Ingenious Games & Inside Track Productions & Ingenious Film Partners v Revenue & Customs Commissioners (2017)


Sums paid by a business to acquire the rights to receive future income from the distribution of films constituted expenditure of a capital nature under the Income Tax (Trading and Other Income) Act 2005 s.33 and were not deductible in computing taxable profits. Section 33 did not need to be interpreted differently in the light of changes in accounting practice.


The tribunal had to determine whether sums paid by the appellant limited liability partnerships for the right to payment of income deriving from the distribution of films were deductible in computing the appellants' taxable profits.

The appellants were involved in film production. Their case was that, in their early years of operation, those activities resulted in trading losses which could be offset against their taxable income. The tribunal had already dealt with various issues in the appellants' appeal against closure notices issued by HMRC amending their tax returns to deny their claims for trading losses (Ingenious Games LLP v Revenue and Customs Commissioners [2016] UKFTT 521 (TC)). The tribunal had held that sums paid by the appellants for the right to payment of income deriving from the distribution of films were properly deductible for the purposes of the Generally Accepted Accounting Principles as provisions for the impairment of the rights under the relevant agreements. However, in the instant proceedings, a dispute arose as to whether the sums were not deductible in computing taxable profits on the basis that they were capital or of a capital nature, pursuant to the Income Tax (Trading and Other Income) Act 2005 s.33 which provided that "in calculating the profits of a trade, no deduction is allowed for items of a capital nature".


Does s.33of the 2005 Act need to be interpreted differently in the light of changes in accounting practice? No. The move to the Generally Accepted Accounting Principles did not require a revision of previous understanding. There was no warrant for reading the words of the statute differently because accounting practice had changed. In some situations, the legislation mitigated its effect by giving capital allowances or like deductions. The very fact of those allowances indicated that the meaning of "capital" in the prohibition in s.33 remained as it was understood more than half a century ago in the authorities which dealt with the issue. Thus, the question of whether the appellants' expenditure on film rights was deductible had to be resolved by reference to the understanding of "capital" in those authorities without regard to whether or not the result might seem absurd or unfair (see paras 22-24 of judgment).

Was the expenditure of a capital nature? Yes. There was no single rule or touchstone for distinguishing between capital and revenue payments, but there were many factors and approaches to be considered, Tucker v Granada Motorway Services Ltd [1979] 1 W.L.R. 683 applied (para.18). The following factors were relevant in the instant case: (a) The advantage sought by the appellants from the rights under the relevant agreements was the receipt of future income, and whether or not that was an "enduring benefit", as per the judgment of British Insulated & Helsby Cables Ltd v Atherton (Inspector of Taxes) [1926] A.C. 205, depended upon how long was the shadow cast by the longer term nature of the rights in the context of the trade, British Insulated and Regent Oil Co Ltd v Strick (Inspector of Taxes) [1966] A.C. 295 considered (paras 47-53, para.79). (b) The expenditure did not have a recurrent nature in the sense of being continuously demanded by the business, Vallambrosa Rubber Co Ltd v Inland Revenue Commissioners 1910 S.C. 519 considered, BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia [1966] A.C. 224 followed (paras 54-57, para.79). (c) The rights had a length which could not escape from the primitive concept that revenue items had an annual or at least a short-term nature, Strick, BP Australia and Bolam v Regent Oil Co 50 R. & I.T. 79 considered (paras 67-75, para.79). (d) Ordinary commercial accounting principles would nowadays require deduction of part of the cost from the profit and loss account (paras 60-63). (e) The monies were not expended on, and the rights were not part of the structure of, the business, Commissioner of Taxes v Nchanga Consolidated Copper Mines [1964] A.C. 948 considered (paras 64-66). Those considerations were finely balanced but overall weighed in favour of a capital nature. Moreover, the rights were a result rather than a part of the ordinary process of selling, and they were not used or turned over as part of any continuous struggle; the nature of the appellants' trades could not be regarded as creating a constant demand for new film rights contracts; the payments made for the rights were not made periodically; and the rights would exist and the monies could be paid under them for a long period. On balance, the rights were capital in nature. The period over which the rights were to play a part in the appellants' business was the factor which weighed most heavily in reaching that 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, BP Australia followed. Accordingly the impairment amounts, or onerous contract provisions, which related to the capital expenditure on the rights were not allowable deductions (paras 80-89).

Judgment accordingly