Lights! Camera! Tax Shun!

Earlier this month, the Sunday Times ran a story about a celebrity-heavy tax avoidance scheme in which around a thousand notable personalities appear to be implicated.

The roll call of alleged offenders runs the gamut from the obvious (Andrew Lloyd Webber, Bob Geldof, Guy Ritchie) through the disappointing (Ant and Dec, Peter Gabriel, Kate Adie) and into the baffling (Annie Lennox, Anne Robinson, Geri Halliwell). Each of them appears on the books of a company identified by the Sunday Times as Ingenious Film Partners 2 LLP, and each appears to have thrown a minimum of £100,000 into the scheme.

Ingenious say they have done nothing wrong, but HMRC has found their activity to be sufficiently suspicious to launch a full investigation into their dealings. The disputed bill totals about £1.2 billion and the case will be heard in November.

Most journalists don’t explain it because it’s really fucking complicated and the sorts of documents you have to read in order to figure it out are utterly arse-numbing.

Whatever the truth of the matter, every time a scandal like this is broken – and it’s happening with increasing regularity – we always find ourselves wondering “Yes, but how exactly do you fleece the film industry?”

Bent film producers don’t want to talk about it in case they incriminate themselves. The Treasury don’t want to talk about it in case they inspire any would-be swindlers. And most journalists don’t explain it because it’s really fucking complicated and the sorts of documents you have to read in order to figure it out are utterly arse-numbing.

It’s a shame, because there’s some incredibly interesting stories in there – they just very often get steamrollered by phrases like “evolution of Section 48 relief, without further sunset provisions” and “an exemption afforded to vertical agreements” and it becomes too tempting to give up.

So we’re going to attempt to explain – as best we can, in the plainest English possible – the evolution of the modern tax dodge.

The Early Days: The Producers Scam

A.K.A. The One Where Producers Scam The Investors And The Producers Make Money

As made famous by the Mel Brooks film of the same name, the Producers scam is a simple, straight up fraud. It works like this. Say, to fund your film, you need a million pounds. You ask an investor to stump up that million, with the promise that he will get a percentage of the profits if the film makes money. Aware that it’s a long shot, but wanting to have a go at the prestige of investing in a film, the investor hands it over.

Ordinarily, if you were an honest producer, you would then go and make a film with that million pounds. If the film bombs and you fail to recoup the million pounds, you end up with nothing to give back your investor. The money is gone, but your investor expected this and so isn’t too put out.

But imagine you were a dishonest producer. Imagine that you set up not one, but ten meetings – with ten different investors, none of whom knew that you were meeting with the other nine. You raise enough to fund your million-pound film ten times over. Now ten different people are expecting you to create a single one-million-pound movie.

Crucially though, they are all expecting you to make the same one-million-pound movie.

You make your movie, ensure that it tanks, and then show your ten different investors the receipts you amassed. The total bill is one million pounds. Each investor believes it was their million pounds that paid for the movie and, as the film didn’t turn a profit, they assume there’s nothing to give them. So you shake hands, and that is that.

As a money-making ruse it’s really only advisable if you’re massively into table tennis, peeling potatoes and very quick showers.

Congratulations! You are now nine million pounds richer.

You have also broken some pretty tough laws too, though. Fraud on this scale can get you up to ten years in prison; the theft can get you seven – so as a money-making ruse it’s really only advisable if you’re massively into table tennis, peeling potatoes and very quick showers.

Yes, the Producers scam is all-out illegal. Laws guarding against this have existed for a long time and are continually tightened to stop this sort of malpractice.

But if you value your freedom too much to chance a fifteen-year stretch, relax. There are plenty of other, marginally legal ways to skim.

Next Up: Sale and Leaseback

A.K.A. The One Where Investors Scam The Treasury And The Investors Make Money

Sale and leaseback is not, in and of itself, a scam. It is a legitimate funding model employed in many different industries – and to great acclaim. It works by getting an investor (or, more likely, a group of investors working in partnership) to buy a very expensive asset off you. In selling it, you become cash rich but the investors now own your expensive asset. The investors then lease this same asset back to you (i.e. you rent it back off them) so you can continue to use it as if you still own it – but you now pay the investors for the privilege.

The benefit to you is that you’ve suddenly freed up a bunch of cash to spend on other things (while still having full use of your asset). The benefit to the investors is that they will make some money on the whole arrangement by charging you interest over the length of the lease.

