expenditure which would have fallen within section 48, but for the provisions of

The starting point is the language of section 101 itself. As Mr Jonathan Peacock QC, for Halcyon, emphasised, that language focuses on the disallowance of certain acquisition expenditure for the purposes of section 48. That is the natural reading of section 101(1), which limits the availability of the relief under section 48 to "acquisition expenditure... only in relation to an acquisition" by the producer, or directly from the producer. It is underscored by the fact that the draftsman expressly defined "acquisition expenditure" in section 101(2)(a). If HMRC were correct about Parliament's intention, the words "in respect of acquisition expenditure" in section 101(1) would be redundant, as would be the definition of "acquisition expenditure" in section 101(2)(a). Accordingly, giving section 101 its natural meaning, it in effect adds a further condition to those stated in section 48(2) or adds a further category of excluded expenditure to that specified in section 48(3).

Interpreting section 101(1) as disallowing certain expenditure, which would otherwise fall within section 48, is not only consistent with the statutory language, but also credits the draftsman with an appreciation of the way in which section 48 operated. The draftsman is to be assumed to understand that section 48 operated as a modification of section 42, which remained the relieving provision, and that certain expenditure on the acquisition of a small film could, by virtue of section 48(2)(a) and (c) and (3) fall outside section 48 but still be entitled to relief under section 42. If, therefore, the draftsman had intended that acquisition expenditure excluded from section 48 by section 101 should be excluded from all relief under section 42, it is reasonable to expect that this would have been stated clearly and expressly. On any footing, that has not been done.

I do not consider that sections 99 and 100 lead to a different conclusion. They are dealing with different matters, and their language is appropriate for their subject matter. They are certainly not inconsistent with an interpretation of section 101 that limits its effect to a restriction on the ambit of expenditure within section 48, leaving the unmodified relief under section 42 available in respect of acquisition expenditure on small films outwith section 48.

Further, as the Judge emphasised, HMRC's approach to the meaning of section 101 produces a disparity between the treatment of small films and other films for which there is no discernible policy reason. Section 48 was intended to give effect to a policy of promoting small British films over and above British films in general. It therefore conferred in respect of small films the more generous 100 per cent relief rather than the one third relief under the unmodified section 42. The effect of HMRC's interpretation of section 101 is that, rather than restoring parity between large and small films with regard to "non-original" acquisition expenditure, small films were placed in a disadvantageous position compared to large films: there would be no relief at all under section 42 in respect of such expenditure on small films, whereas relief under that section continued to be available in respect of such expenditure on large films. No evidence at all has been adduced of such a policy or the reasons for it. Moreover, any such policy would seem to be at odds with the continuation of the more favourable treatment of small films on first acquisition, for which 100 per cent relief was still permitted.

Before the Special Commissioners and the Judge, and before us, Mr Peacock relied upon sections 138 and 140 of the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA") in support of Halcyon's interpretation of section 101. The parties do not agree whether ITTOIA is properly characterised as a consolidating statute. It is common ground, however, that ITTOIA chapter 9 (ss. 130-144) was intended to restate the pre-existing provisions governing film relief. Section 48 became section 140 ITTOIA. Section 140 was subject to the limitation previously found in section 101. Section 42 became section 138 ITTOIA, but section 138 was not subject to such a limitation. It is common ground that those successor provisions are consistent with Halcyon's interpretation of section 101 and inconsistent with that of HMRC, and that a taxpayer in the position of Halcyon, acquiring a small film otherwise than by or from the producer, could obtain relief under the statutory successor to section 42. Halcyon submits that, if section 101 is ambiguous, it is legitimate to use ITTOIA as an aid to the interpretation of the inter-relationship between section 42, section 48 and section 101 since the corresponding provisions of ITTOIA are in pari materia with them. For that proposition, Mr Peacock relies on Bennion on Statutory Interpretation (5^th ed) section 234 and Golden Bay Cement Co Ltd v CIR [1998] STC 1172, 1179e-f.

Neither the Special Commissioners nor the Judge considered it appropriate to have regard to ITTOIA in the search for the proper meaning of section 101. I agree with them. Sections 138 and 140 of ITTOIA were never brought into force. The Finance Act 2005, which was passed on 7 April 2005, exactly two weeks after ITTOIA was passed on 24 March 2005, substituted new provisions for ITTOIA chapter 9. The relevant changes took effect immediately for the 2005-2006 tax year and subsequent years of assessment (at least in respect of films not in production at 2 December 2004). So far as relevant, their effect was to bar claims to acquisition relief for small films under the successor to section 42 if they fell within the multiple-dipping counter measures in the successor to section 48. In those circumstances, it would be unsafe to rely upon ITTOIA as giving any clear insight into the meaning and effect of section 101. In any event, for the reasons I have given, section 101 is neither ambiguous nor unclear, so that the principle upon which Halcyon seeks to rely for referring to ITTOIA has no application.

Finally, Mr Peacock submitted that there is a presumption, applicable in the present case, that a taxpayer is not to be deprived of an existing tax relief in the absence of clear words. He relied on the following statement of Peter Gibson LJ in Carr (Inspector of Taxes) v Armpledge Ltd[2000] STC 410:

That statement, which is concerned with whether a tax relief may be utilised by the taxpayer in a manner not expressly prohibited, does not support the existence of any presumption in favour of Halcyon in the present case, which is concerned with the proper meaning and effect of subsequent legislation expressly qualifying a pre-existing relief. Halcyon's right to relief under section 42 does not depend upon any presumption, but upon the interrelationship between section 42, section 48 and section 101 in the light of their express terms.

For the reasons I have given, I would dismiss this appeal.

Halcyon served a respondent's notice seeking to uphold the Judge's order on the two further grounds I have discussed in paragraphs 22, 26 and 27 above. It is not necessary to make any separate order on the respondent's notice.

I agree.

I also agree.