Take 3.9 TV Partnership & Ors v The Commissioners for HMRC

Neutral Citation: [2026] UKFTT 00696 (TC) Case Number: TC 09882 FIRST-TIER TRIBUNAL TAX CHAMBER Taylor House Appeal reference: TC/2025/01802 TC/2025/01803 TC/2025/01805 TC/2025/01806 TC/2025/01807 INCOME TAX – Appellants entering into highly-geared transactions involving anticipated tax reliefs for their partners and also the prospect of profits or losses from the films in which the Appellants were involved – held that the amounts borrowed by the Appellants were never actually incurred by the Appellants on the production of the films and that the sole purpose of those borrowings was to increase the tax reliefs which the Appellants’ partners were anticipating – however, the tax motivation underlying the borrowings did not mean that the Appellants were not carrying on trades or that the amounts actually incurred by the Appellants on the films were not wholly and exclusively for the purposes of the trades – appeals upheld in part Heard on: 7, 8, 9 and 10 April 2026 Judgment date: 12 May 2026 Before TRIBUNAL JUDGE TONY BEARE MR JULIAN STAFFORD Between (1) TAKE 3.9 TV PARTNERSHIP (2) TAKE 3.10 TV PARTNERSHIP (3) TAKE 3.12 TV PARTNERSHIP (4) TAKE 3.13 TV PARTNERSHIP (5) TAKE 3.14 TV PARTNERSHIP Appellants and THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS Respondents Representation: For the Appellant:Mr Stephen Rawlinson, appearing in person on behalf of the Appellants For the Respondents: Mr Imran Afzal KC, Ms Riya Bhatt and Ms Rebecca Murray, of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs DECISION heading page introduction 1 background 3 the points in dispute 4 i capture the castle 5 the evidence 9 the economic analysis 26 findings of fact 28 discussion 32 disposition 64 right to apply for permission to appeal 64 Introduction

1. This decision relates to closure notices issued by the Respondents on 16 September 2022 to each of the Appellants amending their partnership returns for the tax year ending 5 April 2002 (the “2001/2002 tax year”) and the tax year ending 5 April 2003 (the “2002/2003 tax year” and, together with the 2001/2002 tax year, the “relevant tax years”).

2. Each partnership return, as amended by the relevant Appellant prior to the issue of the related closure notice, had been submitted on the basis that: (1) the relevant Appellant was carrying on a trade and was entitled to relief under Section 40B Finance (No 2) Act 1992 (the “F(2)A 1992”) for the expenditure which it had incurred in the course of that trade in relation to films and television programmes produced by companies within the group of companies headed by Tanmarsh Communications Limited, including a company called Peakviewing (Interactive) Limited (the “Peakviewing transactions”); and (2) as regards its involvement in other films and television programmes (the “non-Peakviewing transactions”), the relevant Appellant was carrying on a trade and was entitled to a deduction for the expenditure which it had incurred in the course of that trade as “production expenditure” pursuant to Section 42 of the F(2)A 1992 and Section 48 of the Finance (No 2) Act 1997 (the “F(2)A 1997”).

3. Each closure notice amended the relevant partnership return on the basis that: (1) the profits and losses in relation to the Peakviewing transactions should not have been included in the relevant partnership return at all; and (2) as regards the non-Peakviewing transactions, the Appellant in question had not been carrying on a trade or, if it had been carrying on a trade, the expenditure in question had not been incurred wholly and exclusively for the purposes of that trade and therefore the profits and losses in relation to the non-Peakviewing transactions were non-trading profits and losses.

4. Subsequent to the issue of the closure notices and prior to the hearing to which this decision relates, the Respondents concluded that they no longer wished to defend the closure notices on the basis set out in paragraph 3(1) above, due to an insufficiency of documentary evidence. Consequently, they were prepared to accept that the expenditure incurred by each Appellant in the relevant tax years in respect of the Peakviewing transactions gave rise to relief under Section 40B of the F(2)A 1992 and that the Peakviewing transactions gave rise to a trading profit or loss.

5. The above description can be represented in tabular form as follows: Partnership and tax year Position recorded in amended partnership return – trading profit/(loss) (£) Position recorded in closure notice – non-trading profit/(loss) (£) Outcome now sought by the Respondents Outcome now sought by the Respondents Trading profit/(loss) (from the Peakviewing transactions) (£) Non-trading profit/(loss) (from the non-Peakviewing ransactions) (£) Take 3.9 TV Partnership – the 2001/2002 tax year (4,679,517) (2,076,112) (3,375,644) (1,303,873) Take 3.9 TV Partnership – the 2002/2003 tax year 3,270,377 163,008 3,107,369 163,008 Take 3.10 TV Partnership – the 2001/2002 tax year (3,622,736) (1,621,045) (2,612,833) (1,009,853) Take 3.10 TV Partnership – the 2002/2003 tax year 2,531,190 125,963 2,405,227 125,963 Take 3.12 TV Partnership – the 2001/2002 tax year (3,997,313) (1,787,156) (2,887,033) (1,110,280) Take 3.12 TV Partnership – the 2002/2003 tax year 2,796,936 139,246 2,657,690 139,246 Take 3.13 TV Partnership – the 2001/2002 tax year (1,649,967) (751,550) (1,189,172) (460,975) Take 3.13 TV Partnership – the 2002/2003 tax year 1,152,018 57,354 1,094,644 57,354 Take 3.14 TV Partnership – the 2001/2002 tax year (1,901,301) (875,270) (1,372,121) (529,180) Take 3.14 TV Partnership – the 2002/2003 tax year 1,329,247 66,173 1,263,074 66,173

6. On the basis of the above: (1) regardless of our decision in relation to the non-Peakviewing transactions, the appeal against each closure notice is upheld to the extent that it relates to the Peakviewing transactions; and (2) in the rest of this decision, we will focus solely on the tax implications for the Appellants of the non-Peakviewing transactions in the relevant tax years. The Peakviewing transactions will be taken into account only insofar as they formed part of the overall activities of the Appellants in the relevant tax years and are therefore relevant in considering whether each Appellant was carrying on a trade in the relevant tax years. Similarly, although the closure notices relate only to the relevant tax years, the activities of each Appellant in tax years other than the relevant tax years will be taken into account only insofar as they are relevant in considering whether the relevant Appellant was carrying on a trade in the relevant tax years. background

7. The Appellants are five general partnerships which were sponsored by a firm of stockbrokers specialising in tax-based investments called Teather & Greenwood (“T&G”), which in turn was advised by a media company called Baker Street Media Finance Limited (“BSMF”) to whom T&G delegated the management of the Appellants.

8. The Appellants were just some of the partnerships which were established by T&G and managed by BSMF under the “Take 3” umbrella (the “Take 3 partnerships”). In aggregate, fourteen partnerships, entitled Take 3.1 TV Partnership through to Take 3.14 TV Partnership and involving some 161 individual partners, were established and managed under that umbrella. In addition, that umbrella was part of a wider chain of partnership umbrellas established and managed by T&G and BSMF for similar purposes entitled “Take 2”, “Take 4”, “Take 5”, “Take 6”, “Take 7”, “Take 8” and “Take 9”, respectively (the “Take partnerships”).

9. None of the Take partnerships other than the Appellants is in issue in these appeals. Moreover, these appeals do not even involve all of the Take 3 partnerships. As regards the other Take 3 partnerships: (1) the appeals made by each of the Take 3.1 TV Partnership through to and including the Take 3.7 TV Partnership have been settled by agreement between the relevant partnership and the Respondents; (2) in relation to the Take 3.8 TV Partnership, no closure notice was ever issued by the Respondents. There was only one partner who might have been affected by a closure notice in relation to the relevant partnership returns and that partner entered into a settlement agreement with the Respondents; and (3) in relation to the Take 3.11 TV Partnership (“Take 3.11”), there was also only one partner who might have been affected by a closure notice in relation to the relevant partnership returns and that partner also entered into a settlement agreement with the Respondents. However, despite that settlement agreement, the Respondents went on to issue closure notices in respect of the relevant tax years to Take 3.11. After discussions taking place before and at the start of the hearing before us, those closure notices were settled by agreement on the same terms as the settlement agreement which had been entered into between the Respondents and the relevant partner in Take 3.11, with the result that Take 3.11’s appeals against the closure notices are now finally determined and are not relevant to this decision.

10. There has been a somewhat convoluted and regrettable background to these appeals. A quarter of a century has now passed since the relevant tax years. The Respondents opened their enquiry into each Appellant’s tax return in respect of the 2001/2002 tax year in January 2004 and their enquiry into each Appellant’s tax return in respect of the 2002/2003 tax year in January 2005 but there then followed an extensive period in which, due to changes in personnel within the Respondents and the fact that the Appellants did not have legal representation, the enquiries remained open without the Respondents’ identifying the arguments which they are now advancing. In fact, the Respondents did not issue the closure notices to which these appeals relate until September 2022, some twenty years after the relevant tax years.

11. At the hearing, Mr Rawlinson expressed considerable dissatisfaction with that and various other aspects of the Respondents’ conduct in relation to the Appellants and the other Take 3 partnerships. For reasons on which we elaborate below, those are not matters which are ultimately relevant to this decision. However, we will say, in passing, that at least some of Mr Rawlinson’s complaints appeared to us to be entirely reasonable.

12. The most significant impact of the delays which have occurred is that we have been required to consider the issues between the parties at a time when a number of the documents which are relevant to the appeals have been lost or destroyed and some important witnesses have either died or become incapacitated. In addition, as we will see below when we come to the witness evidence, the passage of time has meant that two of the three witnesses who appeared before us were of limited assistance to us. Without attaching any blame to them, they simply could not accurately recall very much about the transactions into which the Appellants had entered.

13. To compound the problems arising out of the matters referred to in paragraph 12 above, the transactions into which the Appellants entered in the relevant tax years were extremely complex and effected by way of intricate and densely-drafted documentation which was, in places, impenetrable. As he is not a lawyer and did not have the benefit of legal representation, Mr Rawlinson was unable to explain to us how the documentation was intended to work and even the Respondents, with their substantial team of solicitors and three counsel, did not have a complete grip on the legal rights and obligations to which the various documents gave rise. The consequence was that a considerable part of the hearing was spent in our collectively going through the documents to try to piece together the arrangements that had been implemented. the points in dispute

14. There is no dispute between the parties in relation to the proper interpretation of the legislation which has given rise to these appeals.

15. It is common ground that, so far as the non-Peakviewing transactions are concerned, the partnership return of each Appellant in respect of each relevant tax year, as amended by the relevant Appellant prior to the issue of the applicable closure notice, will have been correct as long as: (1) the relevant Appellant was carrying on a trade in the relevant tax year; and (2) the expenditure which the relevant Appellant claims to have incurred on the production of films in the relevant tax year was actually incurred and was incurred wholly and exclusively for the purposes of that trade.

16. The Appellant submits that both of those conditions are satisfied whereas the Respondents submits that neither condition was satisfied.

17. Given the common ground in relation to relevant legislative provisions, we do not propose to set out those provisions in this decision. I Capture the Castle Introduction

18. Each Appellant was involved in eight productions overall, of which seven were non-Peakviewing transactions and were also films. (There was conflicting evidence in the bundle as to whether the film entitled “Inquisition”, which we have included in the above figures, was one of the films in which the Appellants were involved or whether it was the other Take 3 partnerships instead which were involved in that film. However, the funding figure in relation to Inquisition was relatively small and, for the purposes of this decision, we have included it).

19. The funding for some of the seven non-Peakviewing films did not commence until tax years following the relevant tax years. Accordingly, the tax implications of the Appellants’ involvement in those films are not the subject of these appeals although, as noted in paragraph 6(2) above, the films themselves are relevant to these appeals because whether or not each Appellant was carrying on a trade in the relevant tax years is necessarily informed by its activities as a whole, including those activities into which it entered after the relevant tax years.

20. It was agreed by the parties before the hearing that, even though the precise details of the arrangements relating to each film in which the Appellants were involved differed from film to film, the arrangements relating to a film entitled “I Capture the Castle” (“ICTC”) should be taken to be representative of the arrangements in relation to each such film. This was by far the biggest in terms of numbers as well.

21. Accordingly, at the hearing, we proceeded, at the invitation of the parties, on the basis that we would rely on the structure to which the ICTC documents gave rise as being indicative of the structure of the arrangements in relation to each film in which the Appellants were involved.

22. In adopting that approach, we see no point in rehearsing, in minute detail, the terms of each document making up the ICTC documentation. This is because, as we have noted above, the documents are voluminous and complicated and, in any event, some of the documents relating to the film had been lost before the hearing took place. In addition, many of the more detailed aspects of the documents are of no significance in the present context. The key point is to gain a broad understanding of the legal rights and obligations to which the documents gave rise – and, from that, the commercial substance of the arrangements – by referring to the main terms of the documentation package as a whole. ICTC – the initial transaction

23. With that introduction, the principal features of the arrangements to which the ICTC documentation gave rise may be summarised as follows: (1) the partners in the Appellants contributed sufficient capital to the Appellants to ensure that, after the Appellants discharged the initial fees associated with the transaction, they retained the sum of approximately £1.2 million; (2) the Appellants entered into two loan agreements with Barclays Bank plc (“Barclays”) to the following effect: (a) under the first loan agreement (“Loan Agreement 1”), Barclays agreed to provide a loan facility to the Appellants, inclusive of fees and rolled up interest, of approximately £3 million (“Loan 1”) on terms that, inter alia: (i) no drawing could be made under the facility unless: (A) the balance on an account held by a film production company called Trademark (Castle) Limited (“TCL”) with Barclays (“Production Account B”) at the relevant time was at least equal to the amounts outstanding under Loan Agreement 1 (including the proposed drawing); and (B) TCL had executed a deed of charge in favour of Barclays (the “Deed of Charge”), the terms of which are described in further detail in paragraph 23(9) below; (ii) all amounts drawn down by the Appellants under Loan Agreement 1 would be credited automatically to another account held by TCL with Barclays (“Production Account A”); (iii) the Appellants’ obligations under Loan Agreement 1 would at all times be secured by the Deed of Charge; (iv) interest on Loan 1 would be payable quarterly by way of capitalisation – which is to say that it would increase the principal amount of Loan 1; and (v) Loan 1 would be required to be repaid on 30 April 2002 by way of set off against the current balance on Production Account B. Any difference, at that time, between the balance on Production Account B and the amounts outstanding under Loan Agreement 1 would, in the case of an excess, be administered pursuant to the Interparty Agreement (as defined in paragraph 23(10) below) and, in the case of a shortfall, be required to be discharged by the Appellants; (b) under the second loan agreement (“Loan Agreement 2” and, together with Loan Agreement 1, the “Loan Agreements”), Barclays agreed to provide a loan facility to the Appellants, inclusive of fees and rolled up interest, of approximately £1.4 million (“Loan 2” and, together with Loan 1, the “Loans”) on terms that, inter alia: (i) no drawing could be made under the facility unless: (A) the Deed of Charge, the IOM Agreement (as defined in paragraph 23(7) below) and the Completion Guarantee (as defined in paragraph 23(8) below) had taken effect; (B) the rights of TCL to receive payments from the Department of Trade and Industry in the Isle of Man (the “IOM”) under the IOM Agreement had been assigned to Barclays by way of security and the IOM had been irrevocably instructed to pay those amounts directly to Barclays; and (C) the rights of the Appellants to receive payments from Film Finances Inc (“FFI”) under the Completion Guarantee up to the amounts outstanding under Loan Agreement 2 had been assigned by way of security to Barclays as security for the amounts outstanding under Loan Agreement 2; (ii) all amounts drawn down by the Appellants under Loan Agreement 2 would be credited automatically to Production Account A; (iii) the Appellants’ obligations under Loan Agreement 2 would at all times be secured by the Deed of Charge and the assignment by way of security referred to in paragraph 23(2)(b)(i)(C) above; (iv) interest on Loan 2 would be payable quarterly by way of capitalisation – which is to say that it would increase the principal amount of Loan 2; and (v) Loan 2 would be required to be repaid on the earlier of 30 June 2002 or completion and delivery of the film, by way of set off against the current balance on Production Account B. Any difference, at that time, between the balance on Production Account B and the amounts outstanding under Loan Agreement 2 would, in the case of an excess, be administered pursuant to the Interparty Agreement and, in the case of a shortfall, be required to be discharged by the Appellants; (3) pursuant to an agreement (the “Co-production Agreement”) between the Appellants and TCL: (a) the Appellants agreed with TCL to act as the co-producer of the film; (b) TCL assumed certain specified obligations, and the Appellants were granted certain specified rights, in connection with the production of the film; (c) the Appellants agreed to pay into Production Account A in accordance with the production cash flow the sum of approximately £5.6 million (the “T3 Advance”) towards the production of the film; and (d) subject to receiving the T3 Advance, TCL agreed to pay all the costs associated with the production of the film; (4) pursuant to an agreement (the “Sub-contracting Agreement”) between TCL and its wholly-owned subsidiary, Trademark Films (IOM) Limited (“TCL IOM”), TCL agreed to sub-contract to TCM IOM its obligations in relation to the production of the film; (5) pursuant to two agreements between TCL and the British Broadcasting Corporation (the “BBC”) – a licence agreement (the “BBC Licence”) and a production agreement (the “BBC Agreement”) – the BBC agreed to pay into Production Account B in accordance with the production cash flow the sum of approximately £1 million (the “BBC Advance”) towards the production of the film, made up: (a) as to approximately £450,000 (the “BBC Licence Fee”) for TCL’s agreement to co-produce the film with the Appellants and for the sole and exclusive television rights in the film in certain specified jurisdictions (the “Licence Territories”); and (b) as to approximately £550,000 (the “BBC Recoverable Advance”) for TCL’s agreement to co-produce the film with the Appellants; (6) pursuant to an agreement (the “DH Agreement”) between TCL and a film distributor called Distant Horizon Limited (“DH”) TCL engaged DH to act as its executive sales agent throughout the world (except in the Licence Territories) and DH agreed to pay into Production Account B in accordance with the production cash flow the sum of approximately £2 million (the “DH Advance”) towards the production of the film; (7) pursuant to an agreement (the “IOM Agreement”), between TCL, TCL IOM and the IOM, the IOM agreed to pay into Production Account B the sum of approximately £1.4 million (the “IOM Advance”). The IOM Advance was initially required to be paid into Production Account B on 30 April 2002 but the IOM Agreement was subsequently varied, inter alia: (a) to allow for the IOM Advance to be paid only on the later of 5 April 2002 and completion and delivery of the film; and (b) to provide that payment of the IOM Advance to Barclays pursuant to the security assignment referred to in paragraph 23(2)(b)(i)(B) above would be treated as satisfying the IOM’s obligation to pay the IOM Advance into Production Account B; (8) pursuant to an agreement (the “Completion Guarantee”) between the BBC, DH and the IOM (together, the “Other Contributors”), the Appellants and FFI, FFI guaranteed the completion and delivery of the film or to make payments to each of the Appellants and each of the Other Contributors of the amounts advanced by them to TCL towards the production of the film; (9) pursuant to a deed of charge (the “Deed of Charge”), TCL agreed to provide security to Barclays for the Appellants’ obligations to Barclays under the Loan Agreements, such security’s taking the form of: (a) a charge over the monies standing to the credit of Production Account B from time to time; and (b) an assignment by way of security of TCL’s right to receive the IOM Advance under the IOM Agreement; (10) the various parties to the transaction other than Barclays – which is to say, the Appellants, the Other Contributors, TCL, TCL IOM and FFI – entered into an agreement (the “Interparty Agreement”) which drew together the respective rights and obligations of the parties in relation to the production of the film. As amended (to reflect the delay in the IOM’s obligation to pay the IOM Advance, as mentioned in paragraph 23(7) above), the Interparty Agreement: (a) provided for the repayment of each of the BBC Advance, the DH Advance and the IOM Advance by TCL or FFI if completion and delivery of the film did not occur by 30 June 2002 but subject always to the prior rights of Barclays to those amounts under the Loan Agreements and the related security arrangements; and (b) set out, in a recoupment schedule, a transaction waterfall of the payments to be made out of future receipts from the film. Broadly, that transaction waterfall provided that, after the payment of certain fees and other outgoings, receipts would be applied in discharging the IOM Advance, the BBC Recoverable Advance, the T3 Advance – but only to the extent that the T3 Advance was equal to the approximately £1.2 million of equity in the Appellants (the “T3 Equity” component of the T3 Advance) – the DH Advance (in the case of receipts arising outside the Licence Territories) and any amounts paid by FFI, and would then be paid: (i) as to 50% to TCL; and (ii) as to the balance to the BBC, the IOM, DH and the Appellants in percentages corresponding to the respective amounts of the BBC Recoverable Advance, the IOM Advance, the DH Advance and the T3 Equity component of the T3 Advance; and (11) the terms of the transaction waterfall in the Interparty Agreement were reflected in a separate agreement (the “Collection Agreement”) to which each of TCL, TCL IOM, FFI, the Other Contributors and the Appellants was party.