So, how does this apply to the film industry? You, as a producer, are at the helm of a potentially valuable sort-of-asset (your soon-to-be film). Films made on relatively modest budgets can sometimes be worth billions, so investors are keen to acquire them. At the early development and pre-production stage, however, there’s nothing particularly tangible to actually sell on to an investor – but production can’t really kick in until there’s some investor cash in the producer’s pocket.

Which is where Tony Blair and the Cool Britannia brigade enter the picture. When New Labour came to power in 1997, Gordon Brown revised the existing tax legislation in such a way that it became possible for producers of British-made films to sell up to £15 million worth of tax relief on to investors.

Instead of giving investors a tangible thing for their money, you (as a producer) give them this tax relief.

To cut a long and tedious process short, this tax relief doesn’t just knock money off the investors’ annual tax bill. It has an actual, short-term cash benefit.

By writing off £15 million (or however much any individual investor forked out) as an operating loss they could – according to both the letter and the spirit of the law – immediately claim 40% of that sum back from the Treasury as a tax rebate. The idea is that this 40% chunk is then retrieved over the next ten or fifteen years in the form of income tax, when the investor receives their annual ‘rent’ payment (i.e. the lease money) on the asset from the producer.

(The Treasury, having a lot of money, can afford to wait out 15 years to recoup it, as it is to the overall benefit of the film industry.)

The system got so brutally abused it’s probably got a best-selling autobiography in it.

There is a bit more to it, but if you just want to know what the figures are, for every £100 you invested (and then wrote off as a trading loss on your tax return) you would get £40, in cash, as a rebate from the Treasury. On the full £15 million then, you are looking at a £6 million rebate. This is why investors got in the game.

This was all completely legal and, to a large extent, completely encouraged. It did wonders for the British film industry, which flourished with all the new investment – much of it international. Producers got the money they needed to make their films; investors got a helpful tax break for investing in British business; and cinema-goers got films like Harry Potter And The Philosopher’s Stone.

None of this was the problem. The problem was that it was fairly easy to abuse this system. And the system got so brutally abused it’s probably got a best-selling autobiography in it.

One way to do this was your classic move of diverting these tax rebates into offshore companies with low rates of corporation tax. So those promised 15 years’ worth of tax receipts never actually got into the Treasury’s hands.

Another was to get a bank to secure up to 80% of your actual stake in the investment. The bank would happily extend this line of credit, so investors were getting a 40% rebate for what amounted to only 20% of the investment. Therefore only £20 of every £100 investment would be the individual’s own money, but the investor would receive all £40 of the cash rebate – meaning they doubled their money instantly.

Bizarrely, this wasn’t actually illegal. It certainly wasn’t considered cricket though (like any of that matters to your seasoned tax avoider) and this was one of the reasons Gordon Brown amended Government policy on film industry tax breaks in the mid-2000s.

So with this option no longer viable, what then for the opportunistic grifter? Where next to skim a bit of extra cash?

Following On: Slate Funding

A.K.A. The One Where The Producers Scam The Treasury And The Producers Make Money

Again, there is a very sound and sensible financial principle behind slate funding. There is nothing scandalous or suspicious about the way it works in theory. In fact, it’s probably the best way to foster a sustainable film industry, but it did underpin one of the biggest unspoken scandals of British cinema.

Slate funding is essentially a hedge bet. What that means is that instead of putting your money into one single film (which has about a 13% chance of turning profit), instead you help to co-fund what is known as a ‘slate’ of films. A slate is a selection of around ten or so films that one production company is commissioned to make.

This is good for investors because when films do turn a profit, they usually turn a big profit – so you only really need one film on a slate of ten to be a success and you will see a return on your investment. It is also good for filmmakers because it means that one dud film won’t kill off their company completely. They can absorb a few losses before they finally strike it lucky.

Tax dodgers are like Terry Richardson: they’re up for mistreating any model they can get their hands on.

This is pretty much how a record label works. Instead of setting up a separate label for each act, all of your acts feed off the one label. Investment goes into the label as a whole and the manager decides how the funds are best distributed.

You may only draw profit from one mega-selling act (Boyzone) but those profits are big enough to support the rest of your less lucrative projects (Bellefire, Wonderland etc…) Lots of people get a shot at being pop stars and everyone makes money.

There is a very solid argument to be made for slate funding being used as the industry standard. The only trouble is that tax dodgers are like Terry Richardson: they’re up for mistreating any model they can get their hands on. And the weakness that the tax dodgers chose to exploit with slate funding is the built-in expectation that nine out of ten films on any given slate will fail.

