Two of the UK’s most prominent film financiers endured a fierce grilling at the hands of the House of Commons Public Accounts Committee exploring Tax Avoidance.
In a heated session, Patrick McKenna, chief executive at Ingenious Media, and Tim Levy, director of Future Capital Partners, were in the firing line as committee chair Margaret Hodge (a former Labour Culture Minister) waxed indignant about tax avoidance in the film industry and the perceived abuses of the sale and leaseback era.
McKenna, in particular, came in for sharp criticism from Hodge.
“I am particularly disappointed in seeing you this morning,” said the chairwoman to the Ingenious boss.
“When I was Culture Minister, I used to consider that you played an important role in supporting the creative industries.”
She suggested that McKenna had been using investment schemes in the creative industries primarily to help its clients avoid tax.
Ingenious boss hits back
The indignant Ingenious boss countered that the company has already generated $965m (£600m) in UK taxable income with a further $1.6bn (£1bn) to be expected.
He also acknowledged later that $2.2bn (£1.35bn) had been generated in tax relief through the various schemes
Hodge reacted with astonishment to McKenna’s claims that “full tax had been paid.”
“You may say that it’s legal. I say that it’s immoral,” Hodge proclaimed, expressing her disappointment that McKenna had been “exploiting a well-intentioned tax relief to try to get individuals and God knows who else to mitigate their tax.”
“We are not in the business of tax avoidance. We are in the business of generating profits on which we pay UK tax,” McKenna countered.
Sale and leaseback
Hodge and McKenna clashed sharply over the legacy of the “sale and leaseback” era and of Section 42 and Section 48 tax relief.
“We had to close it down because people like you exploited it,” Hodge (in the Labour Government in the late 1990s when the tax relief was introduced) said of sale and leaseback.
“We had to amend it considerably with HMRC because people like you used it for a purpose that Parliament had never intended to.”
Levy and McKenna both took issue with the idea that HMRC never intended sale and leaseback to happen.
“The job Mr McKenna and I had was to try and raise capital for the British film industry,” Levy said. “About 90% of all the films by number we financed were British qualifying.”
McKenna referred to the way the “mood music” at HMRC changed after 2008 as the Revenue began to challenge the schemes
The Committee Chair and the film financier disagreed strongly over the nature of the Ingenious “Aries Film Partners” scheme.
Hodge described it as an “exit scheme” for helping investors to avoid taxation on other schemes.
“It is not a vehicle the purpose of which is to invest in films. It’s a vehicle to help them mitigate tax liability that they may have gained from their original investment,” she said.
McKenna refuted this description.
Inefficiency and mismanagement
Asked if any of his arrangements were offshore, McKenna said that “all income is brought into tax in the United Kingdom…we are taking worldwide gross income from films into charge in the United Kingdom. Receipts from Avatar come into tax in the United Kingdom.”
He also sought to defend Ingenious’ decision to do some of its administration in Jersey.
Quotes were read from a letter Ingenious had written to the Committee in which the Ingenious boss attacked HMRC, complaining about its “repeated inefficiency and (by its own admission) mismanagement.”
Future’s US dealings
Future Capital Partner’s involvement in acquiring US studio films for its investors also came under question.
Hodge referred pointedly to Future’s Eclipse 35, a partnership with 289 members that (she said) had gained $188m (£117m) in tax relief on a $1.6bn (£1bn) scheme with Disney.
Challenging the legality of the scheme, HMRC won a court victory but the partners are appealing against that decision.
The Committee hearing comes amid widespread anger and debate in the UK over corporate tax avoidance in a period when the national economy is struggling.
Hodge pronounced herself “gobsmacked” at some of the schemes under discussion and questioned whether they had any ethical basis.