24. In the rest of this decision, we will refer to the part of the T3 Advance which exceeded the T3 Equity component of that advance as the “T3 Debt” component of that advance. Based on the indicative figures set out above, the T3 Advance was approximately £5.6 million, the T3 Equity component of that advance was approximately £1.2 million and the T3 Debt component of that advance was approximately £4.4 million. The DH Purchase

25. The documentation in relation to ICTC we have described above is the documentation which we have treated, at the invitation of the parties, to be typical of each of the non-Peakviewing films in which the Appellants were involved.

26. However, for completeness, we should record that, in the case of ICTC itself, there was a later amendment to the transaction structure in that, in March 2002, it became clear that DH was not going to be able to fulfil its contractual obligation to pay the DH Advance in full. Following negotiations between the parties, the Appellants agreed to step into DH’s shoes as regards approximately £1 million of the DH Advance, which was approximately 50% of DH’s overall obligation in relation to paying the DH Advance (the “DH Purchase”). In consequence, the Appellants became entitled under the transaction waterfall to approximately 50% of DH’s entitlement to receipts from the film and consequential changes were made to the transaction waterfall in the Collection Agreement to reflect this.

27. We mention this at this point because that additional contribution by the Appellants in relation to ICTC as a result of the DH Purchase had an impact on the overall economics of the arrangements in relation to ICTC and therefore of the arrangements in relation to the Appellants’ entire portfolio, for both the partners in the Appellants and the Appellants themselves. However, as an unforeseen and subsequent development in relation to ICTC, it does not affect our description of the generic structure of the arrangements based on the ICTC documentation set out above or the economic analysis of those arrangements, to which we will come in due course. The evidence Introduction

28. In addition to the ICTC documentation described above, we were provided with both written evidence and witness testimony at the hearing. The written evidence

29. The written evidence which is of principal relevance to this decision was as follows: (1) the Co-production Agreement, which governed the relationship between the Appellants and TCL; (2) each of the BBC Licence, the BBC Agreement, the DH Agreement and the IOM Agreement; (3) an undated information memorandum (the “IM”) produced by T&G in marketing the Appellants (and the other Take 3 partnerships) to prospective partners; (4) various film updates provided by T&G to the Take 3 partnerships – those being: (a) an update provided in December 2002 (the “December 2002 Film Update”); (b) an update which, from its contents, was clearly provided at some point after the end of the 2002/2023 tax year but before early May 2003 (the “Late April 2003 Film Update”); (c) an update provided in July 2003 (the “July 2003 Film Update”); and (d) an update provided in November 2004 (the “November 2004 Film Update, and, together with the December 2002 Film Update, the Late April 2003 Film Update and the July 2003 Film Update, the “Take 3 Film Updates”); (5) a letter from T&G to Mr Rawlinson and, by logical extension, the other partners in the Take 3 partnerships, including the Appellants, dated 17 February 2004 (the “T&G Letter”); (6) minutes of a general meeting of the Take 3.7 TV Partnership (“Take 3.7”) of 14 December 2004 (the “Take 3.7 Minutes”); (7) a note of a meeting between representatives of the Respondents, BSMF, Smith and Williamson and Chiltern plc of 30 March 2005 (the “2005 Meeting Note”); and (8) an attachment to an email from Mr Keith Evans of BSMF to Officer Taymar Rad of the Respondents of 29 June 2023 (the “2023 Email Attachment”). The Co-production Agreement

30. The terms of the Co-production Agreement which are of principal relevance to this decision are as follows: (1) clause 2.1, in which the parties agreed that they would co-produce the film and that TCL would effect delivery in accordance with the agreement, the BBC Agreement and the DH Agreement; (2) clause 2.2, in which the parties agreed: (a) to co-produce the film in accordance with the script, the budget and the production schedule (as it might be amended from time to time with the Appellants’ approval) as economically as possible; (b) that the film would commence and complete photography on specified dates subject to any extension required by force majeure; and (c) that TCL would “retain final say on matters relating to production, completion and delivery of the film”; (3) clause 3, in which TCL agreed that the Appellants’ nominee: (a) could exercise the Appellants’ rights under the agreement; (b) could be present on reasonable notice during production and production meetings; and (c) was to be made available from time to time for consultation with TCL; (4) clause 4, in which: (a) the parties agreed that, subject to the terms of the Interparty Agreement, the BBC Agreement/BBC Licence and the IOM Agreement, the Appellants would have the right of approval over eighteen specified elements relating to the film and then described those elements, indicating in relation to all but three of them that the Appellants had already indicated their approval in relation to the relevant element; and (b) the Appellants agreed to exercise their rights of approval reasonably and in good faith and in such a manner as not to interfere with the timely production of the film or frustrate the intentions of the agreement; (5) clause 5, in which the parties agreed that the Appellants or TCL, at the Appellants’ discretion, would enter into a sale and leaseback of the film, that the net proceeds of any such sale and leaseback would be subject to the transaction waterfall and that each of the Other Contributors would have rights of approval over the identity of the lessor and the terms of the transaction; (6) clause 7, in which the parties agreed that the Appellants would pay the T3 Advance into Production Account A and that, subject to their making that payment: (a) TCL would bear all of the costs associated with the production of the film; and (b) the Appellants would not be obliged to commit any further sums to the film in excess of the T3 Advance; (7) clause 8, in which the parties agreed that TCL would take out insurance against various specified risks naming the Appellants as an insured party and would use its best endeavours to maintain that insurance; (8) clause 9, in which: (a) TCL made nineteen representations and warranties to the Appellants; and (b) the Appellants made two representations and warranties to TCL; (9) clause 10, in which the parties agreed, in relation to the master tape and other physical materials relating to the film (the “Materials”), that, subject to the requirements of any sale and leaseback: (a) until the T3 Debt component of the T3 Advance had been repaid, they would be owned solely by the Appellants and held by the laboratory subject to the security arrangements in place between the laboratory, the parties and various other specified parties to the transaction; and (b) thereafter, they would be owned solely by TCL; (10) clause 11, in which the parties agreed that the copyright and all other rights in respect of the film apart from the Materials (the “Rights”) would be owned as to 25% each by the Appellants, TCL, the BBC and DH; (11) clause 13, in which the parties agreed that: (a) TCL would open Production Account A into which the T3 Advance would be paid and Production Account B into which the BBC Advance, the DH Advance and the IOM Advance would be paid; (b) TCL would use Production Account A only for payment of expenses in connection with the film; (c) any budget underspend could be applied against a budget overspend in another area by TCL without recourse to the Appellants; (d) subject to the Interparty Agreement and the rights of the BBC and the IOM under the BBC Agreement and the IOM Agreement, any potential budget overspend would be the subject of discussion between TCL and the Appellants and TCL would comply with all reasonable instructions given by the Appellants in relation to it; (12) clause 16, in which the parties agreed that TCL would keep accurate records of all expenditure relating to the film which the Appellants would be entitled to audit; (13) clause 17, in which the parties agreed that: (a) TCL would provide the Appellants with such facilities and information as the Appellants required in relation to the film; (b) TCL would provide regular progress reports and cost reports to the Appellants; and (c) the Appellants through their representative would be entitled to examine the film rushes and cut sequences and soundtracks; (14) clause 19, in which the parties agreed that, subject to any sale and leaseback, all tax benefits arising by virtue of the film's being a qualifying film would belong to the Appellants; (15) clause 20, in which the parties agreed that: (a) TCL would prepare the first rough cut of the film and subsequently make any changes required to ensure that the film met the requirements of the BBC Agreement and the DH Agreement; (b) prior to preparing the fine cut of the film, TCL would make a print available for viewing and subsequently make any changes required to effect delivery of the film in accordance with the BBC Agreement and the DH Agreement; and (c) after delivery, subject to the terms of the Interparty Agreement, DH would be entitled to make such changes as might be required for the purposes of censorship or advertising or airline versions as DH, TCL and the Appellants would jointly agree; (16) clause 22, in which four events of default on the part of TCL were set out and the parties agreed that, should such an event occur, the Appellants would be entitled to the repayment of such part of the T3 Advance as had not already been spent, or contracted to be spent, on the film; and (17) clause 27, in which the parties agreed that nothing in the agreement would constitute a partnership between them or make either one of them the agent of the other. Each of the BBC Licence, the BBC Agreement, the DH Agreement and the IOM Agreement

31. As we have already explained, each of these documents was a contract between TCL (and, in the case of the IOM Agreement, TCL IOM) and the specified Other Contributor and required the relevant Other Contributor to make a payment into Production Account B in return for receiving certain rights. The precise nature of those rights differed from agreement to agreement. For example: (1) pursuant to the BBC Licence, TCL agreed to complete and deliver the film to the BBC in accordance with the BBC Agreement and granted the BBC sole and exclusive television rights (excluding the literary rights) in respect of the film in the Licence Territories; (2) pursuant to the BBC Agreement, TCL agreed to complete and deliver the film to the BBC in accordance with the budget, the production schedule and various specified transaction documents; (3) pursuant to the DH Agreement, TCL appointed DH as its exclusive sales agent to exploit and distribute the film outside the Licence Territories; and (4) pursuant to the IOM Agreement, TCL and TCL IOM undertook to spend a specified portion of the film’s budget in the Isle of Man.

32. So far as this decision is concerned, it is unnecessary to describe all of the rights and obligations arising for each party to each agreement because they are not particularly relevant. It suffices to say that, under each agreement: (1) in return for a payment made by the relevant Other Contributor, the relevant Other Contributor received an entitlement under the transaction waterfall to a specified proportion of the future receipts from the film which reflected its financial contribution to the film; and (2) TCL entered into obligations as regards its activities in relation to the production of the film which were similar in nature to the obligations on its part to the Appellants contained in the Co-production Agreement.

33. Delving further into the latter: (1) in the BBC Agreement, TCL, inter alia: (a) agreed, inter alia: (i) that the film would be produced in accordance with the budget, the production schedule and various specified transaction documents; (ii) to ensure that the film was fully synchronised and had a first-class technical quality, based on a screenplay which the BBC had approved and with specified main actors and a specified director or replacements approved by the BBC; (iii) that the BBC would have rights of approval over specified personnel; and (iv) not to enter into any contract which might cause the budget to be exceeded or BBC’s receipts under the waterfall to be reduced without the consent of the BBC (clause 2); (b) agreed to effect various insurances with companies approved by the BBC naming BBC as an additional insured party and to deal with the insurance proceeds in defraying the cost of the film (clause 4); (c) provided extensive representations and warranties to the BBC (clause 5); (d) agreed to keep accurate records of all expenditure relating to the film which the BBC would be entitled to audit (clause 7): (e) agreed, inter alia: (i) to provide the BBC with such facilities and information as the BBC required in relation to the film; (ii) to provide regular progress reports and cost reports to the BBC; (iii) to allow the BBC to attend shooting and to inspect the film rushes; (iv) that it would consult with the BBC during production and editing and that it would incorporate the BBC’s reasonable suggestions and requests which were consistent with the budget and various specified transaction documents; (v) to allow the BBC to view the director’s cut of the film and to incorporate the BBC’s suggestions for the final cut following consultation; (vi) for the avoidance of doubt, that the BBC, in consultation with TCL and the IOM, and DH would jointly agree the final cut; and (vii) to allow the BBC to make (at its own expense) any changes that it reasonably considered to be necessary to meet any legal or censorship requirements or to comply with television standards (clause 8); (f) agreed, inter alia: (i) to deliver to the BBC all materials detailed in the BBC Licence and to DH all materials detailed in the DH Agreement, including a “panned and scanned” version of the film; and (ii) to deliver to the BBC an audited statement showing the cost of producing the film (clause 9); (g) agreed with the BBC the screen credits which the BBC and others associated with the film would receive (clause 12); (h) agreed not to release any major publicity relating to the film without the prior consent of the BBC (clause 15); and (i) agreed to assign all of its right, title and interest in the film to the BBC by way of security and that, subject to that and other security arrangements associated with the financing of the film, the copyright in the film would be owned as to 25% each by the Appellants, TCL, the BBC and DH (clause 16); (2) in the BBC Licence, TCL agreed to produce and complete the film in accordance with the terms of the BBC Agreement (clause 3); (3) in the DH Agreement, TCL, inter alia: (a) granted DH extensive rights to enter into distribution, publicity and advertising agreements on its behalf in relation to the film and to perform various activities in relation to those agreements (clause 1); (b) agreed to complete and deliver specified materials relating to the film by a specified date (clauses 4 and 14 and schedule 2); (c) agreed that DH would receive specified screen credits in relation to the film (clause 11); and (d) provided extensive representations and warranties to DH (clause 12); (4) in the IOM Agreement, TCL and TCL IOM, inter alia: (a) agreed that the IOM would receive specified screen credits in relation to the film (clause 8); (b) agreed that: (i) the expenditure incurred in the Isle of Man in relation to the film would be no less than a specified percentage of the budget; (ii) they would procure that the UK distributor of the film provided two first class VHS cassettes of the film to the IOM within a specified period after completion and delivery of the film; (iii) the time spent on principal photography on the film in the Isle of Man would not be less than a specified percentage of the overall time spent on principal photography on the film; (iv) they would keep the IOM informed of progress on the production of the film and, in particular, send the IOM daily call sheets and progress reports and weekly cost reports; (v) they would employ no fewer than a specified number of Manx workers on the film while filming in the Isle of Man; and (vi) they would use their reasonable endeavours to procure that the IOM was provided with statements from DH in relation to sales and revenues from the film (clause 9); (c) agreed that the IOM could consult with, inter alia, the Appellants, the BBC, DH and FFI in connection with the production, completion, delivery, sale and distribution of the film and undertook to authorise those parties to provide such information relating thereto as might reasonably be requested by the IOM (clause 11); (d) agreed that representatives of the IOM could view weekly film rushes while the film was shooting in the Isle of Man and could attend a rough cut screening of the film and agreed to consider in good faith all suggestions made by the IOM to the BBC in relation to the final cut of the film (clause 12); (e) undertook that the film would be: (i) completed and delivered in accordance with the transaction documents; (ii) produced and delivered as economically as possible in accordance with the budget and production schedule; (iii) fully synchronised as to dialogue and music; (iv) have a first class technical and pictorial quality; and (v) be based on the agreed screenplay except for minor revisions required by circumstances or as agreed with the IOM and the other transaction counterparties (clause 13); and (f) provided extensive representations and warranties to the IOM (clause 16 and schedule A). The IM

34. The IM provided an overview and explanation of the Take 3 partnerships’ intended activities.

35. The key features of the IM so far as this decision is concerned are as follows: (1) there was a strong emphasis throughout the IM as a whole on the tax benefits associated with investing in the partnerships and the role which the high gearing in the partnerships was expected to play in the overall return to be derived by partners. For example: (a) in the overall summary on page 1 of the document, the document stated that: (i) the tax benefits to partners were one of the objectives of the partnerships; (ii) the partnerships carried a low risk profile because they “will only fund a production if a pre-sale or guarantee is in place from a broadcaster or distributor for at least 60% of the [partnerships’] funds committed. This initial 60%, when combined with higher rate individual tax relief, has the effect of largely eliminating any “downside” for investors”; and (iii) the partnerships intended “to spend all monies raised, net of issue costs, in the first accounting period in order to provide the maximum tax benefit for Partners”; (b) on page 2 of the document, the document described T&G, who was the sponsor of the partnerships, as “an established sponsor of tax-efficient investments”, (c) on page 5 of the document, under the heading “What is Take 3”, the document explained that: (i) the partnerships intended to deliver a high degree of tax relief relative to the value of a partner's contribution – a partner should expect to receive tax relief equal to some 91% of the value of a partner's contribution; (ii) the partnerships would “only co-produce British productions where there is a [pre-sale] commitment for at least 60% of the funds contributed by the [partnerships]….The 60% [pre-sale] commitment, when combined with higher rate individual tax relief, should have the effect of largely eliminating any "downside"”; (iii) the partnerships were taking the form of general partnerships rather than limited partnerships “[in] order to provide maximum tax relief”; and (iv) the structure offered two elements of gearing in order to maximise returns for partners. The first way in which a partner could benefit from gearing would be to borrow to finance his or her partnership contribution. This was a matter for the individual partner in question. The second way in which a gearing benefit arose lay in the fact that each partnership would enter into a pre-sale commitment in relation to each of the productions that it financed and enter into a borrowing for the short period until the relevant production was completed which would be: (A) secured against the pre-sale commitment relating to the relevant production; (B) non-recourse to the partners in the partnership; and (C) repaid out of the proceeds of the pre-sale commitment. The effect of the short-term borrowing described above was that each partner would obtain tax relief equal to 91% of his or her contribution to the partnership because the partners would be entitled to 100% of the tax relief attributable to the production cost despite having contributed only 40% of that cost themselves. A table was set out showing that, based on a £100,000 contribution by a partner, £9,000 would be paid to T&G as an initial fee, leaving £91,000 to be invested by the partnership, a loan to the partnership attributable to the relevant partner of £136,500 and therefore total expenditure attributable to the relevant partner of £227,500, giving rise to £91,000 of tax relief to the relevant partner; (d) on page 6 of the document, under the heading “Background to Film and TV Partnerships”, the document stated that the Government had increased the amount of tax relief which could be claimed in a single year for expenditure on qualifying films from 33.3% to 100% but that the relevant concession was due to expire in July 2002 unless extended by the Government and that therefore there was currently “a window of opportunity”; (e) on pages 9 and 10 of the document, under the heading “Financial Illustrations”: (i) the document explained that it was the full investment of the partnership funds in year one of the partnership’s life which was expected to give rise to the tax relief that generated the after-tax return for the partners and that: “It is intended that all income received in years two to five will be re-invested into an expanding portfolio of TV programmes, so that the Partnerships continue to report nil or minimal tax profits for the full five-year period…”; and (ii) the document set out tables, showing (inter alia) that, assuming a partner undertook no borrowing other than the partnership borrowing, the after-tax return for a prospective partner from investing £100,000 in a partnership could be as high as 59% based on a tax saving of £91,000 in year two attributable to the tax relief for expenditure in year one; (f) on pages 11 to the 13 of the document, the document summarised the tax implications for a prospective partner of investing in a partnership; (g) on pages 14 and 15 of the document, under the heading “Risk Warnings”, the document drew the attention of prospective partners to various risk factors, one of which was that the anticipated tax benefits from becoming a partner as described in the document might not materialise for various reasons; (h) on page 16 of the document, under the heading “General Information”, the document stated, inter alia, that: (i) an advantage of the partnership structure was that partnerships were transparent for tax purposes which thus gave rise to an “opportunity to use tax reliefs and allowances against other income”; and (ii) it was likely that the partnerships would resort to borrowing “in order to achieve the optimum tax relief for [partners]. However, any borrowing will be secured against pre-sales and it is the intention that there will not be any recourse to [partners] in respect of such loans”; and (i) on page 20 of the document, under the heading “Minimum and Maximum Contributions”, the document stated that there was no limit to the amount which could be contributed by any partner, “subject to his or overall tax requirements”; (2) however, in addition to highlighting the tax benefits associated with investing in the partnerships, the IM also explained at various points how the partners might expect to derive profits from the activities of the partnerships which were unrelated to tax. For example: (a) in the overall summary on page 1 of the document, the document said that: (i) one of the objectives of the partnerships was “to co-produce and exploit a spread portfolio of British TV productions, providing both tax and income benefits to individual [partners]. Partners’ funds will be used to co-produce a broad variety of TV material, with emphasis on the long-term potential sales and realisation of the rights”; (ii) the potential “upside” for the partnerships might be “delivered by way of international sales and through the realisation of rights in the programmes after five years”; (iii) in the four years following the initial year, the partnerships intended “to re-invest all income in further productions, resulting in a growing portfolio of titles. At the end of the five-year cycle, unless otherwise determined by the [partners], all accrued income will be distributed to [partners] and a realisation of programme rights will be sought in order to produce a further cash sum. On the basis of the financial illustrations on page 9, an overall post tax return of around 159% on the initial contribution could be achievable”; and (iv) the partnerships would be managed by T&G “with the day-to-day assistance of [BSMF], which has extensive expertise in the funding, production and distribution of British TV productions”; (b) on page 5 of the document, under the heading “What is Take 3”, the document stated that: (i) the objective of the partnerships was “to co-produce and exploit a broad variety of British TV Productions including drama, TV movies, music, factual and children's productions. It is the intention to participate in as broad a range of material as possible in order to diversify and spread risk”; (ii) the criteria for the productions which the partnerships would co-produce were not only that they were British productions with a pre-sale commitment for at least 60% of the funds contributed by the partnerships but also that the productions had to “have strong international sales potential evidenced by a written sales projection from a reputable distributor”; (iii) the partnerships would derive income from three potential sources as follows: (A) the pre-sale of rights in the UK and overseas; (B) ongoing international television exploitation, including income from ancillary rights; and (C) the realisation of long-term rights; (iv) the partnerships intended to realise all of their rights as soon as possible after the expiry of five years and these disposals “could yield significant amounts in the case of successful programmes with long-term appeal”; and (v) the partnerships were intended to operate for no less than five years and would be terminated after their fifth anniversary unless partners were in favour of extension but that a partnership could be dissolved sooner if the partners so wished; (c) on pages 6 and 7 of the document, the document set out a description of the television and film industries and the relative merits of investing in them from the commercial perspective; (d) on page 9 of the document, under the heading “Financial Illustrations”: (i) the document explained that: “It is intended that all income received in years two to five will be re- invested into an expanding portfolio of TV programmes, so that the [partnerships] continue to report nil or minimal tax profits for the full five-year period. Over the life of the [partnerships] this will mean that a growing number of productions will have been funded, resulting in a broad library of programmes owned or part-owned by the [partnerships]”; (ii) the document set out two tables, showing that the after-tax return for a prospective partner from investing £100,000 in a partnership could be as high as 159% of the original investment based on a pre-tax profit for the partnership equal to 131% of that original investment and attributable to library sales; and (iii) T&G would be entitled to a success fee if the after-tax return for a partner exceeded 160% of the original investment; (e) on pages 14 and 15 of the document, under the heading “Risk Warnings”, the document explained that: “3.1 Past performance, or even present events or circumstances, is no guide to future performance. There is no guarantee of future performance. Possibilities, assumptions, intentions, aims, or targets described in this Information Memorandum are no more than that and should not be taken as forecasts. 3.2 Although all reasonable steps will be taken to mitigate risk, the TV production industry can be risky. There is no certainty that a [partner] will get back the amount he or she has contributed. 3.3 The value of [partners'] interests in the [partnership] and the value of the underlying assets of the [partnership] may go down as well as up. 3.4 The income from the [partnership] may fluctuate and a [partner] should not rely on estimates of income. Income may be zero”; and (f) on page 16 of the document, under the heading “General Information”, the document stated, inter alia, that: (i) the purpose of the partnerships was “to co-produce and exploit British TV Productions”; and (ii) if, after a partnership had been set up, tax legislation or practice were to change to remove the tax reliefs described in the document, then T&G would have “the right to proceed regardless”; (3) the document also provided details in relation to the proposed co-production activities of the partnerships. These were set out on page 8, under the heading “The Take 3 Team”, and described the role which was to be played by BSMF on behalf of the partnerships as follows: “• Review and initial selection of programmes which meet the Take 3 criteria • Submission of co-production recommendations to the Partners and [T&G]. • Ensuring that appropriate contracts and documentation are in place for each production. • Scrutiny of all pre-sale and/or guarantee arrangements. • Negotiation of terms with producers and distributors. • Monitoring production and completion. • Monitoring of sales reports and income. • Book-keeping and accounting for the Partnerships. • Preparation of half-yearly and annual reports”; and (4) the document stated that the fees payable to T&G would be as follows: (a) an initial fee equal to 9% of partners’ contributions to cover issue costs; (b) an annual fee equal to 4% of partners’ contributions in respect of its management function; and (c) a success fee equal to 25% of the amounts by which the total after-tax return to partners exceeded 160% of partners’ contributions. The Take 3 Film Updates

