Tribunal finds that film partnerships were carrying on a genuine trade

In Take 3.9 TV Partnership and others v HMRC [2026] UKFTT 696 (TC), the First-tier Tribunal (FTT) held that the appellants were carrying on a genuine trade and therefore the equity-funded portion of their film production expenditure qualified for tax relief, but the debt-funded expenditure was incurred only to enhance tax relief and therefore did not qualify for tax relief.

Background

Take 3.9 TV Partnership and four other partnerships (the Appellants), were general partnerships which challenged closure notices issued by HMRC on 16 September 2022, which amended their partnership returns for the tax years ending 5 April 2002 and 2003 (some 20 years after the relevant tax years in question).

The partnership returns were prepared on the basis that the Appellants were carrying on a trade and were entitled to relief under section 40B, Finance (No 2) Act 1992 (F(No2)A 1992) for the expenditure incurred in the course of their trade in relation to films and television programmes produced by companies within the Tanmarsh group of companies, including a company called Peakviewing (Interactive) Ltd (the Peakviewing Transactions).

The partnership returns also claimed that as the Appellants were carrying on a trade they were entitled to deduct the expenditure which they incurred in the course of that trade as "production expenditure", under section 42, F(No2)A 1992 and section 48, Finance (No 2) Act 1997 (F(No2)A 1997), in relation to their involvement in other films and television programmes (the Non-Peakviewing Transactions).

HMRC issued closure notices in relation to the Non-Peakviewing Transactions on the basis that the Appellants had not been carrying on a trade or, if it they 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.

HMRC also issued closure notices to the Appellants on the basis that the profits and losses in relation to the Peakviewing Transactions should not have been included in the relevant partnership returns at all. However, HMRC subsequently conceded this issue and accepted that the expenditure incurred by the Appellants in respect of the Peakviewing Transactions gave rise to relief under section 40B, F(No2)A 1992. 

The Appellants appealed to the FTT. The central issue before the FTT concerned the treatment of the Non-Peakviewing Transactions. The expenditure incurred comprised amounts advanced by the Appellants to a film producer. Part of each advance was paid directly by the Appellants out of partnership contributions. The remainder was debt-financed, funded by bank loans taken out by the Appellants, with those amounts being paid directly to the film producer.

The key issues for the FTT to determine were whether:

1. the advances were expenditure of a revenue nature;

2. the Appellants were carrying on a trade; and

3. the advances were expenditure incurred wholly and exclusively for the purposes of the Appellants' trade. 

FTT decision 

The appeals were allowed in part. 

The FTT found as a fact that the primary motive of the partners of the Appellants in investing in the Appellants was to enable the partners to benefit from the tax relief which they expected to be available in respect of the entire sums advanced in respect of each film and in respect of the reinvestment by the Appellants of the proceeds generated by any film. The FTT considered that the making of profits from the films was also a motive of the partners in investing in the Appellants, but it was a motive of lesser importance to the partners and the Appellants than the tax-related motive. 

However, the FTT distinguished between the equity contributions and the debt-financed expenditure and held that the equity contributions were incurred wholly and exclusively for trading purposes so as to attract tax relief, but the debt-financed expenditure was incurred only to enhance tax relief and therefore did not qualify for tax relief. In the view of the FTT, there is a distinction between a person who advances monies for the production of a film in the hope that future sales or rights after the film is completed will generate receipts that are sufficient to recoup that expenditure, and a person who advances monies for the production of a film on terms that the borrower is required to repay the monies in due course, come what may.

1. Were the advances expenditure of a revenue nature?

The FTT held that only the equity contributions of each advance qualified as expenditure of a revenue nature.  

The FTT considered that regardless of the nature of the business carried on by the Appellants, the references to "expenditure incurred", in section 42(4), F(No2)A 1992 and section 48(2), F(No2)A 1997 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 the Appellants' accounts.

The FTT found that the debt component of each advance was not actually incurred by the Appellants on the production of films, for the purposes of section 42, F(No2)A 1992 and section 48, F(No2)A 1997. 

2. Were the Appellants carrying on a trade in relation to the equity contributions?

The FTT held that the Appellants were carrying on a trade in relation to the equity contributions. 

Applying the 'badges of trade' to the Appellants' circumstances, the FTT found that many of those badges were satisfied. The FTT pointed to various factors, such as the fact that there was a multiplicity of transactions with the Appellants being involved in the production of a number of films, the production and exploitation of films is normally the subject matter of trade, the Appellants' activities involved an element of speculation and risk and the Appellants' activities involved conduct which was typical of a trade of producing and exploiting films. 

With regard to the debt component, the FTT considered that it was self-evident that those activities were no more than a device for increasing the tax relief which would become available to the partners. 

3. Were the advances incurred wholly and exclusively for the purposes of the Appellants' trades?

In the view of the FTT, the equity contributions of each advance was expenditure incurred wholly and exclusively for the purposes of the Appellants' trades. The FTT considered that this 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. 

However, with regard to the debt component of each advance, the FTT held that, even if it had been expenditure of a revenue nature incurred on the production of a film, it was not incurred wholly and exclusively for the purposes of the Appellants' trades. This was because, in the view of the FTT, the sole purpose underlying the debt component's very existence was to generate additional tax relief. 

Arguments based on equity and fairness

The FTT also dismissed a number of arguments raised by the Appellants based on principles of equity and fairness, such as the right to a fair trial, estoppel, legitimate expectation and the government's policy at the time to encourage investment in British films. These arguments were dismissed by the FTT. 

Comment

Although turning on its own facts, this decision provides important guidance on the meaning of 'expenditure incurred', the trading test, and the application of the 'wholly and exclusively' rule, in the context of tax motivated film finance arrangements. 

The decision is also a reminder of the difficulty of succeeding before the FTT with estoppel based arguments and of the importance of retaining contemporaneous documents in fact sensitive cases especially when any appeal to the FTT may not be heard until many years after the relevant tax year in issue. 

Read the decision in Take 3.9 TV Partnership and others.