The decision considered whether certain expenditure was capital or revenue.
The FTT has now handed down a supplementary judgment which considers whether certain expenditure should be treated as capital or revenue, and effectively denies any relief for the partners in Ingenious Film Partners 2 (IFP2) or its sister partnerships. The original judgment was handed down by the First-tier Tribunal (FTT) last August. At around 350 pages it was one of the longest FTT decisions to date.
In its original judgment, the FTT held that:
Importantly however, although the partnership had claimed its interests in the films were trading stock, the FTT also held that they were in fact Intangible Fixed Assets (IFAs) for UK GAAP purposes, to be held on the balance sheet, accounted for at cost and impaired to Net Realisable Value (NRV).
The FTT then adjourned proceedings to allow the partnerships and HMRC to agree revised figures. At the time we had assumed that the direction to agree revised figures meant that the impairment of the IFAs would be deductible for tax purposes and so generate a trading loss (albeit considerably smaller than that originally claimed) which could be offset by the partners against their other income.
It appears that the partnership thought likewise. However, HMRC did not, taking the alternative view that the IFAs represented capital expenditure and so any impairment should therefore be disallowed for tax purposes. The hearing was therefore resumed to consider this point and the supplemental judgment deals solely with this issue.
The question of whether certain expenditure falls to be properly treated as capital or revenue is one of those areas of the law which is highly fact sensitive with no firm boundaries. Or as Templeman J put it:
“an intellectual minefield in which the principles are elusive…analogies are treacherous…precedents appear to be vague signposts pointing in different directions…and the direction finder is said to be the ‘judicial common sense”
HMRC’s argument was relatively straight-forward: the assets were IFAs for accounting purposes and so for tax purposes they were assets acquired for the enduring benefit of the trade.
The partnership’s argument relied firstly on the absurdity of no deduction being available (quickly dispatched by the judge) and the distinction between fixed and floating capital (the expenditure of floating capital being tax deductible).
There is no correct approach to answering the question of capital versus revenue and, over the years various judges have formulated different approaches in reaching their conclusions. The FTT looked at the main authorities in turn before applying them to the facts of the case before it. Ultimately in finely balanced cases like this it probably comes down to the judge’s instinct. The FTT’s summarised its thusly:
“It is with misgivings and reluctance that we conclude that the rights were capital in nature. The period over which the rights were to play a part in the business of the company is the factor which has weighed most heavily in reaching this conclusion despite the fact that the rights were ordinary commercial contracts and were the source of income rather than the setting in which it was generated.
“We therefore find that the impairment amounts (or onerous contract provisions), which related to the capital expenditure on the rights, were not allowable deductions.” (Our underline)
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