36. The December 2002 Film Update: (1) stated that the television programme sales market continued to be soft and explained the reasons why that was the case; (2) stated that BSMF, “your industry advisers, attended the Mipcom television market in October, and whilst buyers interest continues to be good for the various Take 3 co-productions, with a few exceptions noted below, many decisions are being deferred until next year”; (3) stated that the Take 3 partnerships had three films spread across the various blocks of partnerships and, despite the economic slowdown, sales had been progressing; (4) stated that some five films, along with one Peakviewing production, either had been, or were about to be, released in various territories world-wide; (5) provided an update in relation to each film, explaining where it was in the production cycle, how sales were progressing and likely prospects; and (6) described five films which were due to be produced in the current tax year and had been earmarked for the Take 3 partnerships “in order to ensure that income arising during the current year from previous productions continues to be sheltered”.

37. The Late April 2003 Film Update referred to: (1) two films which had been produced in the preceding tax year; (2) two films which were opening for general release in the UK in early May; and (3) three films which were going to have their world premieres at the Cannes Film Festival in late May. It then went on to say “[we] are currently looking at a number of interesting proposals for the coming year and have a very good supply of projects both for re-investment of any income to your [partnership] from previous productions and for Take 6, our new fund, which we reported to you in the minutes of February’s General Meeting of your [partnership]”.

38. The July 2003 Film Update referred to two films and, in each case, summarised the plot of the relevant film, described how the relevant film was faring at the box office and provided an update on the relevant film’s past sales. In addition, in the case of one of the films, it described the future prospects in relation to the film.

39. The November 2004 Film Update: (1) described two recent films produced by the Take partnerships and, in each case, described how well the relevant film had done on its release, concluding, in relation to one of them, that “[internationally] the film’s prospects also look encouraging with a major sale to the USA concluded at Toronto and other territories selling well” and saying that the other’s being shown as the Royal Command Performance “generated an enormous amount of publicity for the film, which should result in heavy interest at the box office”; (2) provided an update on nominations of recent Take partnership films for awards; (3) provided an update on the position of five films which were in post-production, noting that sections of one of them had been shown to buyers at the American Film Market and had been well-received; and (4) referred to the fact that there might well be opportunities for partners to attend preview screenings of four of the films in which the Take 3 partnerships had been involved. The T&G Letter

40. This letter explained that, due to a change in law which had recently taken effect, a change to the lending arrangements in relation to each Take partnership was being proposed whereby the partners would individually take out the borrowings which had hitherto been taken out by the Take partnerships themselves. The Take 3.7 Minutes

41. This meeting was attended by representatives of T&G and BSMF along with a number of named members who were described as being present by proxy. The minutes noted, inter alia, that: (1) “the management team was targeting a small further tax loss for the current year which would give rise to another small tax relief for Partners in the middle of 2005” as long as sufficient cash was received in the second part of the year to provide the necessary cash for re-investment; (2) “the current estimate of overall value for April 2005 was around £0.92 against a full cycle target of £2.57 but it was stressed that this did not take into account the value of any library sales and only assumed each film made no further sales other than its presales. In general, the conclusion was that Take 3.7 was on course to deliver at least par value”; (3) a sales reports had been circulated showing expenditure on productions, total sales including pre-sales and total cash received excluding pre-sale income, “which showed in the books as income and gave rise to a tax charge, but which was, in effect “cashless” income in that it had to be repaid to the bank in repayment of loans”; and (4) a brief update had been provided on the progress of various productions in the portfolio and the prospects of their generating profits. (That production update, dated November 2004, was generic for a number of the Take partnerships, including the Appellants.) The 2005 Meeting Note

42. Further information in relation to the activities of the partnerships was set out in the 2005 Meeting Note, in which Mr Evans explained BSMF’s role in acting for the Take 3 partnerships as follows: “At the first stage, BSMF effectively acts as a whole administration system for the partnerships (managing, negotiating, liaising with sales agents, etc). BSMF does not act for any other retail partnerships. Producers approach BSMF literally on a daily basis. BSMF assesses film for certain criteria (e.g. in terms of budget, location, casting, sales agent, etc) before contacting the partnership(s) with recommendations, which they are able to accept or decline. No fees are charged to the partnership until a script is accepted for production…BSMF has a somewhat "supervising producer" role at this contracting stage – a process that is often longer than the production stage. At the second stage, BSMF monitors the production of the film/TV programme. A consultant, Emma Hayter, who is contracted by BSMF on a film-by-film basis, liaises with the production team to ensure everything is on track (shooting schedule, budget, quality, etc). BSMF receives information daily from the production team to enable identification of problems as they happen. Weekly cost reports are provided to enable comparisons with budget. The final stage is post-production. Once a rough cut is available, a screening is usually organised. BSMF's involvement is via Emma Hayter and Bill Allan, who assess the rough cut (e.g. for editing, dialogue, music, etc) and discuss changes as they deem fit with the director/editor. Minutes are usually taken to note significant points raised in the discussions”. The 2023 Email Attachment

43. In the 2023 Email Attachment, Mr Evans said that T&G and BSMF were responsible for the management of the Take 3 partnerships and that BSMF was a company set up by him and Mr Allan “to select, recommend and manage suitable productions on behalf of the [partnership]. [BSMF] grew it’s [sic] full-time team to include an in-house media lawyer (ex New Zealand TV), an experienced TV producer to monitor productions in progress and in edit, a qualified accountant to monitor production spend and to prepare Take accounts, as well as a number of assistant staff.” The witness evidence Introduction

44. Sadly, neither Mr Evans nor Mr Allan was available to give evidence to us at the hearing. Mr Evans was unwell and Mr Allan had passed away. That was an unfortunate consequence of the lengthy delays which have taken place between the start of the enquiries and the issue of the closure notices which have led to these appeals.

45. However, we were provided with the evidence of three witnesses: (1) Mrs Emma Hayter, a freelance producer and executive producer of film and TV dramas, who was mentioned in the meeting note set out in paragraph 42 above and provided her services to BSMF when it was acting on behalf of the Appellants; (2) Mr Richard Moxon, a retired solicitor who was a partner in the firm of Davenport Lyons at the relevant time and who provided advice to BSMF in relation to documenting the transactions implemented by the Appellants; and (3) Mr Martin Sherwood, who was head of the Tax Efficient Solutions Group at T&G at the relevant time and was involved in the formation and management of the Appellants. The evidence of Mrs Hayter

46. Mrs Hayter testified that her activities on behalf of the Appellants in relation to the films in which the Appellants were involved included the following: (1) reviewing submitted scripts to assess their suitability to be filmed; (2) contributing to decisions in relation to: (a) casting and key personnel, including the director and the director of photography; (b) the script; and (c) locations; (3) along with individuals who were representatives of the producer (in the case of ICTC, TCL and TCL IOM), the other contributors to the cost of the film (in the case of ICTC, the BBC) and the completion guarantor (in the case of ICTC, IFF): (a) negotiating budgets; (b) liaising with professional colleagues, including lawyers, in relation to the funding and financial administration of productions; (c) liaising with sales agents to ensure the best possible distribution for the film; (d) reviewing the chain of title before filming commenced to ensure that it would not give rise to an exposure to any liabilities; (e) examining, on a weekly basis, a cost report prepared by a production accountant and comparing it to the budget; (f) reviewing, on a daily basis, the call sheet setting out details of the scenes to be shot the following day, including the matters required to be provided by each department, timings and the details of the actors involved; (g) reviewing, on a daily basis, a progress report comparing the details on the previous day’s call sheet with what had actually happened; (h) reviewing the film rushes and providing input on them; (i) overseeing the post-production processes, including editing, sound and final colour-grading; and (j) overseeing the final delivery of the film, taking into account the specific requirements of each person to whom delivery was to be made.

47. In the case of ICTC, she did not start working for BSMF until a few weeks after the principal photography on the film had commenced and therefore her role on ICTC itself did not include the matters set out in paragraphs 46(1), 46(2) and 46(3)(a) to 46(3)(d) above but those matters were a feature of her role in relation to the other films in which the Appellants were involved.

48. In response to a question in relation to the nature of the relationship between her (as the representative of BSMF, and hence the Appellants) and TCL/TCL IOM, she said that the responsibility of TCL/TCL IOM “was to deliver everything on the contracts to Baker Street. So in the sense of doing a similar job, they were doing the work and I was signing off on it and making sure that it all agreed” (Transcript Day 2 page 37 lines 13 to 16).

49. She added that, although everyone – the producer, the contributors to the cost of the film and the completion guarantor – had the common aim of completing and delivering the relevant film, they did not always have the same point of view or aligned interests in relation to particular matters. The overall process was collaborative and therefore most disagreements would be resolved by discussion and negotiation but, at the end of the day, the contributors to the cost of the film had ultimate control because they were paying for the film and they could therefore pull rank. In relation to ICTC, she said that she had had a very good relationship with the BBC in relation to the matters described in paragraph 46(3) above.

50. We considered Mrs Hayter to be an honest and credible witness, whose testimony in relation to her role for BSMF on behalf of the Appellants was helpful to us in gaining a better understanding of the role played by the Appellants in the transactions in which they were involved. The one aspect of her evidence which we doubted was whether the level of control which was exercisable by the Appellants over TCL was quite as extensive as she suggested. We say that because clause 2.2 of the Co-production Agreement in relation to ICTC said that “it is agreed that TCL shall retain final say on matters relating to the production, completion and delivery of the Film”. It therefore seems to us that, in relation to ICTC at least, it was TCL that had ultimate control of the production of the film in circumstances where a disagreement arose and the collaborative process described by Mrs Hayter broke down. However, in terms of relevance to this decision, very little turns on where the ultimate control over the decision-making process lay. The key point is the extent to which the Appellants were engaged in the activities relating to the production of the films in which they were involved. The evidence of Mr Moxon

51. Mr Moxon testified that: (1) he had been responsible for producing the transaction documents for the Take 3 partnerships. However, other members of his firm had been responsible for the tax advice in connection with the transactions and for the IM and he was therefore unable to comment on any of the tax aspects of the transaction and how the tax reliefs for investors in the Take 3 partnerships were intended to reduce the downside risk of investing in the partnerships, as stated in the IM; (2) having said that, he knew that legislation had been introduced to encourage investments in films and that the transactions implemented by the Take 3 partnerships were designed to make use of the tax reliefs set out in that legislation; (3) a common feature of the media business was what he called “gap-funding” – the need for finance to cover the period of time when the production costs were being incurred but the producer had not yet become entitled to receive payments from distributors because those payments were conditional on the completion and delivery of the relevant film; (4) in this case, the money paid by the Other Contributors into Production Account B was no more than security provided by the Other Contributors for their obligations to pay the BBC Advance, the DH Advance and the IOM Advance once completion and delivery occurred. Until that time, the money in Production Account B was effectively in escrow pending completion and delivery of the film and gap-funding was required by TCL; (5) as regards the transaction waterfall, it was not uncommon for the receipts from a film to be shared in a manner which was disproportionate to the financial contributions made to the film. The transaction waterfall was always a matter for negotiation and depended on the strengths and weaknesses of each negotiating party’s position; and (6) in the case of the Take partnerships, he clearly remembered that, before getting around to drafting the documents in relation to a film, there would be discussions with technical advisers in relation to the likelihood that the film would be a box office success. Those were only estimates and not guarantees but the exercise was always carried out.

52. Whilst we considered Mr Moxon to be an honest witness, trying to recall the precise details of transactions which had been implemented twenty-five years ago, the credibility of his evidence was inevitably impaired by the passage of time. In addition, there were aspects of his evidence which we found troubling in the light of the content of the written evidence provided to us. For example: (1) despite the fact that Mr Moxon was not a tax expert, we were surprised that he had been able to document the transactions implemented by the Take partnerships without being aware that a fundamental aspect of those transactions, as reflected in the IM, was the way in which the gearing in the partnerships was expected to enhance and amplify the tax benefits enjoyed by the partners; (2) we did not think that his explanation of the T3 Debt component of the T3 Advance as “gap-funding” pending payment of the BBC Advance, the DH Advance and the IOM Advance was entirely consistent with fact that each of the BBC and DH had to make its advance to TCL before the partnerships were able to borrow from Barclays to fund the T3 Debt component of the T3 Advance to TCL and that each of the Other Contributors ranked behind Barclays in terms of the monies they advanced; and (3) whilst we have no doubt that, in general terms, a transaction waterfall might not always reflect proportionally the financial contributions made to the relevant film, it seemed to us to be telling in this particular context that the Appellants’ rights under the relevant transaction waterfall matched precisely the T3 Equity component of the T3 Advance, relative to the BBC Advance, the DH Advance and the IOM Advance.

53. For the above reasons, we had some reservations in relation to Mr Moxon’s evidence. The evidence of Mr Sherwood

54. Mr Sherwood testified that: (1) he was head of the group at T&G responsible for sponsoring tax efficient investments to high-net-worth individuals; (2) in his view, the leverage involved in the transactions implemented by the Appellants enabled the Appellants to acquire a much broader portfolio that that which they would have acquired without the leverage. That, in turn, meant a greater portfolio spread with a consequent reduction in risk. The purpose of the leverage was not to inflate the tax relief which the partners in the Appellants could obtain; (3) the Loans were fully recourse to the partners as the Appellants were general partnerships. Initially, T&G had hoped that Barclays might agree that the Loans could be limited recourse but, when Barclays insisted otherwise, T&G had had to write to prospective partners to explain that that was the case; (4) the transactions carried various risks for the Appellants and hence the partners – for example, a failure to get certification of the film as a British film from the Department of Culture Media and Sport and an exposure to defaults by the parties; (5) in relation to each Appellant, T&G charged an initial fee equal to 9% of the equity contributed to the Appellants and 4% per annum on the amount of that contributed equity thereafter. There was also a success fee if the post-tax returns derived by the partners in the partnerships reached a specified level. BSMF’s fees were paid by T&G out of its fees; (6) the intention was that each Appellant would have a five-year life. Cash generated by the initial films would be reinvested in further films and there would then be a library sale at the end of that period; and (7) T&G assessed the likelihood of the Appellants’ making profits from the films including receipts from library sales and did so by reference to spreadsheets prepared by Mr Evans of BSMF that considered the worst-case, medium-case and best-case scenarios for each film. However, none of those spreadsheets remained available given the time which had elapsed since the films had been made.

55. Whilst we do not doubt the honesty of Mr Sherwood, there were aspects of his evidence which we found troubling in the light of the written evidence with which we were provided, as follows: (1) first, he was unable to explain the precise subject matter of the library sales to which he alluded in paragraph 54(6) above, given that: (a) upon completion and delivery, ownership of the Materials passed to TCL exclusively; and (b) the Appellants only ever had a 25% interest in the Rights – see clauses 11 and 12 of the Co-production Agreement and clause 16 of the BBC Agreement. This meant that the only rights which the Appellants had to sell in the library sales were their rights under the transaction waterfalls and their 25% interest in the Rights. It was unclear whether Mr Sherwood was referring to those; and (2) secondly, he insisted that the reason for the gearing in the Appellants was to spread the risk inherent in the Appellants’ portfolio and had nothing to do with increasing the tax relief which would become available to the partners in the Appellants. The latter was somewhat at odds with the terms of the IM as set out in paragraph 35(1) above and we could not understand how the former could be the case given that the debt taken on by the Appellants in relation to each transaction was a fundamental part of the transaction structure and completely matched by the funding provided by the other contributors to the cost of the relevant film – in the case of ICTC, the Other Contributors. Consequently, neither of us could understand how the gearing in the Appellants could ever have played any role in increasing the Appellants’ overall portfolio at all.

56. For the above reasons, we had some reservations in relation to Mr Sherwood’s evidence. The economic analysis

57. It can be seen from the description of the IM set out in paragraphs 34 and 35 above that the indicative figures provided to prospective partners in the IM suggested that each partnership’s payments into Production Account A would be funded as to 40% out of the relevant partnership’s equity and as to the balance of 60% out of the relevant partnership’s debt. On those figures, the table set out on page 5 of the IM showed that, if a partner contributed 100 to a partnership, 9 would be used to pay the initial fee to T&G, and the remaining 91, along with 136.5 raised by the partnership by way of partnership debt (91 x 60/40), which is to say 227.5 in aggregate, would be paid into Production Account A. The IM therefore contemplated that, for every 100 contributed by a partner, the partner would be entitled to 91 of tax relief based on a 40% rate of income tax (227.5 x 40%).

58. However, as things transpired, that was not the gearing ratio actually adopted in relation to the Appellants’ transactions. For instance, looking at the original form of the ICTC transaction – which is to say, before the Appellants made the DH Purchase – the T3 Equity component of the T3 Advance was approximately £1.2 million whereas the T3 Debt component of the T3 Advance was approximately £4.4 million. This equates to a ratio of 21% (T3 Equity) to 79% (T3 Debt) and it has a significant impact on the relationship which the anticipated tax relief for each partner bears to the initial contribution made by that partner.

