In Ingenious Games LLP & Ors v HMRC [2021] EWCA Civ 1180, the Court of Appeal (CA) overturned the ruling of the Upper Tribunal that the LLP film and video game tax scheme partnerships were not trading and undertaken with a view to profit, although the original claims for losses were still denied.

  • The three Limited Liability Partnerships (LLPs) named in the proceedings were Ingenious Games LLP (IG), Inside Track Productions LLP (ITP) and Ingenious Film Partners 2 LLP (IFP2). They offered film and video game schemes to investors as a means of generating trading losses that could be used, via Sideways Relief, to offset higher rate income.
  • The LLPs were the lead appellants with five follower LLPs, with a total of more than £1.6 billion in disputed losses at stake.
  • The LLPs contracted with a Commissioning Distributor (CD) who provided 70% of the film production costs to the LLP. The LLPs gave the 70% and a further 30% from its members (less a 5% fee) to a Production Services Company (PSC) to cover the costs of making a film.
  • At the end of year one, a Net Realisable Value (NRV) had to be attributed to the film production, usually at 20% of total costs. This gave losses in year one of 80%. The LLPs allocated these trading losses to the members equally (pre-LLP legislation that required allocation in proportion to capital shares). These losses were used by the individual members to offset other income through sideways relief.
  • HMRC contended that the LLPs were not trading. The LLPs acquired rights to an income stream and this was an investment. 
  • HMRC also argued that the total expenditure incurred by the LLPs was not 100% of the money given to the PSC, but only 30%. The remaining 70% belonged to the CD.
  • The fact patterns for the video game schemes were essentially the same and so the findings and decisions applied to both.

On Appeal to the First Tier Tribunal (FTT), an immense amount of documentation and evidence was meticulously scrutinised by the judges. In determining whether there was a trade, the Badges of Trade were considered in detail. It was held:

  • HMRC's contention that the LLP injected 30% of the costs and so was entitled to 30% of the losses was correct.
  • On that basis, there was a trade. The FTT worked through all badges of trade and found that, on balance, there was a trade.
  • There was also a view to profit, integral to the LLPs being treated as Partnerships and taxed accordingly.
  • Again using the 30% basis, there was the economic burden of expense and the expenditure was wholly and exclusively incurred for the trade (with the exception of the 5% fee).
  • The accounts had not been correctly compiled using GAAP. The P&L needed re-calculating using the 30% basis. Additionally, the NRV at the end of year one was too low. As a result, the available losses were much lower.
  • The rights which generated the income stream and the losses for the LLPs were in fact capital in nature due to the length of time held. They became an investment, meaning the majority of the losses were not trading.

On this basis, the FTT disallowed 97% (ITP) and 96% (IFP2) of the losses due to incorrect valuations and being capital in nature. IG was held to not be trading and so had no available losses. 

HMRC appealed to the Upper Tribunal (UT) on the basis that the LLPs were not trading and did not operate with a view to profit. The LLPs appealed all of the FTT's decisions, including the trading and view to profit decisions as these should have applied to 100% of the expenditure, not just the 30%. It was held that:

  • Whilst the UT could only overturn an FTT decision if there was an error of law, there were errors of law/principle and the UT reconsidered the FTT's findings with regard to the question of trade.
  • The UT found that the FTT was wrong to assess and interpret the facts to the extent that they changed the investment activities of the LLPs into trading activities.
  • Given that there was no trade, the UT did not consider the other decisions made by the FTT. However, they did conclude that there was no evidence of a view to profit on the 30% basis and the LLPs had not suggested that this existed.

The effect of the UT's findings did little to change the outcome for the LLPs, except that now all of the losses were disallowed.

The UT restricted any basis of appeal to the two issues of trading and view to profit and on this basis, the LLPs appealed to the CA.

  • The CA reiterated the principle that the FTT decisions can only be overturned if there is an error in law.
  • The CA reviewed the FTT's findings in detail and concluded that they had carefully weighed up all of the evidence and drawn conclusions that were correct in law. There was no basis for the UT to have overturned the FTT's decision on whether the LLPs were trading.
  • It concluded that none of the assumed errors on the part of the FTT had any substance to them. There was no basis for the UT to remake the decisions.
  • With regard to a view to profit, the CA stated that the UT were too focused on the LLPs argument that it was working on the 100% basis. The CA noted that the 30% and 100% basis categorisations were merely labels for what was actually the nature of the transactions and it was based on the real activities and intentions that the FTT made its decision. The CA held that, again, the FTT had clearly considered the facts and evidence and had come to a conclusion without erring in law.

The UT upheld the LLPs' appeals and restored the FTT's decisions. The decision by the FTT regarding IG being non-trading was upheld throughout.

Useful guides on this topic

Losses, trade losses and sideways relief
How can trade losses be utilised? What are the restrictions? 

Is it a trade, a business, or an investment activity?
Starting in business? Is your new or existing business a trade, a business or an investment activity? The distinction is very important for tax purposes. This guide summarises key issues for tax purposes.

Badges of Trade: Are you trading or not?
Are you trading, running a business, or just buying and selling investments? The 'Badges of Trade' are a set of indicators, built up over time by the courts, to decide when an activity is a trading or investment activity.

External links

Ingenious Games LLP & Ors v HMRC [2021] EWCA Civ 1180  - Court of Appeal decision

Ingenious Games LLP & Ors v HMRC [2019] UKUT 226  - Upper Tribunal decision

Ingenious Games LLP & Ors v HMRC [2016] TC05270 - First Tier Tribunal decision


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