Following a four-day hearing the First-Tier Tribunal Tax Chamber (Sir Stephen Oliver QC, Charles Baker FCA) has rejected an appeal by a film financing partnership against HMRC’s decision to exclude from the partnership’s returns expenditure based on deferred film production costs.

The Tribunal rejected the tax-payer’s legal analysis of those costs, finding that they did not constitute unconditional obligations and therefore did not constitute qualifying expenditure for the purposes of the relevant tax statutes.

Having heard conflicting expert witness evidence on the proper accountancy treatment of those costs the Tribunal also accepted the HMRC’s submission that the costs could not properly be recorded as liabilities under GAAP.

The decision is expected to have wider implications and to read across to other similarly constituted schemes intended to obtain tax relief for investors.

HMRC was represented by James McClelland (appearing as sole counsel).

The tax-payer was represented by Michael Sherry (Head of Chambers at Temple Tax Chambers), leading Professor  Anne Redston (former Head of Ernst & Young’s UK Financial Services Tax Practice).

A copy of the judgment (Alchemist (Devil’s Gate) Film Partnership v HMRC TC/2010/06180) can be found here