59. Using the formula suggested by the table in the IM example, the relevant partner would have expected to obtain tax relief on 428 for his or her contribution of 100 to the relevant Appellant (91+ 337) which, at the 40% tax rate, amounted to tax relief of 171.2. Thus, even if: (1) the Appellants had had no receipts whatsoever from their involvement in ICTC; and (2) T&G had taken their annual management fee of 4 over the five-year life of the Appellants, aggregating to 20, the relevant partner would have expected to realise an after-tax profit from his or her participation in the Appellants in relation to ICTC of 51.2 (171.2 – 120).

60. When one expands the analysis and looks at the figures for all of the films in which the Appellants were involved – including both Peakviewing and non-Peakviewing but before taking into account the impact of the DH Purchase – which were agreed by the parties at the hearing, the figure for expected tax relief was slightly higher than that, at 173.7 for every 100 of partner contribution – leading to an expected after-tax profit for each partner of 53.7 (173.7 – 120).

61. Of course, the fact that the Appellants made the DH Purchase and thus substantially reduced the gearing referable to its involvement in ICTC had an impact on both of the above figures. In order to fund that purchase, the relevant partner had to contribute a further 82 to the relevant Appellant and that would have taken his or her aggregate contribution to the relevant Appellant in relation to ICTC above the tax relief even before taking into account the T&G annual fees.

62. As for the impact of the DH Purchase on the aggregate figures for all of the films in which the Appellants were involved as referred to in paragraph 60 above which were agreed by the parties at the hearing, this was to give rise to a figure for expected tax relief of 148 for every 100 of partner contribution. Thus, even if: (1) the Appellants had had no receipts whatsoever from any of the films in which they were involved; and (2) T&G had taken their annual management fee of 4 over the five-year life of the Appellants, aggregating to 20, the relevant partner would have expected to realise an after-tax profit from his or her participation in the Appellants of 28 (148 – 120).

63. Having said that, the DH Purchase was not part of the plan at the time when the Appellants first became involved in ICTC and we consider that it is the initial figures set out in paragraphs 58 to 60 above which are the more pertinent in considering the motives of the partners and the Appellants in relation to the Appellants’ activities. findings of fact

64. We set out below our findings of fact in relation to these appeals, in each case together with the reason for the relevant finding, based on the evidence described above: (1) Finding – the activities carried out by Mrs Hayter on behalf of the Appellants were as described by Mrs Hayter in giving her evidence and summarised in paragraphs 46 to 50 above, subject to the reservation which we expressed at the end of paragraph 50 above. Reason – we considered Mrs Hayter to be a credible and reliable witness. In addition, Mrs Hayter’s testimony is supported by the terms of 2005 Meeting Note and the 2023 Email Attachment – see paragraphs 42 and 43 above; (2) Finding – the primary motive of the partners of the Appellants in investing in the Appellants, and hence of the Appellants in carrying on their activities, was to enable the partners of the Appellants to benefit from the tax relief which they expected to be available in respect of the entire T3 Advance in respect of each film and in respect of the reinvestment by the Appellants of the proceeds generated by any film. Reason – this is clear from: (a) the numerous references in the IM to the importance of the tax relief which partners could expect to derive from investing in the Appellants as described in paragraph 35(1) above, particularly the statement on page 20 of the document to the effect that there was no limit to the amount which could be contributed by any partner, “subject to his or her overall tax requirements”; (b) the fact that the Appellants were marketed to high-net-worth individuals because of the anticipated tax relief on offer, as noted by Mr Sherwood; (c) the fact that the anticipated tax relief was such a significant part of the return which the partners were expecting to derive from the activities of the Appellants, as noted in the economic analysis set out at paragraphs 57 to 63 above; (d) the degree of artifice implicit in the structure of the arrangements implemented in relation to each film whereby costs of production that were actually borne by the Other Contributors were presented as being borne by the Appellants in order to enable the partners in the Appellants to increase the tax relief claimed; (e) the terms of the T&G letter referred to in paragraph 40 above, which demonstrated the significance attached by the partners to the tax relief they expected to obtain; and (f) the statement in the December 2002 Film Update to the effect that five productions which were due to be produced in the then-current tax year had been earmarked for the Take 3 partnerships “in order to ensure that income arising during the current year from previous productions continues to be sheltered” – see paragraph 36(6) above – and the statement in the Take 3.7 Minutes that the management team was “targeting a small further loss for the current year” – see paragraph 41(1) above; and (3) Finding – the making of profits from the films in which the Appellants were involved was also a motive of the partners of the Appellants in investing in the Appellants and hence of the Appellants in carrying on their activities, albeit a motive that was of lesser importance to the partners and the Appellants than the tax-related motive described in paragraph 64(2) above. Putting this another way, in investing in the Appellants, the partners of the Appellants, and, in carrying on their activities, the Appellants, were not simply indifferent as to whether or not the Appellants made profits from the films in question but were motivated by a wish that such profits arose. Reason – we have not found this an easy point to decide because the evidence with which we have been provided is limited. We should start by saying that we have not ascribed any great weight to the examples given to us by Mr Rawlinson of cases where films, including those in which the Take 3 partnerships were involved, have ultimately generated considerable profits for the investors in them. It seems to us that it is perfectly possible for a film to generate profits in circumstances where the investors in the film are simply indifferent as to whether or not it does so – for example, because the tax relief which is expected to arise from investing in the film is so significant that a profit from the film, whilst no doubt most welcome, is simply a “nice-to-have” and not part of the investor’s motive in investing in the film at all. We are reminded of the analogy adopted by the Upper Tribunal (the “UT”) in Ingenious Games LLP v The Commissioners for Her Majesty’s Revenue and Customs [2017] SFTD 1158 (“Ingenious UT”), at paragraph [379], of the amateur runner who enters the London Marathon, where victory would doubtless be most welcome but for most would not be an aim. There are numerous examples of such cases in the applicable case law and the economic analysis set out in paragraphs 57 to 63 above could easily be taken to suggest that this is one of them. That analysis demonstrates that the fiscal advantage which the partners expected to derive from investing in the Appellants was so significant that their investment made perfect commercial sense even if the Appellants made no profit whatsoever from their activities. We have also placed limited weight in relation to this question on the fact that Mrs Hayter, and no doubt others at BSMF, played an active role in the production of the films in which the Appellants were involved pursuant to the terms of the Co-production Agreement. We recognise that this might fairly be regarded as evidence that the partners in the Appellants were anxious to ensure that the films in which the Appellants were involved were as successful as possible so that they could generate profits for the Appellants. However, the fact is that the sponsor of the Take 3 partnerships, T&G, and its adviser, BSMF, were well aware that, in order for the desired tax relief to be available to the partners in those partnerships to set off against their other income, each partnership would need to be carrying on a trade. For that reason, even if the partners had been totally indifferent as to whether or not the partnerships were profitable, the structure created by T&G and BSMF would inevitably have involved a person or persons playing an active role on behalf of the partnerships in the production of the relevant films. We therefore consider the activities of Mrs Hayter ultimately to be neutral in relation to the question of whether the partners in the Appellants, and hence the Appellants, had a genuine interest in the profitability of the Appellants. The points which we have made above have informed the views taken by the Respondents in this case. However, whilst we recognise their force, we have ultimately come to the conclusion that they are not correct. This is because there is, in our view, enough evidence to suggest that, despite the interest of the partners and the Appellants in the tax-related benefits which the partners expected to derive from their investment in the Appellants, the partners in the Appellants, and hence the Appellants themselves, were also interested in the profits which the Appellants might derive from the films in which the Appellants were involved. For example: (a) based on the specimen gearing level described in the IM, the partners in the Appellants were due to receive a post-tax return of only 91 for each 100 which they invested in the Appellants. Taking into account the T&G annual fee of 4 in each year of the Appellants’ life, that would give rise to an after-tax return on an initial investment of 100 which was some 29 lower than the costs incurred by the partners in investing in the Appellants. This means that the Appellants would have needed to realise profits from the films in which they were involved of 29 for each 100 of investment made by the partners in the Appellants before the partners broke even (100 + 20 – 91). We do not place reliance on this alone because, as we have seen from the economic analysis set out in paragraphs 57 to 63 above, the gearing ratio set out in the IM ultimately proved to be much lower than the gearing ratio actually adopted by the Appellants in relation to the films in which they were involved. And we recognise the possibility that, based on the knowledge of T&G and BSMF to which we have referred above – namely, that the ability of the partners to set off, against their other income, the tax relief arising from the Appellants’ activities was dependent on each Appellant’s carrying on a trade – the intention of the sponsor and its adviser all along was to set out a low gearing level in the IM whilst informing prospective partners privately that the actual gearing levels would be much higher. However, we think that that was unlikely. The IM was the primary marketing document made available to prospective partners and was the document upon which those prospective partners were being invited to participate in the Appellants. It seems to us to be unlikely that T&G and BSMF would have chosen to set out in the IM a level of gearing which they had no intention of using. It seems much more likely that the prospective partners that the sponsor and its adviser were seeking to attract were those who, in addition to wanting to shelter their income with the tax relief which was expected to arise from their participation in the Appellants, were also keen to speculate on the films in which the Appellants would be involved; (b) there is also the fact that there were numerous references in the IM to the potential profits which might arise in the partnerships, including from library sales. These included a table showing such profits in the IM, albeit subject to the inevitable sponsor’s disclaimer – see paragraph 35(2) above. Whilst Mr Sherwood was somewhat hazy on the precise nature of the rights which were available for the Appellants to sell in those library sales, there is no doubt that the Appellants did have rights which they could monetise pursuant to those sales, in the form of their rights under the various transaction waterfalls. It also seems improbable to us given the numerous references to library sales in the IM and in the material which was sent to partners on an ongoing basis that such sales were never intended; (c) the fact that T&G was entitled to a success fee if the after-tax return for a prospective partner exceeded 160% of the prospective partner’s original investment – see paragraphs 35(2)(d)(iii) and 54(5) – is consistent with the view that, so far as the partners in the Appellants, and hence the Appellants, were concerned, significant profits were an aim and a realistic possibility; (d) the terms of the Take 3.7 Minutes are also indicative of the fact that the partners in the Appellants, and hence the Appellants themselves, were not indifferent to the profitability of the Appellants. In relation to those minutes, we accept that Take 3.7 is not itself one of the Appellants and therefore the minutes relate to a partnership which is not involved in the present proceedings. However, it is common ground that all of the Take 3 partnerships were established with a common purpose and therefore we think it is reasonable to conclude that the subject matter of the discussions recorded in the Take 3.7 Minutes was being replicated in relation to other Take 3 partnerships, including the Appellants. That being the case, the references in those minutes to: (i) estimated future sales – including library sales; (ii) the production of sales reports; and (iii) the progress of productions and their prospects of generating profits all suggest to us that the partners in the Appellants, and hence the Appellants, were genuinely interested in the profitability of the Appellants; (e) similar evidence is to be found in the various Take 3 Film Updates. Taken together, they show that T&G and BSMF kept the partners in the Take 3 partnerships regularly informed of the films in which the Take 3 partnerships were involved and, in relation to those productions, the sales made and the prospects of future sales. We were struck in particular by the reference in the December 2002 Film Update of BSMF’s being “your industry advisers”. This phrase suggests that the partners in the Appellants were looking to BSMF for ongoing advice in relation to the films in which the Appellants were involved. We accept that the Take 3 Film Updates are not as detailed as we might have expected to see by way of evidencing the intention of the partners in the Appellants, and hence the Appellants, that the Appellants would make profits, but they seem to us to go much further than mere window-dressing. It is quite apparent that the partners in the Appellants, and hence the Appellants, had a genuine proprietorial interest in the films in which the Appellants were involved and interested in finding out whether those films might generate profits; (f) it is true that we have not been provided with any detailed profit projections by T&G and BSMF on behalf of the Appellants, to support the figures in the IM, the Take 3.7 Minutes or the Take 3 Film Updates. However, there are three reasons why we do not consider the absence of such projections to indicate that they did not exist. These are that: (i) first, Mr Sherwood testified that such projections had been produced by T&G and BSMF at the relevant time and Mr Moxon said that, before a Take 3 partnership was formed, detailed consideration was given to the box office prospects of the films in which the relevant partnership would be involved; (ii) secondly, when one looks at the information in the IM and the information which was provided to the partners on an ongoing basis at partners’ meetings and by way of the regular film updates, as exemplified by the Take 3.7 Minutes and the Take 3 Film Updates, it seems unlikely that that information was not supported by underlying projections made by the persons who were responsible for collating and providing the information – which is to say T&G and BSMF; and (iii) thirdly, the absence of projections is readily explicable by the long period of time which has passed between the time when the Appellants entered into the relevant transactions and the time when the Respondents first raised the trading argument. Whilst it was incumbent on the Appellants to keep all of the evidence necessary to establish that they were trading, for the reasons set out in paragraphs 70 and 71 below, we can understand why they did not do that in these circumstances. The absence of the projections does not prove, in and of itself, that the projections did not exist; (g) although it falls short of being a detailed projection as such, Exhibit I to the Interparty Agreement set out various figures relating to anticipated sales of ICTC in various jurisdictions and: (i) clause 7.1.2 of the Interparty Agreement gave the Appellants, along with the BBC, the IOM and TCL, a right of approval over any sale which DH might wish to make at less than the relevant figure set out in that exhibit; and (ii) clause 7.3 of the Interparty Agreement provided as follows: “DH confirms that, in its good faith business judgement, the "minimum prices" set out in Exhibit I are accurate estimates based on the current principal casting elements and it will use its reasonable efforts to achieve such "minimum prices". Notwithstanding the above, the parties hereto acknowledge that DH has made no warranty as to the level of receipts that may be realised from the exploitation of the Film.” This again suggests that the partners in the Appellants, and hence the Appellants, were not indifferent to the profitability of the Appellants; and (h) there is also the minor detail that, as the table set out in paragraph 5 above demonstrates, the Appellants did in fact make taxable profits in the 2002/2003 tax year. Whilst it is perfectly possible to make a profit despite being indifferent as to whether or not one arises, this is of some support to the proposition that the partners participated in the Appellants in the hope that the Appellants would be profitable and that that was one of the motives of the partners in investing in the Appellants, and hence of the Appellants in carrying on their activities. For the reasons set out above, we have concluded that the partners in the Appellants, and hence the Appellants themselves, did have a motive of making profits from the films in which the Appellants were involved although, for the reasons set out in paragraph 64(2) above, that motive was subsidiary to the tax-related motives which the partners in the Appellants had in participating in the Appellants, and hence which the Appellants had in carrying on their activities. discussion Introduction

65. Now that we have dealt with the relevant facts, we will address the matters in dispute between the parties, as set out in paragraphs 14 to 17 above.

66. Mr Rawlinson made a number of submissions in relation to these appeals. Those submissions can usefully be divided into two broad categories, as follows: (1) submissions that can best be characterised as being based on principles of equity and fairness; and (2) submissions that related to the application of the legislation and applicable case law. The equity-related submissions The submissions

67. Mr Rawlinson said that, given: (1) the extensive period of time which had elapsed between the start of the enquiries and the issue of the closure notices; (2) the conduct of the Respondents over that time; and (3) the fact that many of the transaction documents and other relevant evidence had been destroyed or lost, the appeals should be upheld.

68. Although Mr Rawlinson did not articulate his arguments in quite this way, we think that they can usefully be broken down into four distinct submissions. They were that the appeals should be upheld because: (1) first, the matters described in paragraph 67 above meant that the Appellants were incapable of receiving the fair trial which they deserved; (2) secondly, the matters described in paragraph 67 above meant that the Respondents should be estopped from defending the closure notices; (3) thirdly, the matters described in paragraph 67 above had given rise to a legitimate expectation on the part of the Appellants that the closure notices would not be issued; and (4) fourthly, not to uphold the appeals would mean that the partners in the Appellants were being penalised for doing no more than acting in accordance with the express policy of the Government to increase investment in British films by providing tax relief for such investment. Discussion Introduction

69. We will deal with each of the arguments described in paragraph 68 above in turn. The right to a fair trial

70. In relation to the first argument, whilst we have considerable sympathy for Mr Rawlinson’s complaints, the fact remains that, as a matter of law, the burden of proof in these appeals is on the Appellants and not the Respondents and it is incumbent on the Appellants to ensure that they have the evidence required to discharge that burden of proof. If the Appellants do not have that evidence, then, regardless of which of the parties is responsible for that shortcoming, the appeals must necessarily fail.

71. In addition, once the enquiries were opened, the Appellants had an obligation under Section 12B of the Taxes Management Act 1970 (the “TMA”) to keep the records which were necessary for ensuring that the tax returns for the relevant tax years were correct and complete until the closure notices were issued and the enquiries were completed. In this case, the documents demonstrating that the Appellants were trading and that the expenditure they had incurred was wholly and exclusively for the purposes of their trades were relevant to ensuring that the tax returns to which the closure notices relate were correct and complete. It follows that a failure to retain those documents was a breach of Section 12B of the TMA. Estoppel

72. The second argument is dependent on the private law equitable concept of estoppel by convention. Estoppel by convention is potentially engaged where parties have been proceeding on the basis of a common understanding between them and then one of them seeks to resile from that understanding. In this case, the basis for the submission is that, before the Respondents raised the arguments that are the subject of the present dispute – which was not until some twelve years had passed after the Respondents opened the enquiries into the relevant tax years – both the Appellants and the Respondents had been proceeding on the basis that each Appellant had been carrying on a trade and the whole of each T3 Advance had been incurred wholly and exclusively for the purposes of the relevant Appellant’s trade. It followed that the Respondents could not now resile from that commonly-understood position.

73. Our views on that submission are as follows. In principle, the First-tier Tribunal (the “FTT”) has the jurisdiction to consider estoppel by convention in respect of either party to the proceedings before it. However, it is clear from the authorities that, in tax appeals, the circumstances where estoppel by convention can apply successfully against the Respondents will be rare. This is for the simple reason that the Crown cannot be estopped from carrying out its statutory duty of applying the law and collecting tax which is properly due in accordance with the law – see MWL International Limited and Maywal Limited v The Commissioners for His Majesty’s Revenue and Customs [2026] UKUT 62 (TCC) (“MWL”) at paragraphs [15] to [50]. In this case, if the Respondents, acting in accordance with their statutory duty to collect tax in accordance with the law, have concluded that each Appellant was not carrying on a trade in the relevant tax years and that, even if it was, each T3 Advance was not wholly and exclusively incurred for the purposes of the relevant Appellant’s trade, then, however belated that conclusion may be, the Respondents cannot be estopped from acting in accordance with that conclusion. Legitimate expectation

74. The third argument is dependent on the public law concept of legitimate expectation. Mr Rawlinson said that the matters described in paragraph 67 above had given rise to a legitimate expectation on the part of the Appellants that the Respondents would not end their enquiries into the relevant tax years by issuing closure notices on the basis that they have. Our views on that submission are as follows. Unlike estoppel by convention, the concept of legitimate expectation does raise a jurisdictional issue for the FTT because the FTT is a creature of statute and its powers are confined to those for which the legislation provides. The FTT has no inherent or common law jurisdiction. Accordingly, in a case where the legislation confers a statutory right of appeal, as does the legislation in this case, an argument based on the public law concept of legitimate expectation can succeed only if the statutory provision in question permits it. This is ultimately a matter of statutory construction, taking into account the purpose and context of the provision in question – see MWL at paragraphs [76] and [77].

75. In this case, the following legislative machinery applies: (1) the Respondents issued their closure notices to the Appellants under Section 28B of the TMA; (2) pursuant to Section 31(1)(b) of the TMA, the Appellants had the right to appeal against the “conclusion stated or amendment made by” the closure notices; and (3) the disposal of the appeals – which is the process on which we are now embarked – is then governed by Section 50 of the TMA, which provides that, on the appeal, the FTT may increase or reduce the amounts shown in the closure notices.

76. There is no suggestion in any of the above provisions that public law principles are engaged. It is simply a matter of our considering whether the Respondents were correct, as a matter of law, to reduce the trading losses shown in the original returns made by the Appellants.

77. For the above reason, we consider that we do not have the jurisdiction to consider whether the matters described in paragraph 67 above gave rise to a legitimate expectation on the part of the Appellants that the Respondents would not conclude as they have, at the end of their enquiries. For that reason, we will not express a view on whether, had the concept of legitimate expectation been applicable in this case, the Appellants would have been able to rely on it.

78. However, we would observe that, in MWL at paragraph [84], the UT noted that: “The general principles on which a claim for legitimate expectation can be sustained are well settled. Broadly, a legitimate expectation arises in circumstances where the claimant has an expectation of being treated in a particular way favourable to the claimant by the defendant public authority; the authority has caused the claimant to have that expectation by clear words or conduct; the claimant's expectation is legitimate, and it would be an unjust exercise of power for the authority to frustrate the claimant's expectation.”