In the late part of the last decade, there was decent money around for slate funding. If you were the disreputable sort, you could secure your film company some cash for a slate of eight to ten films. Because everybody involved had accepted that many of these projects were likely to come up short, the investors concentrated most of their attention on that one money spinner.

This allowed for a huge whack of the total budget to be sunk into projects that nobody expected to see the light of day. So when a lot of these films didn’t surface, nobody was too alarmed. Which was a little cruel to the non-executive artists and filmmakers who had their projects picked up by dodgy moneymen – only to find their life’s work used to do little more than massage some of the figures on a finance sheet – but hey. That’s business, baby.

By the time that anyone thought to look at how the whole of these slates were performing, it was too late. The money had long since been siphoned off. Notably few films financed by slate funding were actually making it into production, and even fewer into distribution, so the plug got pulled. Grants ceased to be issued and a lot of (very costly) mismanagement was swept under a carpet.

Although this level of slate funding was short lived in Britain, it was quite a significant game-changer. It introduced the idea of investing in film without investing in one particular film. You would be investing in a bunch of films that had no script, films that were yet to be discovered, developed or even dreamed of.

And so it became perfectly normal to just invest in film in general. Just ‘film’. Which helped pave the way for this…

Today: Adventures In Venture Capital

A.K.A. The One Where The Treasury Loses And The Financiers Win

If we give the impression that the film industry is riddled with crooks, it isn’t. It’s merely seasoned with them

Now, it is worth pointing out that most filmmakers are not on the make. If you don’t know any directors or screenwriters or independent producers personally, take it from us that the vast majority are not rich. Most of them are scraggy-arsed grafters, who spend decades driven by nothing but passion for the project. They want their films to be released, they want their films to be successful and they want to reward the people who helped them realise their vision. They are rarely the people at fault in these processes. But their devotion to making movies is such that it allows them to be used by money-making financiers who are primarily interested in sheltering income.

So if we give the impression that the film industry is riddled with crooks, it isn’t. It’s merely seasoned with them. But we’ve now reached the stage where the real sharks come out to play.

The venture capitalists.

Venture capitalists don’t specialise in film. They put their money everywhere. Anywhere. They invest in a wide range of industries.

Before now, venture capitalists wouldn’t have been massively interested in the British film industry. It was too small and too risky. But now that the industry has a bit of heft, and because modern film increasingly relies on the use of emerging technologies (in a way that it never really did in the 70s, 80s and 90s) it has attracted their attention.

And why wouldn’t it? The expectation that only few films turn a profit; the ease of cooking a film’s books to inflate and invent losses; the capability to write those losses off against other taxable income within a diversified portfolio – it all means that the film industry was perfect fodder for the shady venture capitalist.

Venture capital in the film industry is like slate-funding squared. You continue to put all of the films in which you’re investing onto one slate, but then that film slate is put on a second, much larger slate – where it sits alongside a biotechnology company, and a cybersecurity software firm, and the next social media dotcom.

It’s slates within slates – and this, therefore, increases the opportunity to use inflated film losses to chip away at other taxable income.

And when they occasionally hit upon a blockbuster, the profits easily match the growth of any successful start-up. You pay tax on a few big ticket successes to keep up appearances, while continuing to plough fortified losses through the system; the tax relief upon which is (finally) passed back to the celebrities and other noted personalities who have been investing in them.

The Future…

If you’re looking to find out what the next big film funding thing will be, then what happens in 2014 is likely to shape the next few years. There are at least three, maybe four, big tax cases involving film partnerships and production companies slated to hit the headlines between now and December. You can see the jockeying for public positioning already taking place.

Given the profile of the people involved, and the amount of money floating about, no-one’s going to let these schemes go down without a fight. And even though it’s thought that billions of pounds of potential tax revenues have disappeared through film financing since 1997, HMRC’s recent attack on high-profile international corporations (Vodafone, Starbucks et al) was rather limp. So is a sea-change in the film-scam racket likely?

In short, no. Not really. Films need money and locations. Governments around the world are competing to make their investment climates desirable to international producers in the hope that they will choose their country to locate their movie. And while the UK cannot possibly compete with Hollywood in the film sector, the one area where Britain still rules the waves is that of innovative tax planning and the use of complicated financial instruments.

But maybe it’s not all bad. Just think: someone, somewhere is probably already dreaming up a way to finance Sex Lives Of The Potato Men 2.

And the even better news? You’re probably going to be paying for it.