79. The UT then went on to point out that, in the context of legitimate expectation claims against the Respondents, in determining whether it would be unjust for the Respondents to frustrate the claimant’s expectation – which is to say, at the last stage of the process described in the extract from MWL set out in paragraph 78 above – the fact that the Respondents have a duty to the general body of taxpayers to collect the right amount of tax is an important consideration to bear in mind – see MWL at paragraphs [85] to [90] referring to R (oao Aozora GMAC Ltd) v The Commissioners for Her Majesty’s Revenue and Customs [2019] EWCA Civ 1643.

80. It would be a matter for the High Court (the “HC”) to address in any future judicial review proceedings whether the conduct of the Respondents in this case gave rise to a sustainable claim for legitimate expectation based on those tests for the Appellants. However, it is not a matter which we have the jurisdiction to address. Acting in accordance with Government policy

81. The fourth argument is that, in investing in the Appellants, the partners in the Appellants were doing no more than acting in accordance with the express policy of the Government to increase investment in British films by providing generous tax reliefs for such investments. Those tax reliefs had been introduced initially in 1992 at the rate of 33.3% per annum over three years and then enhanced in 1997 to provide for 100% relief. The 100% relief was due to expire in 2002 but that deadline was extended to 2005 in the 2001 Budget. Mr Rawlinson said that the partners should not be penalised for seeking to take advantage of tax reliefs that had been introduced and then enhanced for a fixed period which was then extended, simply because they had engaged in transactions which the legislation was intended to promote.

82. He explained that the arrangement to which the appeals related involved the formation and funding of the Appellants in order that the Appellants could participate in the production of British films and then enjoy part of the profits deriving from those films. This was directly in accordance with Government policy at the time. In their Business Income Manual at paragraph BIM 56505, the Respondents had acknowledged that there had been a large number of schemes set up which had used the tax relief in the way that was intended. These schemes clearly fell within that category.

83. The availability of the tax relief described above was not contingent on an absence of debt financing. The Government considered it perfectly acceptable for a person wishing to take advantage of the tax relief to enter into borrowings so that his or her contribution toward the production of the film, and hence the tax relief available, were increased. Thus, in this case, the fact that the Appellants had entered into the Loans in order to increase the tax relief available to the partners in the Appellants did not mean that the present arrangements fell outside the purpose of the legislation.

84. We would respond to this submission as follows.

85. The first problem with it is that it is not directed at any particular statutory provision or applicable case law. It is no more than an appeal to fairness based on perceived Government policy at the time when the relevant legislation was enacted and remained on the statute book. That is not a sustainable basis for success in the appeals, in and of itself. At its strongest, the submission might be a preliminary step in an argument based on a purposive construction of the relevant legislation.

86. However, in any event, we regret to say that we do not agree with the underlying premise.

87. The reason for that is to be found in the explanation which is set out in paragraphs 94 to 133 below as to the nature of the T3 Debt component of each T3 Advance. For the reasons which we give in those paragraphs, we reject the proposition that the T3 Debt component of each T3 Advance was, like the T3 Equity component of each T3 Advance, a contribution made by the Appellants to the production of the relevant film and that the only difference between the two components was that the T3 Debt component was financed out of borrowings taken on by the Appellants. Instead, we consider that the T3 Debt component of each T3 Advance was simply a loan made by the Appellants to TCL – “gap-funding” provided to TCL to be repaid out of monies contributed towards the cost of producing the film by the parties to the transaction who were actually incurring the costs of production funded by the T3 Debt component of each T3 Advance – namely, the Other Contributors.

88. If the Other Contributors had not made their contributions towards the cost of producing the film, and the T3 Debt component of each T3 Advance had genuinely been part of the Appellants’ contribution to those costs, funded out of loans which were fully recourse to the Appellants, then we would have agreed with Mr Rawlinson that these facts fell squarely within the stated Government policy underlying the legislation. In that case, the whole of the relevant T3 Advance would have represented the Appellants’ contribution towards the cost of the relevant film and the fact that the Appellants would have funded a significant part of their aggregate contribution by way of debt would be neither here nor there. The Appellants would have been at risk in respect of the success or failure of the relevant film on the whole of the relevant T3 Advance and not solely on the T3 Equity component of the relevant T3 Advance. However, that was not the case.

89. We therefore do not accept the parallel which Mr Rawlinson sought to draw between the present transaction and a transaction in which part of what amounts to a genuine contribution to the cost of producing the relevant film happens to be debt-funded. We agree that the fact that a payment made as a contribution to the cost of producing a film may be debt-funded is not something which prevents the payment from falling within the intended scope of the tax relief. However, a payment which is not a contribution to the cost of producing a film at all but is merely a provision of interim gap-funding does do so. Conclusion

90. It follows from the above that: (1) no matter how justified Mr Rawlinson’s complaints about the matters described in paragraph 67 above may be; and (2) even if the Government’s policy was to include within the scope of the tax relief debt-funded contributions to films in the same way as equity-funded contributions to films, that does not move the dial in terms of the outcome of these appeals. If the Appellants wish to obtain redress by reference to any of them, they can do so only by going through the Respondents’ complaints process and, if relevant, making a claim to the HC for judicial review. Those matters do not mean that the appeals should be upheld. The submissions based on the application of the legislation and applicable case law The submissions

91. Mr Rawlinson said that, even if we did not accept his equity-related submissions, the Appellants should succeed in these appeals because: (1) each T3 Advance was, in its entirety, expenditure of a revenue nature incurred by the Appellants on the production of the film to which that T3 Advance related; (2) each Appellant was carrying on a trade – namely the trade of co-producing the films; and (3) the whole of each T3 Advance was expenditure incurred wholly and exclusively for the purposes of the Appellants’ trades. Discussion Introduction

92. For the reasons which follow, our views on each of the above submissions are as follows: (1) not all of each T3 Advance was expenditure of a revenue nature incurred by the Appellants on the production of the film to which that T3 Advance related. Instead, only the T3 Equity component of each T3 Advance was such expenditure; (2) each Appellant was not carrying on a trade of co-production but was carrying on a trade; and (3) the T3 Equity component of each T3 Advance was expenditure incurred wholly and exclusively for the purposes of the Appellants’ trades but, even if it had been expenditure of a revenue nature incurred on the production of the film, the T3 Debt component of the relevant T3 Advance was not incurred wholly and exclusively for the purposes of the Appellants’ trades.

93. We will now set out the reasons for the above conclusions. Was the whole of each T3 Advance expenditure of a revenue nature incurred on the production of the film to which that T3 Advance related? Introduction

94. As we have indicated in paragraphs 87 and 88 above, it is our view that only the T3 Equity component of each T3 Advance was expenditure of a revenue nature incurred by the Appellants on the production of the relevant film.

95. The starting point is to observe that our task is to identify what expenditure was incurred by the Appellants on the production of films in the relevant tax years for the purposes of the new Section 42(4) of the F(2)A1992, which was inserted by Section 48(1) of the F(2)A 1997 and Section 48(2) of the F(2)A 1997 and whether that expenditure had a revenue nature.

96. It is now well-accepted that, in carrying out that task, we need to follow the two-stage approach laid down by a long-established line of cases including WT Ramsay Limited v Inland Revenue Commissioners [1981] STC 174 (“Ramsay”), Collector of Stamp Revenue v Arrowtown Assets Limited [2003] HKCFA 46 and Craven v White [1988] 3 WLR 423 of: (1) first, deciding on the basis of a purposive construction of the relevant statutory provisions, exactly what transaction will answer to the statutory description in those provisions; and (2) secondly, deciding whether the particular transaction in this case does so. Construing the statutory provisions

97. In relation to the first stage of the process described above, the threshold point which we need to address is whether, in relation to each relevant tax year, the reference in the relevant sections to “expenditure incurred” on the production of films should be construed as referring to: (1) expenditure on the production of films which was actually incurred by the Appellants; or (2) expenditure on the production of films which was reflected as a debit in the income statement of the Appellants, in accounts produced in accordance with generally accepted accounting practice (“GAAP”).

98. The natural and most obvious construction of the relevant sections is the former. This is because: (1) there is a difference between expenditure which has actually been incurred and a debit which appears in an income statement; (2) the language used in the relevant sections strongly suggests that they were referring to expenditure actually incurred and that the accounting treatment of that expenditure was irrelevant; and (3) in any event, in the case of a non-trading entity such as an entity carrying on an investment activity, the tax treatment of the entity is not based on the entity’s accounts. It follows that, in our view, at least so far as concerns non-trading entities, the relevant sections must have been referring to expenditure actually incurred by the non-trading entity in question.

99. However, in the case of trading entities, the position is a little more complicated. That is because: (1) as a general matter, the profits or losses of a trading entity are required by statute to be determined by reference to the entity’s accounts prepared in accordance with GAAP, subject to any adjustment required or authorised by law in computing profits for tax purposes. So far as income tax is concerned, this was, at the relevant time, required by Sections 42 and 46 of the Finance Act 1998, and, following the consolidation of the income tax legislation, the relevant requirement is now to be found in Sections 25 and 27 of the Income Tax (Trading and Other Income) Act 2005 (the “ITTOIA”); and (2) there is authority in the form of the Supreme Court (the “SC”) decision in NCL Investments Limited and another v the Commissioners for Her Majesty’s Revenue and Customs [2022] UKSC 9 (“NCL”) to the effect that, in carrying out that process, relief for a debit appearing in the trading entity’s accounts is not to be denied simply because the expenditure to which the debit relates was not actually incurred.

100. In NCL, trading companies which were members of a group were required by GAAP to account for share options granted to their employees by their parent company by recognising debits in their income statements and corresponding credits on their balance sheets. The SC held that the trading companies were entitled to relief for the debits so arising despite the existence of a provision in the corporation tax legislation which precluded relief for expenses not incurred wholly and exclusively for the purposes of the trade. The SC held that, in relation to an expense which had given rise to a debit in an income statement in accounts prepared by a trading company in accordance with GAAP, that section did not import a further requirement for obtaining relief to the effect that the expense had actually to have been incurred – see NCL at paragraphs [38] to [47].

101. We have therefore considered whether, in the case of a trading entity, following the reasoning of the SC in NCL, the references, in the sections we are now construing, to expenditure incurred on the production of films should be read as referring not to expenditure which was actually incurred by the entity on the production of films but rather to a debit appearing in relation to that expenditure in the entity’s income statement in accounts prepared in accordance with GAAP, subject to any adjustment required or authorised by law in computing profits for tax purposes.

102. We have concluded that the relevant sections should not be so construed, for the following reasons: (1) first, the sections apply in computing the profits of both a trade and a business other than a trade, such as an investment business and, as we have mentioned in paragraph 99(3) above, the profits of an entity carrying on an investment business are not required to be determined by reference to the entity’s accounts, with the result that, in the case of such an entity, the language in question must be taken to be referring to expenditure actually incurred by the relevant entity and the principle set out in NCL is irrelevant. It seems highly unlikely that the phrase “expenditure incurred” in the sections was intended to be construed differently depending on the nature of the entity’s business and there is certainly no indication in the relevant sections that any such distinction was intended; (2) secondly, the sections were designed to provide enhanced relief for expenditure on the production of films on the basis set out in the legislation – which is to say initially 33.33% over three years pursuant to the 1992 legislation in its original form and then 100% in year one pursuant to the changes made by the 1997 legislation. If the intention was that a trading entity should be treated as incurring expenditure for the purposes of the relief in accordance with its accounting treatment, and not when it actually incurred the relevant expenditure, then the statutory timing schedule laid down by the legislation would mean that the relief provided by the legislation could never have been of benefit to trading entities. The expenditure was deemed by Section 40A of the F(2)A 1992 to have a revenue nature. Consequently, if the sections were to apply by reference to debits appearing in the income statement in accounts prepared in accordance with GAAP, then, even before taking into account the provisions in the legislation conferring the relief, a trading entity would have been entitled to 100% relief for those debits in any event. By providing for relief to be available instead at 33.33% over three years, the 1992 legislation would in fact have had the effect of deferring the timing of the relief and the 1997 enhancement to the legislation would simply have put the trading entity back to where it would have been without the benefit of the legislation. It follows that the reference in the relevant provisions to expenditure incurred on the production of films must clearly have been referring to expenditure actually incurred and not to debits in the income statement in respect of that expenditure. Putting it another way, it would be odd if, following the extension of the relief to 100% in 1997, a trading entity whose accounts prepared in accordance with GAAP spread the debits for expenditure the entity had actually incurred on the production of films in year one in its income statements over several years were to be limited to claiming relief for the expenditure over the years in which it was shown as a debit in the income statements, as opposed to year one; and (3) thirdly, support for this conclusion can be found in Section 48(9) of the F(2)A 1997, which provided that Sections 5(1) to 5(5) of the Capital Allowances Act 2001 (the “CAA”) would apply for determining the timing of when expenditure was incurred. Although that section itself strictly relates to the timing of when expenditure is deemed to be incurred for capital allowances purposes, and not whether or not expenditure is deemed to be incurred for those purposes, it is clear from the terms of the section, and indeed the capital allowances legislation as a whole, that the regime is based on expenditure actually incurred and not debits in the accounts. This is reflected in the decision of the SC in Tower MCashback LLP 1 and another v The Commissioners for Her Majesty’s Revenue and Customs [2011] UKSC 19 (“Tower”) – see, for example, Lord Walker and Lord Hope in Tower at paragraphs [75] and [88]. Thus, by incorporating into the legislation by cross-reference the provisions of Section 5 of the CAA, Parliament was making it clear that the legislation was intended to operate by reference to expenditure actually incurred as opposed to expenditure reflected as a debit in an income statement in accounts prepared in accordance with GAAP.

103. For the reasons set out above, we consider that, regardless of the nature of the business carried on by the taxpayer, the references in the relevant sections to “expenditure incurred” on the production of films must be construed as referring to expenditure of the relevant nature which was actually incurred and not simply expenditure of the relevant nature which gave rise to a debit in the income statement in accounts prepared in accordance with GAAP. Considering how the provisions apply to the transaction

104. Turning then to the second stage in the process described in paragraph 96 above – identifying the expenditure of a revenue nature which was actually incurred by the Appellants on the production of films in the relevant tax years – we have already alluded above to the fact that, pursuant to Section 40A of the F(2)A 1992, any expenditure actually incurred by the Appellants on the production of films in the relevant tax years was deemed to have a revenue nature. It follows that the only remaining issue is to identify the expenditure which was actually incurred by the Appellants on the production of films in the relevant tax years.

105. In dealing with that issue, we must bear in mind the injunction in prior case law to the effect that, in determining whether a particular transaction falls within the ambit of the relevant statutory provision, the transaction in question must be viewed realistically and by reference to its true legal effect in the context of the statutory provision in question – see Ensign Tankers (Leasing) Limited v Stokes [1992] 1 AC 655 (“Ensign HL”).

106. That is the process which we will now follow.

107. Although no distinction between the T3 Equity component and the T3 Debt component of each T3 Advance was drawn in the Co-production Agreement – which simply referred to the Appellants’ being required to pay the whole of the relevant T3 Advance into Production Account A – those two components of the relevant T3 Advance did not share a common character. On the contrary, there was a significant difference between the basis on which the T3 Equity component of the relevant T3 Advance was paid into Production Account A and the basis on which the T3 Debt component of the relevant T3 Advance was paid into that account.

108. When the Appellants used their equity to pay the T3 Equity component of the T3 Advance into Production Account A, they did so as their contribution towards the making of the relevant film. They had no right against TCL to have that component returned to them come what may. While there were circumstances in which some or all of the component might have been returned to them – broadly, where the film was not completed and delivered by TCL or FFI (as the completion guarantor) and the Appellants might become entitled to insurance proceeds or a payment from FFI under clause 7 of the Completion Guarantee – the Appellants were anticipating that the film would be completed and delivered and were primarily looking to their rights under the transaction waterfall to recoup the relevant component, depending on how the film performed.

109. The same was not true of the T3 Debt component of the relevant T3 Advance. On the contrary, when the Appellants used the proceeds of the Loans to pay that component into Production Account A, they did so on terms that TCL was obliged in due course to discharge their obligations under the Loan Agreements using the monies in Production Account B and its rights under the IOM Agreement. That obligation on the part of TCL to discharge the Appellants’ liabilities to Barclays amounted to an obligation on the part of TCL to repay the T3 Debt component of the relevant T3 Advance.

110. Moreover, that repayment obligation on the part of TCL was highly secured by: (1) the charge over Production Account B; (2) the assignment by way of security of TCL’s right to receive the IOM Advance from the IOM; and (3) the assignment by way of security of the Appellants’ right to receive payments from FFI under the Completion Guarantee up to the amounts outstanding under Loan Agreement 2 and the security given by TCL over Production Account B for that repayment obligation ranked ahead of any right on the part of the Other Contributors to recover from Production Account B the amounts which they had paid to TCL in relation to the relevant film.

111. The fact that the Loan Agreements expressly provided for the Appellants’ obligations under the Loan Agreements to be discharged in the first instance by way of set off against the balance on Production Account B is entirely consistent with the above analysis.

112. As a result of the variation to the date on which the IOM was required to make the IOM Advance, the terms on which TCL was obliged to repay the T3 Debt component of each T3 Advance differed as between, on the one hand, the part of that component that was financed by the Appellants out of Loan 1 and, on the other hand, the part of that component that was financed by the Appellants out of Loan

2.

113. As regards the former part, TCL had an obligation to discharge Loan 1 on 30 April 2002 using the balance on Production Account B. The terms on which Loan 1 was advanced by Barclays meant that the balance on Production Account B was always going to be at least equal to the amounts due under Loan Agreement 1 and Production Account B was with Barclays. This meant that, regardless of how the film production progressed, there was no prospect whatsoever that TCL could fail to discharge Loan 1 and therefore discharge that part of the T3 Debt component of the T3 Advance in so doing.

114. The repayment position was slightly less secure in relation to the part of the T3 Debt component of the T3 Advance that was financed out of Loan 2 because, although Loan 2 also had a specified repayment date – the earlier of 30 June 2002 and completion and delivery of the film – TCL was not quite as certain to have the monies required to discharge Loan 2 on that date as it was to have the monies required to discharge Loan

1. In order to be able to discharge Loan 2, it was dependent on its right under the IOM Agreement to receive the IOM Advance. This meant that a little more risk attached to TCL’s obligation to discharge Loan 2 and hence TCL’s obligation to discharge the related part of the T3 Debt component of the relevant T3 Advance.

115. Nevertheless, in relation to both parts of the T3 Debt component of each T3 Advance, it is apparent that, when the Appellants paid that component into Production Account A, they did so on terms that that component was contractually obliged to be repaid to them by TCL by way of TCL’s discharging their liabilities under the Loan Agreements. Therefore, to say that the T3 Debt component of the relevant T3 Advance amounted to an expense incurred by the Appellants on the production of the relevant film would be entirely misconceived. That component was nothing other than a highly secured loan made by the Appellants to TCL which was repayable by TCL out of the monies advanced by the Other Contributors towards the production cost of the film.

116. This is no doubt the reason why the Loans were described in the IM as being non-recourse to the partners in the Appellants even though they were technically fully recourse to them. As Baker Tilly said in a letter to T&G of 5 April 2001 in relation to the IM: “It is stated that [the Loans] will be obtained on the basis they will be “non-recourse to the Partners as they will be secured against the pre-sale contracts and will be re-paid from the proceeds of the pre-sale on completion of the production”.

117. Unlike the Appellants, the Other Contributors did not make their payments into Production Account B with the purpose of having those amounts repaid out of that account. If the film was not completed and delivered by 30 June 2002, then there were circumstances in which some or all of those amounts might have been repaid to them out of that account once the obligations of the Appellants under the Loan Agreements had been discharged in full – pursuant to clause 2.3 of the Interparty Agreement – but, primarily, the Other Contributors were looking to their rights under the transaction waterfall, and hence the performance of the relevant film, to recoup any of those amounts. In our view, it follows inexorably from this that that part of the production expenditure on the film was incurred not by the Appellants but by the Other Contributors.

118. We should stress that the conclusion we have drawn above is based on our analysis of the legal rights and obligations to which the ICTC documentation gave rise and is not simply a re-characterisation of the transactions that occurred by reference to their commercial substance. When the legal rights and obligations to which the documentation gave rise are analysed, the T3 Debt component of each T3 Advance was not expenditure incurred on the production of the films but instead no more than a loan made to TCL so that TCL could incur the expenditure pending its being able to access the monies provided by the Other Contributors.

119. The distinction between those two processes was admirably described by Henderson LJ in Samarkand Film Partnership No 3 & others v The Commissioners for Her Majesty’s Revenue and Customs [2017] EWCA Civ 77 (“Samarkand CA”) at paragraph [61] as follows: “In the interests of clarity, it is important to distinguish between the evaluative exercise which the FTT has to perform, on the one hand, and the proposition that a taxpayer cannot be taxed by re-characterising what he has actually done as something else, on the other hand. Mr Furness submitted that the FTT were guilty of such a re-characterisation, but I am satisfied that they did not fall into an elementary error of this description. Their overall assessment of the commercial nature of the agreements as the payment of a lump sum in return for a series of fixed payments over 15 years (at [220] of the FTT Decision) was not a crude conclusion based on an impermissible transformation of the taxpayers’ activities into an economic equivalent, but rather a way of expressing the ultimate inference of fact which they drew from the totality of the primary facts which they had found.”

120. The conclusion we have reached in relation to the true nature of the T3 Debt component of the relevant T3 Advance is supported by numerous references in the ICTC documentation. A few examples of this are as follows: (1) in the BBC Agreement: (a) the definition of each of the “BBC Licence Fee”, the “BBC Recoverable Advance”, the “DH Advance” and the “IOM Equity” made it clear that each of those amounts were being paid towards the costs of producing the film; and (b) the definition of the “Take 3 Partnership Contribution” – which is to say the T3 Advance – made it clear that the T3 Debt component of the T3 Advance was to be repaid by using the BBC Advance, the DH Advance and the IOM Advance; (2) in paragraphs (a) to (d) of the Completion Guarantee, FFI stated that it had been informed by TCL that: (a) out of the T3 Advance made by the Appellants, the T3 Equity component represented the Appellants’ net investment in the film and the balance – which is to say the T3 Debt component – was “an advance recoupable … from the contributions of the other Financiers” – which is to say, the BBC, DH and the IOM; and (b) each of the BBC Advance, the DH Advance and the IOM Advance had been paid in respect of the cost of producing the film; (3) clause 2.2 of the Interparty Agreement provided that, on completion and delivery of the film, the BBC Advance, the DH Advance and the IOM Advance credited to Production Account B would be paid to the Appellants “in partial recoupment of the T3 Advance”; (4) in clause 5 of the DH Agreement, the contributions of the various parties to the production budget were set out and the Appellants’ contribution was stated to be the T3 Equity component of the T3 Advance and not the T3 Advance as a whole; (5) in the recitals to the IOM Agreement, the contributions of each of the Appellants, the BBC and DH were described as being “towards the budgeted cost of the [film]” and the Appellants’ contribution was said to be the T3 Equity component of the T3 Advance rather than the whole of the T3 Advance; (6) similarly, clause 3.2 of the IOM Agreement provided that TCL was to use the IOM Advance to meet the costs of producing the film; and (7) the transaction waterfall set out in the recoupment schedule to the Interparty Agreement provided that: (a) at the stage when the various contributors to the cost of the film were entitled to the return of their contributions, the Appellants were allocated receipts in amounts sufficient to repay only the T3 Equity component of the T3 Advance and not the whole of the T3 Advance; and (b) at the stage when the contributions of the various contributors to the cost of the film had been fully returned and receipts represented the net profit deriving from the film, the percentage of those receipts to which the Appellants were entitled was wholly consistent with their having made a contribution equal to the T3 Equity component of the T3 Advance and not a contribution equal to the whole of the T3 Advance (which is to say, 11.327% and not the 49.032% to which it would have been entitled had the T3 Debt component truly been a contribution to the cost of the film and the BBC Advance, the DH Advance and the IOM Advance had not).

121. Mr Rawlinson submitted, and Messrs Moxon and Sherwood both testified, that it is common in the industry for a person to advance monies to a film producer by way of “gap-funding” on the basis that those monies will be used to finance the production costs in the first instance and will then be recouped on completion and delivery of the film from pre-sales that have been made to counterparties whose payment obligations are conditional on completion and delivery. We do not know whether, in those circumstances, it was the general practice in the industry for the amounts advanced by the “gap-funder” to be regarded as expenditure incurred by the “gap-funder” on the production of the film for the purposes of the sections we are presently considering but, if that is the case, then, for the reasons we have given, we think that, on a proper analysis of the position, that was not correct. Instead, in that case, the sections should apply on the basis that the relevant expenditure was incurred by the pre-sale counterparty – the person who discharged the “gap-funding” on completion and delivery of the film and took its place in the transaction waterfall. It was that person, and not the “gap-funder”, who ultimately bore the cost of production and who was on risk as to the future performance of the film.

122. In short, we would distinguish between: (1) a person who advanced monies towards the production of a film in the hope that future sales of rights after the film was completed and delivered would generate receipts that were sufficient to recoup that expenditure (and conceivably a return on that expenditure) under the relevant transaction waterfall; and (2) a person who advanced monies towards the production of a film on terms that the borrower was required to repay the monies in due course, come what may, and then made that repayment out of the proceeds of sums it received from others who were reliant on the relevant transaction waterfall to recoup their expenditure (and conceivably a return on that expenditure).

123. In the former case, the person advancing the monies had no right to the repayment of the monies from the entity to whom the advance was made. Instead, it was incurring expenditure on the production of the film and was entirely dependent on the success of the film to recover any or all of those monies. That is the position that the Appellants were in as regards the T3 Equity component of each T3 Advance.

124. However, in the latter case, the person advancing the monies was doing no more than lending money to the entity to whom the advance was made. It was simply a financing arrangement. That is the position that the Appellants were in as regards the T3 Debt component of each T3 Advance, and particularly so in relation to the part of the T3 Debt component of the T3 Advance that corresponded to the amounts outstanding under Loan Agreement 1, where there was no prospect whatsoever that the advanced monies would not be repaid.

125. We wish to be clear that, in saying this, we are not casting any doubt on the practice of “gap-funding”. What we are saying is that, for the purposes of the sections we are considering, the person providing that “gap-funding” was not incurring, to that extent, the cost of producing the film but merely making a loan to enable the borrower, or some other person who was actually contributing to the cost of producing the film, to incur those costs.

126. In this case, it is common ground that Barclays performed the role of “gap-funder” in the case of ICTC. However, it is our view that so too did the Appellants in respect of the T3 Debt component of each T3 Advance. That component was no more expenditure incurred by the Appellants on the production of ICTC than were the amounts advanced by Barclays to the Appellants under the Loan Agreements. In both cases, the relevant amounts were simply lent – first by Barclays to the Appellants and then by the Appellants to TCL – on terms that they were to be discharged by TCL in due course.

127. For the reasons set out above, we do not see how the T3 Debt component of each T3 Advance was ever actually incurred by the Appellants on the production of the films for the purposes of Section 42 of the F(2)A 1992 and Section 48 of the F(2)A 1997. Conclusion

128. For completeness, we should add that, even if we were to be wrong in our conclusion to the effect that the references in the relevant sections in this case to expenditure incurred on the production of films should be construed as referring to expenditure of that nature which was actually incurred by the taxpayer and not expenditure of that nature which was reflected as a debit in the taxpayer’s income statement in accounts prepared in accordance with GAAP, we do not think that that would change the ultimate conclusion we have reached in the above paragraphs.

129. This is because we have not been provided with the actual accounts of the Appellants or any expert accounting evidence. We therefore we do not know whether those accounts: (1) were prepared in accordance with GAAP; and/or (2) included a debit for the T3 Debt component of each T3 Advance in the income statement or instead showed the T3 Debt component of each T3 Advance as a loan to TCL in the balance sheet.

130. The only evidence we have had as to the actual accounting for the transactions implemented by the Appellants is the reference in the Take 3.7 Minutes to the exclusion of pre-sale income from the figure for total cash received on the basis that that income “showed in the books as income and gave rise to a tax charge, but … was, in effect “cashless” income in that it had to be repaid to the bank in repayment of loans” – see paragraph 41 above.

131. It is not entirely clear what implication this oblique reference to the inclusion of credits in the income statement for pre-sale income might have as regards the accounting by the Appellants for the T3 Debt component of each T3 Advance but it suggests that the Appellants may well have included a debit for that component in the income statement.

132. However, even if that were the case, that treatment would need to have been in accordance with GAAP before it could qualify for relief and we have been provided with no accounting expert evidence to that effect. Moreover, for the reasons set out above, we have considerable doubts as to how accounts prepared in accordance with GAAP, which are required to show a true and fair view of the position of the entity in question, to reflect the commercial substance of the transactions which it has undertaken and to match outgoings and income could possibly include a debit for the T3 Debt component of each T3 Advance in the income statement and a matching credit in the income statement for the pre-sale payments. Apart from anything else: (1) the pre-sale payments were made to TCL and not the Appellants. They were not made to the Appellants and could therefore not be income of the Appellants; (2) as we have already explained, as a matter of commercial substance: (a) Loan 1 and the portion of the T3 Debt component of the T3 Advance which reflected Loan 1 had no real existence, because Loan 1 was subject to offset with the balance on Production Account B at all times; and (b) Loan 2 and the portion of the T3 Debt component of T3 Advance which reflected Loan 2 were, in reality, a secured loan from Barclays to the Appellants and a secured loan from the Appellants to TCL, respectively, with both Barclays’ and the Appellants’ looking to the creditworthiness of the IOM for their security; and (3) correspondingly, the Appellants never incurred the T3 Debt component of each T3 Advance as an expense. Those amounts were always due to be returned to the Appellants by TCL in the form of its discharging the Loans on the Appellants’ behalf.

133. For the reasons set out above, even if the Appellants were carrying on a trade, the only expenditure of a revenue nature which was incurred by the Appellants on the production of films in the relevant tax years was the T3 Equity component of each T3 Advance. Was each Appellant carrying on a trade – namely, the trade of co-producing the films? Introduction

134. We have approached this question in two stages as follows: (1) first, did the Appellants co-produce the films? and (2) secondly, if the Appellants did not co-produce the films, were they nevertheless still carrying on a trade of some kind in any event? Did the Appellants co-produce the films?

135. Before we address this question, we should observe in passing that, despite the copious references to television throughout the IM and the inclusion of a reference to “TV” in the name of each Appellant, the evidence with which we have been provided suggests that the productions in which the Appellants were involved were not confined to films for television but also included feature films. However, we do not think that anything turns on this and it was not an issue between the parties at the hearing.

136. Turning to the question itself, it is our view that the Appellants cannot properly be described as having co-produced the films in which they were involved. Whilst the Appellants were described in the Co-production Agreement and clause 2.1 of the BBC Agreement as being “co-producers” of the films alongside TCL – and, as Mrs Hayter testified, the Appellants did have considerable input into the production of the films through its agent, BSMF – we do not think that it is apt in the light of the transaction documentation as a whole or Mrs Hayter’s evidence to describe the Appellants’ role in relation to the films as being that of a “co-producer”. Instead, we would describe the Appellants’ role in relation to the films as being that of a contributor to the cost of the films.

137. We say that for the reasons which follow.

138. Starting first with the terms of the documentation, all of the transaction documents apart from the Co-production Agreement (and the single reference in the BBC Agreement at clause 2.1 to which we referred in paragraph 136 above) were drafted on the basis that it was TCL and TCL alone (using the services provided by its subsidiary TCL IOM under the Sub-contracting Agreement) who was the sole producer of the films. It was TCL alone (along with TCL IOM in the case of the IOM Agreement) who entered into the contracts with each of the Other Contributors. The Appellants were not a party to those contracts. And it was TCL and TCL IOM who were solely responsible for the production of the film albeit that they entered into a number of obligations to the Appellants and each of the Other Contributors in connection with their production activities.

139. We have already observed in paragraphs 94 to 133 above that each film was financed by the Appellants (in an amount equal to the T3 Equity component of the T3 Advance), the BBC (in an amount equal to the BBC Advance), DH (in an amount equal to the DH Advance) and the IOM (in an amount equal to the IOM Advance). As the entities contributing to the cost of producing the film, each of those entities naturally expected TCL and TCL IOM to carry out the production activities in a particular manner and they received that protection by virtue of the contractual undertakings and representations on the part of TCL in each of the Co-production Agreement, the BBC Agreement/ BBC Licence, the DH Agreement and the IOM Agreement, respectively.

140. The precise details of that contractual protection in each case differed from contributor to contributor and depended on the precise role which the relevant contributor was playing in relation to the film. For example, leaving aside the Appellants for the moment, the BBC wished to benefit from screening the film in the Licence Territories, DH wished to benefit from the distribution of the film outside the Licence Territories and the IOM wished to promote, and stimulate the economy of, the Isle of Man. Those slightly different motivations meant that the exact terms of the rights accorded to each of them by TCL and TCL IOM over the production activities differed slightly. However, what is clear from the summary of the rights accorded to each of them in paragraphs 31 to 33 above is that those parties obtained the same generic protection over the activities involved in producing the films through their contractual rights under the BBC Agreement/BBC Licence, the DH Agreement and the IOM Agreement as did the Appellants under the Co-production Agreement.

141. Thus, it would, in our view, be inaccurate to say that, just because the Appellants were accorded certain rights under the Co-production Agreement in relation to the production activities which TCL and TCL IOM were carrying on, they thereby became “co-producers” of the film. Instead, a more accurate description of the legal rights and obligations to which the transaction documents gave rise is that the film was being produced by TCL/TCL IOM alone but that, as contributors to the cost of the film, the Appellants, like each of the Other Contributors, enjoyed certain rights in relation to the manner in which TCL/TCL IOM carried out their production activities.

142. The best way to explain this is to focus initially on the terms of the Co-production Agreement itself.

143. Consistent with the fact that TCL was a member of a group of companies that had historically been involved in the production of films whereas the Appellants had had no such involvement, this agreement was replete with provisions making it clear that it was TCL alone that was carrying out the production activities, albeit subject to certain controls exercisable by the Appellants over those activities. For example, it was TCL alone which: (1) was obliged to effect completion and delivery of the film – see clauses 2.1 and 22.1.2; (2) retained the “final say on matters relating to production, completion and delivery of the film” – see clause 2.2; (3) was obliged to incur all the costs associated with producing the film – see clauses 7.1 and 13; (4) was obliged to ensure that appropriate insurances were taken out – see clause 8; (5) was given control of Production Account A in order to enable it to incur the production expenditure and was required to remedy any over-spend – see clause 13; (6) was obliged to maintain production records and accounts in relation to the film – see clauses 16 and 17; and (7) was entitled and obliged to take the lead in the editing and post-production functions – see clause

20.

144. The Appellants were given various rights in connection with elements of TCL’s activities, such as: (1) the rights of approval and consent in relation to certain matters in clauses 4 and 13; (2) the right to audit TCL’s production records and progress reports in clauses 16 and 17; and (3) the right to review the first rough cut of the film in clause 20, but the way in which the agreement was framed, and the nature of the rights and obligations to which the agreement gave rise, meant that it was TCL (using the services provided by TCL IOM) alone who was obliged to produce the film and who was agreeing with the Appellants that it would do so in a manner satisfactory to the Appellants.

145. In that context, the warranties clause in the agreement – clause 9 – is illuminating because it contained nineteen separate representations and warranties by TCL to the Appellants, extending over some three pages, whereas the Appellants provided just two representations and warranties to TCL, taking up just ten lines, and those were limited to saying that the Appellants would not knowingly do anything to cause any of the insurance policies to lapse, would act expeditiously in all their dealings with TCL and had due power and authority to execute, and perform their obligations under, the agreement.

146. Similarly, in clause 22, there were numerous matters which were stated to amount to an event of default by TCL, thereby giving rise to a right on the part of the Appellants to terminate the agreement under clause

23. There were no events of default giving rise to a TCL termination right so far as the Appellants were concerned.

147. Had the arrangement truly involved a joint co-production, as opposed to a production by TCL alone financed in part with a contribution from the Appellants, the disparities mentioned in clauses 145 and 146 above would not have arisen.

148. Moreover, in addition to the Appellants’ being given various rights in relation to the production activities as against TCL, the Appellants would have been subject to some obligations in relation to those production activities for the benefit of TCL. Instead, the only obligations imposed on the Appellants in relation to the production activities were those that in some way limited or constrained the exercise of their rights against TCL in relation to those activities. The Appellants did not have an obligation to TCL to carry out any of those activities themselves, as one might have expected in a true “co-production” arrangement.

149. There are many other provisions in the ICTC transaction documentation which support the above conclusion. Taking just a few examples: (1) in each of the BBC Agreement/BBC Licence, the DH Agreement and the IOM Agreement – to which, as we have already observed, the Appellants were not party – and in many of the other transaction documents, TCL was defined as the “Producer”; (2) as we have outlined in paragraphs 139 and 140 above, each of the BBC Agreement/BBC Licence, the DH Agreement and the IOM Agreement contained similar contractual protections for the relevant contributor to the ones provided to the Appellants in the Co-production Agreement in relation to the production of the films; (3) in clause 6 of the DH Agreement, it was said that: (a) all agreements for the distribution and other exploitation of the film; and (b) DH’s engagement of sub-agents to provide services in connection with the film, were subject to the approval of TCL. There was no reference to the need for the Appellants’ approval; (4) it was TCL and not the Appellants who had the contractual obligation to each of the Other Contributors to complete and deliver the film – see clause 3 of the BBC Licence, clause 9 of the BBC Agreement, clauses 4 and 14 of the DH Agreement and clause 13 of the IOM Agreement; (5) the recitals to the IOM Agreement stated that TCL intended to produce the film with the aid of services provided by TCL IOM and made no mention of the Appellants as being co-producers; (6) in clause 1.1 of the IOM Agreement: (a) the Appellants were included in the definition of “Financiers”; and (b) the definition of the Co-production Agreement (or the “Take 3 Agreement” as it was referred to in the IOM Agreement) said that it was an agreement between TCL and the Appellants “relating to the Appellants’ investment in the [film]” without referring to any co-production role on the part of the Appellants; (7) it was TCL IOM alone that entered into the agreement with the film’s director pursuant to which the latter’s services were provided and it was TCL alone that entered into the undertaking with FFI not to exceed the production budget and that applied to the DCMS for certification of the film as a British film. The Appellants were not party to any of the agreement, the undertaking or the application; (8) as regards screen credits, the transaction documents provided that the film was to be described as being a BBC and TCL production. Whilst the Appellants received a screen credit, that screen credit did not say that the film was the Appellants’ production as well TCL’s – see clause 12.1.1 of the BBC Agreement, clause 11(b) of the DH Agreement and clause 9 of, and Exhibit G to, the Interparty Agreement; and (9) although, prior to the repayment of the T3 Debt component of the T3 Advance, the Materials relating to the film were owned by the Appellants for the benefit of the parties to the transaction pursuant to the security arrangements, they became the property of TCL as soon as those security arrangements were no longer relevant – see clause 10.1 of the Co-production Agreement and clause 16 of the BBC Agreement.

150. The conclusion we have drawn above based on the transaction documents is not gainsaid by Mrs Hayter’s evidence. Whilst we have already indicated in making our finding of fact in paragraph 64(1) above that we accept her evidence to the effect that she played an active role in relation to the production of the films, and that she played that role on behalf of the Appellants, we believe that she was performing that role on behalf of the Appellants in their capacity as a contributor towards the cost of the films and not in the capacity of a co-producer.

151. Our interpretation of Mrs Hayter’s evidence, as recorded in paragraphs 46 to 50 above, is that the sole producer of the films was TCL/TCL IOM but that, in carrying out its various production activities, TCL/TCL IOM were answerable to the parties who had contributed to the cost of the films, one of whom was the Appellants but also including each of the Other Contributors, all to different degrees. This meant that, although TCL/TCL IOM collaborated with the Appellants and the other contributors to the cost of the films in relation to its production activities, it was TCL/TCL IOM who at all times retained ultimate responsibility for completing and delivering the films as producer of the films. There is nothing in any of that which contradicts the conclusion we have drawn based on the transaction documents.

152. Finally, we would add that, in our opinion, if any of the parties to the ICTC transaction were properly to be described as a “co-producer” of the film with TCL – and, for the reasons set out above, we do not think that there was any “co-producer” once TCL became involved in the project – that party would be the BBC and not the Appellants. As the summaries of the Co-production Agreement and the BBC Agreement in paragraphs 30 and 33(1) above make clear, the BBC’s rights in respect of the production activities were just as extensive as the Appellants’. In addition, it was apparent from Mrs Hayter’s evidence that the BBC had been working on producing the film long before TCL became involved with it and her testimony was supported by various provisions in the transaction documents. For instance: (1) the recitals to the director’s agreement between TCL IOM and the director, Mr Tim Fywell, stated that the BBC had originally engaged Mr Fywell to perform his director’s services on the film before assigning its rights under that agreement to TCL; (2) clause 2.1.7 of the Interparty Agreement stated that, by the time that the transaction documents were executed, approximately £1.2 million of pre-production expenditure had already been incurred on the film by the BBC and DH – of which around two-thirds had been incurred by the BBC – and went on to provide that the BBC and DH should be reimbursed for that expenditure out of the T3 Advance; and (3) in describing the screen credits for the film, the film was stated to be a BBC and TCL production.

153. What this reveals in our view is that ICTC was initially to be produced by the BBC and then TCL was engaged to do so, with the BBC stepping back to play more of a contributing role alone. One thing that it doesn’t show is that the Appellants were co-producing the film with TCL. Our conclusion is supported by an unsigned heads of agreement, which was subject to contract, of August 2001 to which each of TCL, the Appellants and each of the Other Contributors was party and which preceded the execution of the transaction documentation. In the introductory paragraph to that document, the document said that it was purporting to describe the principal terms on which each of the BBC, DH, the Appellants and the IOM (which it defined collectively as the “Financiers”) intended to finance the film and that the film was to be produced by TCL.

154. We emphatically agree with that description. In our view, ICTC was a film produced solely by TCL (with the aid of services provided by its subsidiary TCL IOM) and financed by the Appellants in an amount equal to the T3 Equity component of the T3 Advance, the BBC in an amount equal to the BBC Advance, DH in an amount equal to the DH Advance and the IOM in an amount equal to the IOM Advance.

155. Based on the parties’ agreement that the ICTC transaction documentation should serve as being representative generically of each of the non-Peakviewing transactions in which the Appellants were involved, we reach the same conclusion in relation to those transactions as a whole. Did the Appellants carry on a trade of some kind in any event? Introduction

156. Of course, the fact that the Appellants were not co-producing the films in which they were involved does not mean, in and of itself, that the Appellants were not carrying on a trade.

157. In order to address that question, we need to consider the facts in the present case in the light of the substantial body of case law relating to what amounts to a trade. The relevant law

158. Turning first to the relevant law, the authorities establish the following principles: (1) at the time relevant to this decision, the word “trade” was defined in Section 832(1) of the Income and Corporation Taxes Act 1988 as including “every trade, manufacture, adventure or concern in the nature of trade”; (2) “trade” is a concept of common law. It: (a) is “commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services”; and (b) has for centuries been part of the national way of life and everyone is supposed to know what it is. So Parliament has wisely abstained from defining it and has left it to the courts to say what it does or does not include – see Ransom v Higgs [1974] STC 539 (“Ransom”) at 545d and 554a; (3) whether or not a particular activity is capable of constituting a trade is a question of law but whether or not the particular activity in question constitutes a trade is a question of fact. It is an inference of fact from the primary facts found by the FTT and depends on an evaluation of all the facts relating to the activity against the background of the applicable legal principles – see Eclipse Film Partners (no. 35) LLP v The Commissioners for Her Majesty’s Revenue and Customs [2015] STC 1429 (“Eclipse CA”)at paragraph [112]; (4) in considering whether a person carried on a trade, it is essential to discover and examine what exactly it was that the person did. It is necessary to stand back and look at the whole picture and, having regard to what the taxpayer actually did, ask whether it constituted a trade. It requires an unblinkered approach to the analysis of the facts and a realistic approach to the transaction – see Ransom at 550d, Ramsay,Eclipse CA at paragraphs [109] to [111] and Samarkand CA at paragraph [59]; (5) consistent with that approach, one must not look at the separate steps comprising a single integrated transaction in isolation but instead look at them as a whole. In a case where multiple contracts are executed as part of a single transaction, it is not correct to say that all of the contracts should together be regarded as comprising a single composite agreement. However, it does mean that, in determining the legal and rights and obligations of the parties pursuant to the contractual arrangements, consideration should be given to the package of agreements as a whole. It is not appropriate to adopt blinkers and look at each agreement comprising the arrangement in isolation – see the FTT in Samarkand Film Partnership No 3 & others v The Commissioners for Her Majesty’s Revenue and Customs [2011] UKFTT 610 (TC) (“Samarkand FTT”) at paragraphs [217] to [220] and the UT in Ingenious UT at paragraph [110]; (6) case law has shown that certain tests – which have come to be known as “badges of trade” – can be useful in determining whether or not a particular activity amounts to a trade. However, those tests do not amount to a comprehensive statement of all relevant matters and no one test is decisive in any particular case. The most they can do is to provide common sense guidance to the conclusion which is appropriate and, in each case, it is necessary to stand back and look at the whole picture in order to determine whether the activity amounted to a trade. Moreover, the badges of trade are not always helpful in answering this question – see Marson v Morton [1986] STC 463 (“Marson”) at 470 and 471 and EclipseCA at paragraph [114]; (7) trade normally involves the exchange of goods or services for reward and a person normally cannot be trading unless there is someone with whom he/she is trading. However, in a complex transaction, it is not necessarily helpful to try to identify whether the relevant counterparty can properly be characterised as a “customer” – see Ransom at 554f, Eclipse CA at paragraphs [115] and [116] and Degorce v The Commissioners for Her Majesty’s Revenue and Customs [2017] EWCA Civ 1427 (“Degorce CA”) at paragraph [57]; (8) where an activity involves an element of risk, or speculation, that is an indication of trade but an absence of risk does not automatically negate the existence of a trade – see Eclipse CA at paragraph [143]; (9) repetition and organisation are neutral factors. They can point toward trading but can equally be a feature of an investment activity. “[Building] a portfolio of investments can involve repetition and significant organisation but it is still an investment …investing in, for example, unquoted shares and securities, particularly private equity, real estate and infrastructure investments, can involve a significant amount of complexity, work on legal documentation and subsequent monitoring” – see Ingenious Games LLP v The Commissioners for Her Majesty’s Revenue and Customs [2021] EWCA Civ (“Ingenious CA”) at paragraph [100], citing Ingenious UT at paragraph [251]; (10) mere management activity in relation to an asset, no matter that it is extensive and active, is not an activity that is capable of giving rise to the existence of a trade. Consequently, property management – such as the activities of finding tenants, arranging leases or licences and maintaining the properties – is generally part of the business of holding the relevant property as an investment although additional services or facilities provided to occupants of the properties – such as cleaning, lighting and heating – may well amount to a trading activity – see Webb (Inspector of Taxes) v Conelee Properties Ltd [1982] STC 913 (“Webb”) at 920 and Inland Revenue Commissioners v George [2004] STC 147 at paragraph [27]; (11) where a person enters into a transaction with a view to obtaining a tax advantage, the following principles apply: (a) it is important to distinguish between the motive of the taxpayer and the purpose or object of the transaction. The mere fact that a person enters into a transaction with the motive of obtaining a tax advantage is not of itself determinative of whether that person is carrying on a trade; (b) instead, it is necessary to consider whether, despite that motive, the activities carried out have the characteristics of a trade; (c) this involves considering whether the relevant activities possess not only the outward badges of trade but also a genuine commercial purpose. If the activities have a genuine commercial purpose, the presence of a collateral purpose to obtain a tax advantage does not de-nature those activities. However, if the sole purpose of the activities is to obtain a fiscal advantage, then it is logically impossible to postulate the existence of a commercial purpose; (d) where commercial and fiscal purposes are both present, questions of fact and degree will arise and these are for the FTT to determine. However, the question to be answered is not which purpose was predominant but whether the activities can fairly be described as being in the nature of a trade; (e) the test is an objective one and, in applying it, the component parts of the activities must not be regarded separately but the activities must be viewed as a whole – see Ensign HL at 677D, Eclipse CA at paragraph [117] and Ingenious CA at paragraphs [56] to [65], referring to the principles set out by Millet J in the HC in Ensign Tankers (Leasing) Limited v Stokes [1989] STC 7at 757 to 762; and (12) in some cases, the trading characteristics of an activity can be so eclipsed by the measures which have been taken to secure a fiscal advantage that the activity can be seen only as being part of an overall non-trading activity and is effectively “de-natured”. The activity might be “so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction” – see Lupton v FA & AB Ltd [1972] AC 634 (“Lupton”) at 647G. The application of the relevant law to the relevant facts

159. Turning then to the application of the principles set out above to the facts in the present case, we should start by noting the importance which the authorities in this area have attached to looking at all of the activities carried on by the relevant entity as a whole rather than separate steps and activities in isolation – see paragraphs 158(3) to 158(5) above.

160. This we will ultimately do but, before we do that, we think that it is helpful to observe that, in this case, there were two, quite distinct, aspects of the activities of each Appellant, as follows: (1) using the Appellant’s equity to contribute funding for the production of films, engaging in activities connected to the production of those films (as outlined by Mrs Hayter) and ultimately exploiting those films through the transaction waterfalls with a view to receiving an attractive commercial return on the Appellant’s equity. We will refer to this hereafter as the “First Aspect” of the Appellant’s activities; and (2) simultaneously, borrowing monies from Barclays and lending it to TCL pursuant to documentation which had the effect that the Appellant was not at risk in relation to those monies and with a view to enhancing the fiscal advantage for the partners in the Appellant from their investment in the Appellant. We will refer to this hereafter as the “Second Aspect” of the Appellant’s activities.

161. If we start by focusing solely on the First Aspect of the Appellant’s activities in isolation, for our part, we can see no reason why, had there not also been a Second Aspect of the Appellant’s activities, those activities would not have amounted to a trade. In advancing the T3 Equity component of each T3 Advance, the Appellant was making an equity contribution to the production of the relevant film and was consequently exposed to the risks and rewards associated with the relevant film. In engaging in that activity, the Appellant was exposed to a downside comprising the total or partial loss of the T3 Equity component of the relevant T3 Advance and had an upside of potentially realising a significant return on that component, depending on the performance of the relevant film. In addition, the fact that Mrs Hayter played such an active role in relation to the production of the film with a view to ensuring that the end-product was as good as it could be tends to support the trading analysis. This is because, by performing those activities, Mrs Hayter, as the relevant representative of the Appellant, was doing as much as she could to maximise the return to the Appellant on the T3 Equity component of each T3 Advance.

162. It is not clear to us that considering the First Aspect of the Appellant’s activities in the light of the badges of trade described in Marson at 470 advances matters very much because, ultimately, it is matter of overall impression and the weight to be accorded to the various badges differs from case to case. As Sir Nicolas Browne-Wilkinson said in Marson, the badges of trade are not a comprehensive list of all relevant matters and none of the badges is decisive in all cases. The most they can do is provide common sense guidance to the conclusion which is appropriate. Moreover, in some cases, such as Eclipse CA, the cases by reference to which the list of badges were compiled were considered to be insufficiently analogous to the case in hand to make the list of any value.

163. Notwithstanding that caveat, it is apparent that many of those badges are satisfied in this case by reference to the First Aspect of the Appellant’s activities. For example: (1) there was a multiplicity of transactions – each Appellant was involved in the production of a number of films. In any event, we would observe in passing that there are examples in the authorities where an involvement with a single film has been sufficient to amount to a trade – for example, in Ensign HL, Lord Templeman noted that “[the] expenditure of capital for the purpose of producing and exploiting a film is a trading purpose” – see Ensign HL at 677; (2) the subject matter of the First Aspect of the Appellant’s activities – the production and exploitation of films – is normally the subject matter of a trade; (3) the First Aspect of the Appellant’s activities involved an element of speculation and risk and the taking of risk is an indication of trading, albeit not determinative – see Eclipse CA at paragraph [143]; and (4) the First Aspect of the Appellant’s activities involved conduct which was typical of a trade of producing and exploiting films. Each Appellant engaged BSMF, who were experts in the industry, to act as its agent in relation to the matters involved in producing the films and then chose to exploit the films through transaction waterfalls and library sales, which were customary for trading activities of this kind.

164. On the other hand, some of the badges of trade were not satisfied in relation to the First Aspect of the Appellant’s activities. For example: (1) neither the relevant Appellant nor the partners in the relevant Appellant had a history of carrying on a trade of producing and exploiting films. The Appellant was newly-formed and, as regards the partners in the Appellant, it is apparent from the terms of the IM and the evidence of Mr Sherwood that they were high-net-worth individuals who were not customarily engaged in trades involving or relating to the production and exploitation of films. Whilst it is possible for individuals who have no history of carrying on a trade of a particular type collectively to start carrying on a trade of that type through a partnership, the fact that those individuals do not have that history is a factor to be taken into account when analysing the activities of a partnership comprising those individuals; and (2) the First Aspect of the Appellant’s activities involved capital which was wholly derived from equity whereas trading activities are generally characterised by the existence of gearing.

165. There were also parts of the First Aspect of the Appellant’s activities which were neutral in terms of the badges of trade. For example, the First Aspect of the Appellant’s activities involved the creation of assets with the intention of generating income from the rights attaching to those assets through the transaction waterfalls over a five-year period. This looks more like an investment activity. However, the Appellant then intended to effect library sales at the end of that five-year period. This tends to be indicative of a trading activity.

166. Just pausing there, and looking at the First Aspect of the Appellant’s activities as a whole, we consider that, had there not been a Second Aspect of the Appellant’s activities, the activities of the Appellant would have amounted to a trade carried on by the Appellant. To adopt the language used by Henderson LJ in Samarkand CA at paragraphs [91] and [92], the First Aspect of the Appellant’s activities meant that the relevant Appellant was seriously interested in making profits from its activities and was not merely indifferent to making profits from those activities.

167. In that regard, we do not agree with Mr Afzal’s submissions to the effect that each Appellant’s rights under the transaction waterfall meant that it did not have the purpose of making profits or any realistic expectation of making profits. Those submissions would have been correct if the whole of each T3 Advance, including the T3 Debt component of that advance, constituted the relevant Appellant’s contribution to the production of the relevant film. In reality, as this decision makes clear, the T3 Debt component of each T3 Advance was not part of the relevant Appellant’s contribution to the production of the relevant film at all and accordingly not part of the First Aspect of the Appellant’s activities in any way. When one considers the First Aspect of those activities alone, the profit-making purpose of each Appellant and the logic underlying the terms of the transaction waterfall in terms of potentially realising that profit, make perfect sense.

168. Moreover, we do not agree with Mr Afzal’s submission that the role played by Mrs Hayter on behalf of each Appellant amounted to no more than managing and monitoring the investment of the relevant Appellant in the film and therefore indicative of an investment activity. It is quite clear to us that Mrs Hayter played an active and meaningful role in the production of the film, as opposed to a mere monitoring or “rubber-stamping” role in that process. It is true that TCL, as the producer of the films, had the final say over the completion and delivery of the film, but it is apparent that Mrs Hayter’s role on behalf of the relevant Appellant went beyond mere supervision and monitoring – she had considerable input into the process of production and played an active role in that process in collaboration with TCL and the other contributors to the production costs.

169. So far, we have focused exclusively on the First Aspect of the Appellant’s activities in isolation and without taking into account the Second Aspect of those activities.

170. Applying the same approach in the case of the Second Aspect of the Appellant’s activities, it is self-evident that, when the Second Aspect of the Appellant’s activities is considered in isolation from the First Aspect of those activities, that Second Aspect of the Appellant’s activities was no more than a device for increasing the tax relief which would become available to the partners in the relevant Appellant from the various films in which the relevant Appellant was involved. It was a perfectly circular money flow – an activity which carried no risk or reward for the relevant Appellant and was included solely for fiscal reasons. It follows that, had the activities of the Appellant involved only the Second Aspect and not the First Aspect of those activities, the relevant Appellant would not have been carrying on a trade.

171. Of course, the effect of the authorities to which we have referred above is that we are not allowed to focus exclusively on either aspect of the overall activities of the Appellant to the exclusion of the other but instead to stand back and look at the whole picture – which is to say, the activities of the Appellant as a whole, including both aspects of those activities – and ask whether what each Appellant did in carrying on those activities amounted to a trade.

172. Putting it another way, having previously concluded that the First Aspect of the Appellant’s activities meant that the activities of the Appellant amounted to the carrying on of a trade, does the integration into the overall picture of the fiscal motive underlying the Second Aspect of those activities affect that conclusion?

173. We think that the answer to that question is no and we say that because of the decision of the HL in Ensign HL. Ensign HL

174. In Ensign HL, the taxpayer company embarked on a series of transactions which were designed to obtain fiscal advantages for itself and other members of its group. It entered into two partnerships, each of which was set up to finance the production and exploitation of a film with the purpose of claiming capital allowances on its share of the master negative of the film. The taxpayer company put in by way of equity 25% of the estimated production cost of the relevant film. The balance of that production cost was financed by way of profit-linked loans which were repayable solely out of receipts from the film and non-recourse to the taxpayer company. The purpose of the loans was to increase the capital allowances available to the taxpayer company from its participation in the transaction.

175. The Special Commissioners held that, because each partnership had fiscal motives as its paramount object, neither partnership could be said to be trading. That conclusion was overturned on appeal to the HC. The HL agreed with the HC that each partnership was trading despite the paramount fiscal motive underlying the transaction. Lord Templeman, who gave the leading judgment in the HL, said that the legal effect of the single composite transaction was that each partnership was trading despite the fiscal purpose underlying its participation in the transaction although its expenditure on the production costs was confined to the part of that expenditure which had been financed out of the taxpayer company’s equity.

176. At 677, Lord Templeman said as follows: “My Lords, I do not consider that the commissioners or the courts are competent or obliged to decide whether there was a sole object or paramount intention nor to weigh fiscal intentions against non-fiscal elements. The task of the commissioners is to find the facts and to apply the law, subject to correction by the courts if they misapply the law. The facts are undisputed and the law is clear. Victory Partnership expended capital of $3¼ m. for the purpose of producing and exploiting a commercial film. The production and exploitation of a film is a trading activity. The expenditure of capital for the purpose of producing and exploiting a commercial film is a trading purpose. By section 41 of the Act of 1971 capital expenditure for a trading purpose generates a first year allowance. The section is not concerned with the purpose of the transaction but with the purpose of the expenditure. It is true that Victory Partnership only engaged in the film trade for the fiscal purpose of obtaining a first year allowance but that does not alter the purpose of the expenditure. The principles of Ramsay and subsequent authorities do not apply to the expenditure of $3¼ m. because that was real and not magical expenditure by Victory Partnership.”

177. Applying the reasoning of the HL in Ensign HL to the facts in this case, we think that: (1) the First Aspect of the Appellant’s activities meant that those activities involved the production and exploitation of films, something which the HL in Ensign HL considered to be manifestly a trading activity, like the film in Ensign HL; and (2) the Second Aspect of the Appellant’s activities reflected the primary fiscal motive underlying the activities of the Appellants, like the non-recourse profit-linked borrowings in Ensign HL.

178. Thus, the facts in this case are strikingly similar to the facts in Ensign HL and we have reached the same conclusion in this case as did the HL in Ensign HL – namely, that, when we stand back and look at the activities of each Appellant as a whole, those activities were trading activities despite the paramount fiscal motive underlying them, as reflected in the Second Aspect of the Appellant’s activities. Other relevant case law

179. There have been numerous cases in which the question of whether or not participating in a highly-geared transaction involving the production of films in an attempt to increase the fiscal advantage attributable to that participation constitutes a trading activity. We have considered whether the conclusion we have reached above is cast into doubt by any of those cases. In saying that, it will be apparent from the summary of the law set out above that each case turns on its own unique set of facts and therefore the precise facts in each of those cases are of limited value in assessing the position of the Appellants in this case. The cases are more significant in terms of the principles which they set out. We consider that those principles do not cast doubt on the conclusion we have reached above. Eclipse CA

180. In Eclipse CA, members of a partnership borrowed money and contributed their own money and the proceeds of the borrowings to the partnership. The partnership then entered into a complex series of transactions in relation to two films the result of which was to give rise to a series of fixed payments to the partnership which would be used to discharge the partner’s borrowings and interest thereon and also a contingent right for the partnership to share in gross receipts from the exploitation of the films pursuant to a transaction waterfall.

181. The FTT found that: (1) at inception, “a payment of contingent receipts, although speculative, was reasonably anticipated to be possible” but that “the prospect of earning them was too remote to qualify as a basis or justification for entering upon a trading venture on any commercial level”; (2) the cash flows generated by the transactions were fundamental to the partnership and the partnership would not have entered into the transactions which it had done without them; (3) the tax relief that the partners expected to enjoy in respect of the interest on their borrowings was an objective in entering into the transaction; (4) despite that objective, it did not follow that the arrangements did not have the commercial objective or effect which on their face they appeared to have; and (5) the partnership was not engaged in directing and supervising the marketing and release of the films and neither it nor its agents had the capability to be part of the strategic or day-to-day planning for the marketing and release of the film.

182. The FTT went on to conclude that what the partnership actually did was not a trading transaction but nor was it a mere device to secure a fiscal advantage. Instead, the activities of the partnership, viewed realistically, amounted to a non-trade business of exploiting films, which is to say an investment activity. The UT and the CA upheld the conclusion reached by the FTT in that case that the partnership in question was not carrying on a trade. In Eclipse CA, at paragraphs [123] and [124], the CA summarised its conclusions on the trading question as follows: “[123] … Our reasons can be stated quite briefly. The proper characterisation of the business of Eclipse 35 depends upon the totality of its activity and enterprise. Stripping the business down to its essential elements, the transactions on which Eclipse 35 was engaged had two aspects. One aspect was that a payment by Eclipse 35 of £503m would be repaid with interest over a 20-year term and would produce a profit unrelated to the success or otherwise of the exploitation of the Rights sub-licensed. That aspect had the character of an investment. Mr Aaronson did not argue to the contrary. [124] The second aspect was the possibility of Eclipse 35 obtaining a share of Contingent Receipts and the activity on the part of Eclipse 35 to secure such a share. The FTT considered that this second aspect was in real and practical terms insufficiently significant in the context of Eclipse 35’s business as a whole to lead to a proper characterisation of Eclipse 35’s business as one of trade within the meaning of the tax legislation. In our judgment, that was a conclusion which the FTT were entitled to reach and, indeed, with which we agree…. [139] … Eclipse 35 did not discharge the evidential burden of showing that it was engaged in trade in any realistic or meaningful way. The possibility of obtaining a share of Contingent Receipts did not give the business of Eclipse 35, looking at it as a whole, a trading character: having regard to the business as a whole, the right to Contingent Receipts was no more than a potential additional return on a fixed term investment.”

183. At first blush, it might seem that the decision in Eclipse CA is not easily reconcilable with the decision in Ensign HL. That is because, in the extract from Ensign HL set out above, the HL declined to weigh up the relative significance of, on the one hand, the partnership’s trading motive and, on the other hand, the partnership’s tax avoidance motive. Instead, it simply said that the fact that the partnership carried on activities that reflected its trading motive meant that the partnership was carrying on a trade regardless of the significance of that trading motive in comparison to its tax avoidance motive.

184. In contrast, in Eclipse CA, the CA weighed up the partnership’s alleged trading activity – the contingent receipts – against the partnership’s investment activity – the right to receive an interest-based return on its initial capital – and concluded that the former was too insignificant in comparison to the latter to mean that the partnership was carrying on a trade.

185. However, we think that the two cases are reconcilable in that they were dealing with two different things altogether. In Ensign HL, there was only one type of return that was generated by the activities of the partnership – namely, the return deriving from the production and exploitation of the film – and the HL were addressing the question of whether the fact that the main purpose of the activities was tax avoidance and that that had involved the gearing comprising the non-recourse profit-linked loan – affected the characterisation of the activity which gave rise to that single type of return. The HL held that it did not. In contrast, in Eclipse CA, there were two different types of return which could potentially be generated by the activities of the partnership, one of which was manifestly investment in nature, and the CA held that the second type of return, which involved speculation and might, had it been conducted on its own, have amounted to trading, was too insignificant to give the activities of the partnership as a whole a trading character. In other words, whereas Ensign HL involved a single type of return from activities which had a significant fiscal motivation, Eclipse CA involved two different types of return only one of which had a trading nature and that type of return was too insignificant, relative to the activities of the partnership as a whole, to mean that the partnership was carrying on a trade.

186. Adopting the same distinction in the present case, the Second Aspect of the Appellant’s activities did not involve the generation of any kind of return for the Appellant. It was merely inserted in order to augment the tax relief which the partners of the Appellant hoped to obtain from the Appellant’s activities as whole, in the same way that the non-recourse borrowings in Ensign HL were the means whereby the company partner in the partnership expected to augment the capital allowances that it expected to get from the trading activity of the partnership. As such, this is not a case where it is necessary to weigh up the relative significance of the Second Aspect of the Appellant’s activities against the First Aspect of those activities. That Second Aspect did not give rise to a return for the Appellant in and of itself. It was merely a fiscally-motivated adjunct to the First Aspect of those activities.

187. For the above reason, we think that the facts in Eclipse CA are readily distinguishable from the facts in the present case and that the decision does not change the conclusion we have reached above based on the decision in Ensign HL. Ingenious CA

188. Nothwithstanding the much greater complexity of its facts and the inevitable commensurate increase in length of the analysis, the conclusions reached in Ingenious CA seem to us to support the conclusion we have reached in this case.

189. In Ingenious CA, limited liability partnerships (“LLPs”) were formed by individual members and a corporate member. The individuals invested 30% of the equity in each LLP, with the remaining 70% of the equity being contributed by the corporate partner, who funded its contribution by way of a non-recourse loan repayable only out of the corporate member’s drawings from the LLP. The LLP’s equity was used to pay for the budgeted cost of various films, in return for a share of the revenues to be derived from those films in due course.

190. Each film had to be valued at the end of each accounting period by reference to its net realisable value, which was typically 20% of the production cost because of the risks attaching to the prospect of returns from the relevant film. This meant that a loss equal to 80% of the production cost arose at that point, all of which was allocated to the individual partners under the terms of the LLP agreements.

191. The Respondents said that the LLPs were not trading and that, in any event, the true legal effect of the transactions which had been implemented was that the LLPs had contributed only 30% of the costs of producing the relevant films in return for the right to 30% of the receipts (the “30:30” basis). The LLPs submitted that they were trading and that the true legal effect of those transactions was in fact that the LLPs had contributed 100% of the costs of producing the films in return for the right to approximately 54% of the receipts (the “Ingenious” basis).

192. In Ingenious Games LLP v The Commissioners for Her Majesty’s Revenue and Customs [2016] UKFTT 521 (TC) (“Ingenious FTT”), the FTT concluded that, on a proper construction of the transactions which had been implemented, the true legal effect of the arrangements was that the “30:30” basis applied and, on that basis, concluded that two of the LLPs were trading and the third was not. The CA upheld those conclusions. The conclusion that two of the LLPs were trading had been based on the fact that the transactions into which the LLPs entered were speculative in nature, did not give rise to fixed receipts which were more akin to investment income as had been the case in Eclipse CA and were not de-natured by the underlying tax motivation, applying the approach in Ensign HL – see Ingenious CA at paragraphs [80] to [91] and [105], where the CA set out the reasoning adopted by the FTT in that case and concluded that it did not reveal any errors of law. All three of those factors are features of the present case.

193. The activities of the third LLP shared many of the characteristics of the activities of the less active part of the businesses of the other two LLPs – namely, the part relating to studio films as opposed to the part relating to independent films – but, critically, that LLP played a much less active role in the transactions in which it was involved than did the other two LLPs and gave the impression of having simply been inserted into existing projects. Accordingly, the FTT held that the third LLP had not been trading and the CA upheld that conclusion – see Ingenious CA at paragraphs [109] to [112]. Degorce CA

194. In Degorce CA, an individual taxpayer purchased rights to a percentage of future receipts from films with the benefit of non-recourse loans. The present value of those rights on the date of purchase was lower than the purchase price, leading to the making of a provision in respect of those rights in the individual’s trading accounts and it was that loss, enhanced by the gearing used to make the purchase, which was intended to generate the fiscal advantage for the taxpayer. The FTT had concluded that the activities of the taxpayer did not amount to an adventure in the nature of a trade and had done so based on findings of fact which were criticised by the higher courts. However, the FTT’s conclusion was upheld in both the UT and the CA on the basis that, despite those errors, it was ultimately based on the FTT’s finding, supported by the evidence, that the taxpayer had entered into a set of pre-arranged contracts in quick succession, the result of which was that he had done no more than acquire the right to a future income stream and that that was not an adventure in the nature of a trade – see Degorce CA at paragraph [77].

195. The present facts are some way removed from those in Degorce CA. In this case, each Appellant’s activities were speculative in nature and did not give rise to a fixed income stream but rather a prospect of losses or profits under the transaction waterfalls. The decision therefore does not cast doubt on the conclusion we have reached on the facts in this case. On the contrary, it tends to support that conclusion in that, in Degorce CA, at paragraph [78], the summary by the CA of the UT decision in that case noted the UT’s view that: (1) the facts in that case were materially distinguishable from the facts in Ensign HL because the relevant taxpayer in Ensign HL “did not merely buy and immediately dispose of rights, but contributed to the financing of the production of the films, as one of the members of a partnership”; and (2) if a comparison were to be made with another case, the better comparison was with the facts in Eclipse CA “in which the taxpayers, investors in partnerships which acquired rights in films and then assigned them in exchange for an income stream, were found not to have been trading”. As we have already observed in paragraphs 183 to 187 above, the facts in the present case are clearly closer to those in Ensign HL than those in Eclipse CA. Samarkand CA

196. In Samarkand CA, the UT and the Court of Appeal upheld the conclusion reached by the FTT that an LLP which had entered into a purchase and leaseback transaction in relation to a film was not carrying on a trade, even though it noted that there was no dispute that the purchase and leaseback of a film was inherently a trading activity. The basis for the FTT’s conclusion was that the LLP in question had entered into a single composite transaction whose material features were the receipt and payment of monies. Thus, as was the case with the facts in Degorce CA, the facts in Samarkand CA are closer to the facts in Eclipse CA than the facts in Ensign HL. Conclusion

197. In conclusion, it is our view that each Appellant in this case was carrying on a trade notwithstanding the fiscal motive underlying the Second Aspect of its activities. This is because, as we have outlined above, this was not a case where the activities of each Appellant as a whole were simply designed to secure a tax advantage. Instead, the relevant Appellant was carrying on activities (in the form of the First Aspect of those activities) which, on a standalone basis, amounted to trading and then inserted into the structure an additional aspect to those activities (the Second Aspect) which was designed to increase the tax advantages attaching to the First Aspect of the activities. That fiscal motive was something quite separate from the activities of the relevant Appellant in general and did not serve to de-nature those activities in much the same way that, in Ensign HL, the fact that steps had been taken artificially to inflate the expenditure incurred by the partnership which qualified for capital allowances did not mean that the partnership was not trading – see Lord Jauncey in Ensign HL at 684 to

686.

198. Finally, for completeness, we would note that the present facts are very different from the facts in Lupton, where the activities of the taxpayers were held to be so affected by the fiscal consequences which they were seeking to achieve as to cease to be trading activities at all.

199. As the UT noted in Ingenious UT at paragraphs [176] to [179], referring to the decision in New Angel Court v Adam [2004] EWCA Civ 242 at paragraphs [93] to [99]: “[179] He then concluded at [98] that s 173(1) does not require the absence of fiscal considerations as elements in the acquisition of the asset in question: rather, it requires the presence of a trading purpose. He made reference to Megarry J’s statement at first instance in Lupton [1968] 2 All ER 1042, [1968] 1 WLR 1401 (referred to by Lord Morris in that case [1971] 3 All ER 948 at 955, [1972] AC 634 at 648) that the existence of fiscal considerations will not ‘de-nature’ a trading purpose, just as the existence of fiscal considerations will not prevent what would otherwise be a trading transaction from being regarded as such for the purposes of s 173(1). Finally, at [99] he said: ‘… at the heart of the matter, as it seems to me, is the need to recognise that in the context and for the purposes of s 173(1) a trading transaction may be dictated entirely by fiscal considerations, without losing its character as a trading transaction …’” – see also Ingenious UT at paragraph [267] and Ingenious CA at paragraphs [93(3)], [98] and [99]. Was the whole of each T3 Advance expenditure incurred wholly and exclusively for the purposes of the Appellants’ trades Introduction

200. Now that we have concluded that each Appellant was carrying on a trade, we move on the second challenge made by the Respondents in their closure notices in this case – namely, whether the whole of each T3 Advance was expenditure incurred wholly and exclusively for the purposes of that trade. The relevant law

201. Turning first to the relevant law, the UT in Ingenious UT (at paragraph [461]) approved of the manner in which the FTT had expressed the relevant principles in this area in Ingenious FTT at paragraph [839]. These are as follows: (1) “for the purposes of the trade” means for the purposes of enabling a person to carry on the trade and earn profits in it; (2) subject to the qualification that follows, in order for relief to be available for an expense, the whole of the relevant expense needs to be wholly and exclusively for the purposes of the trade. Where an expense has a dual purpose, then, except where it is possible to identify a specific part of the expense that is wholly and exclusively incurred for trading purposes, none of the expense qualifies for relief. That apportionment rule is now codified in Section 34(2) of the ITTOIA but, at the time relevant to this decision, it had yet to be codified and instead was embodied in cases such as Lochgelly Iron and Coal Company Limited v Crawford 6 TC 267 CS and Copeman v Flood 24 TC 53 KB. As a result, an expense incurred both for the purposes of the trade and for another purpose is not deductible except where the exception described above applies; (3) the purpose referred to is that of the taxpayer, subjectively determined; (4) the purpose of the taxpayer must be distinguished from the effect of the expense. Thus, a private benefit which is merely a consequence or an incidental effect does not give rise to a dual purpose – see Vodafone Cellular v Shaw [1997] STC 734 at 742 to 745; and (5) although the purpose is to be subjectively determined, this does not limit the investigation to the taxpayer’s conscious motives. A pinch of salt is necessary – some consequences are so inevitably and inextricably involved in a payment that, unless merely incidental, they must be taken to be a purpose for which the payment is made.

202. The UT in Ingenious UT at paragraphs [462] and [463] added the following two additional principles, which it said derived from the UT decision in Scotts Atlantic Management Limited (in liquidation) v The Commissioners for Her Majesty’s Revenue and Customs [2015] STC 1321: (1) first, although the focus of the test is on the object of the expenditure rather than the means of incurring it, it does not follow that the means by which the expenditure is incurred cannot be one of the circumstances to be taken into account in determining its purpose; and (2) secondly, a trader may have a choice of the way in which it achieves an end which is exclusively for the benefit of the trade and that choice may be influenced or dictated by the tax consequences. Making such a choice does not necessarily involve a duality of purpose as regards the expense. In each case, the question is whether the payment is made exclusively for the purposes of the trade and that is a question of fact for the FTT. The application of the relevant law to the relevant facts

203. We think that the answer to this question is straightforward.

204. First, notwithstanding our conclusion to the effect that each Appellant was carrying on a trade, we do not see how any part of the T3 Debt component of each T3 Advance can be said to have been paid wholly and exclusively for the purpose of that trade. After all, the sole purpose underlying that component’s very existence was to generate additional tax relief. Thus, even if we had not already concluded that the T3 Debt component of each T3 Advance was not incurred by the relevant Appellant on the production of the film, it is plain that that component was not wholly and exclusively incurred for the purposes of the Appellant’s trade.

205. Turning then to address the question of whether the T3 Equity component of each T3 Advance was paid wholly and exclusively for the purposes of the trade, we consider that it clearly was. After all, that component of the relevant T3 Advance was the money which the relevant Appellant genuinely contributed to the making of the relevant film and the only purpose of doing so was to derive a profit from the film through the relevant transaction waterfall.

206. There are essentially three reasons why that conclusion might be open to challenge and they are as follows.

207. First, it might be said that, leaving aside for the moment the gearing which was adopted in creating the present structure, and looking at the position of any person who chose to contribute to the production of a British film in the light of the fiscal incentive introduced by Parliament to encourage investment in the British film industry, the fact that that person was motivated by the availability of the fiscal incentive in incurring his expenditure means that he must have had the purpose of obtaining tax relief in addition to his trading purpose.

208. We do not see how that can be the case. This is because this challenge mistakes motive for purpose. We agree that the availability of the tax relief provided by the legislation was no doubt what motivated the partners in each Appellant, and hence each Appellant, to contribute the T3 Equity component of the relevant T3 Advance towards the production of the film. However, it was not the relevant Appellant’s purpose in incurring that expenditure. That purpose was to create a film which might ultimately generate a profit for the relevant Appellant.

209. We would add that the converse view must clearly be wrong because the inevitable corollary of that view is that no trader could ever take advantage of the fiscal incentive offered by the legislation. The very fact that the trader was motivated by the fiscal incentive conferred by the legislation would automatically have vitiated the trader’s purpose. As such, the legislation would have been completely self-defeating. The tax relief which was designed to incentivise investment would never have been available to traders.

210. That leads on naturally to the second reason why the conclusion might be challenged which is that this case is distinguishable from the general situation described above in that, here, the contribution to the British film industry (the T3 Equity component of the T3 Advance) was accompanied by the T3 Debt component of that advance. Mr Afzal submitted that, because the latter component was solely tax-motivated, so that the tax relief arising from the T3 Advance as a whole was being “ramped up”, the non-trading purpose of the latter component “infected” the purpose of the former component.

211. We do not agree with that submission. The mere fact that the latter component was solely motivated by the expected fiscal benefits made no difference to the purpose for which the former component was incurred and, as we have said above, the sole purpose for which that component was incurred remained the purpose of the trade notwithstanding the tax avoidance purpose of the rest of the relevant T3 Advance.

212. That in turn leads on to the third potential challenge to the conclusion we have reached which is based on the argument that the T3 Advance was a single payment and therefore the fact that part of the T3 Advance – the T3 Debt component – was not incurred for the purposes of the trade necessarily meant that the payment as a whole failed the wholly and exclusively test.

213. However, this argument, whilst superficially appealing, is also wrong in our view.

214. Our main reason for saying this is that, although the Co-production Agreement may have referred to the T3 Advance as a single payment into Production Account A, the relevant advance actually comprised two quite separate payments into that account – one payment made directly by the relevant Appellant out of the equity provided by its partners and one payment made directly by Barclays in advancing the Loans. Clause 6.2 of each Loan Agreement made it clear that Barclays would make the relevant Loan by transferring the proceeds directly to Production Account A. In other words, this was not a case where Barclays advanced the Loans to the Appellant and then the Appellants used the proceeds of the Loans to pay the T3 Advance. Instead, in the case of the part of the T3 Advance that was financed by the Loans, the relevant Appellant was by-passed when the monies flowed. It follows that, when the relevant Appellant paid the T3 Equity component of the T3 Advance into Production Account A, that payment was not accompanied by the payment by the Appellant of the T3 Debt component of that advance into that account.

215. Even if it were to be said that the separation in money flows we have described in paragraph 214 above does not mean that there were two expenses because the relevant Appellant had a single payment obligation under the Co-production Agreement to pay the whole of the T3 Advance into Production Account A, the very fact that that was the process by which the T3 Advance was made means that the T3 Equity component of the T3 Advance is readily distinguishable from the T3 Debt component of that advance. That, in turn, means that the exception we have described in paragraph 201(2) above for a separately-identifiable part of a single payment would apply in relation to the relevant T3 Advance. In other words, it would be easy to identify which part of the relevant T3 Advance was the T3 Equity component of that advance.

216. For completeness, we would add that, in any event, even if that had not been the case, to the extent that the T3 Debt component of the relevant T3 Advance was matched by the BBC Advance and the DH Advance, that portion of the T3 Debt component of the relevant T3 Advance would have been incapable of being confused with the T3 Equity component of the relevant advance because there was always a matching payment into Production Account B by the BBC or DH on the date that the relevant component was paid by the Appellant. It follows that, regardless of whether the T3 Advance comprised one payment or two, the T3 Equity component of that single payment was separately-identifiable and made wholly and exclusively for the purposes of the trade.

217. For the reasons set out above, we have concluded that the T3 Equity component of each T3 Advance was wholly and exclusively incurred for the purposes of the relevant Appellant’s trade and, consequently, that the relevant Appellant was entitled to relief for that component. disposition

218. For the reasons set out above, we hereby allow the appeals in part and require the closure notices to be amended.

219. Those amendments fall into two categories, as follows: (1) first, each closure notice needs to be amended to reflect the Respondents’ change of view in relation to the Peakviewing transactions. That should be a straightforward process given that the relevant figures are already set out in the penultimate column of the table set out in paragraph 5 above; and (2) secondly, each closure notice needs to be amended to reflect our conclusion that part of each T3 Advance – namely, the T3 Equity component of that T3 Advance – qualified as a trading expense in the relevant tax years but that the other part of that T3 Advance did not do so. We think that that too should be a straightforward process given that the relevant components of each T3 Advance should be readily-identifiable for the reasons set out in paragraphs 214 to 216 above. Accordingly, the precise figures for the adjustment should be capable of agreement between the parties. However, if the passage of time and/or the loss of documentary records means that the parties are unable to agree on the identification of the T3 Equity component of each T3 Advance, they have liberty to return to the FTT for us to do so, either on the papers or after a further hearing. Right to apply for permission to appeal

220. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date:12 May 2026