England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		CH/2008/APP/0579 Royal Courts of Justice Strand, London, WC2A 2LL
		22 May 2009

Mr Justice Davis:

Introduction

1. These are two separate appeals brought by the Commissioners for Her Majesty's Revenue and Customs ("HMRC") against two decisions of Special Commissioners (Mr Edward Sadler and Mr John Clark) released on 30 June 2008.
2. The context of the dispute in each case is film finance and the availability of tax relief. Significant sums of money are at stake and I was also told that – although the relevant legislation has since been altered – there may be other cases which may be affected by the outcome of these cases.
3. The respondents to each appeal are limited liability partnerships: Micro Fusion Limited 2004-1 LLP ("Micro Fusion") and Halcyon Films LLP ("Halcyon") respectively. The issues raised on each of the two appeals are distinct. They variously involve an assessment of the meaning and effect of complex documentation entered into for the purposes of the overall transaction in question and the meaning and effect of applicable, or potentially applicable, statutory provisions.
4. HMRC were represented on each appeal by Miss Ingrid Simler QC and Mr Andreas Gledhill. Micro Fusion and Halcyon were represented by Mr Jonathan Peacock QC and Mr Jolyon Maugham. I am grateful to all counsel concerned for their careful and detailed written and oral arguments.

The issues in the Micro Fusion appeal

5. The background facts and circumstances are set out very helpfully and in very great detail in the decision of the Special Commissioners. The hearing before them extended over some seven sitting days; and they received a significant quantity of evidence, written and oral. A number of issues which they had to decide are not sought to be challenged on this appeal.
6. The main issue raised on this appeal is whether HMRC rightly disallowed Micro Fusion's claims to make deductions under section 42 of the Finance (No.2) Act 1992 ("the 1992 Act") and section 48 of the Finance (No. 2) Act 1997 ("the 1997 Act"). More specifically, the principal questions were:-

6.1 Did Micro Fusion carry on a trade or business which consisted of or included "the exploitation of films" within the meaning of section 42 of the 1992 Act? It is common ground that that is a precondition of claiming relief under both section 42 of the 1992 Act and section 48 of the 1997 Act; further or alternatively

6.2 Did the film in question constitute "trading stock" within the meaning of section 100(2) of the Income and Corporation Taxes Act 1988, so that relief otherwise available under section 42 or 48 was thereby precluded by reason of section 42(8)?

A further question potentially arising was this:-

6.3 If deductions for losses could be made under section 42 and section 48, did section 60 of the Finance Act 2005 apply so as in effect to reduce the amount of deductions that could properly be made for tax purposes?

As to this third question, a yet further point was raised, to the effect that the Court has no jurisdiction to hear, and HMRC could not pursue, the section 60 ground: because, as it is asserted, the closure notice served on Micro Fusion by the Inspector of Taxes had not relied on section 60. This jurisdictional point was expressly left open by the Special Commissioners (on the agreed footing that it could be pursued on any appeal to the High Court): the Special Commissioners decided the third issue substantively, reaching a conclusion – as on the first two issues – adverse to HMRC.

7. The relevant facts, as found by the Special Commissioners, are in summary these.
8. Micro Fusion was incorporated as a limited liability partnership on 9 July 2003, changing its name to its present name with effect from 11 June 2004. By its Partnership Deed dated 16 December 2004 but expressed to have effect from 1 October 2004 the partnership business was defined as "the trade of the production and/or acquisition and exploitation of Qualifying Films [as defined] and the other business set out in Clause 1.2". Clause 1.2 provided that the partnership should carry on the Business "including the production, acquisition and in connection therewith granting rights over and otherwise turning to account Qualifying Films ….". The members of Micro Fusion were a number of individuals: it is clear that their investment in the partnership was in part motivated by hoped for taxation advantages as well by hoped for profits.
9. During the course of 2004 Micro Fusion acquired a perpetual licence in a screenplay for a film called "Mrs Henderson Presents" which was released in the United Kingdom on 25 November 2005, principal photography having started in September 2004. The film was directed by Stephen Frears and starred, among others, Dame Judi Dench and Bob Hoskins. In due course, it received a number of film nominations and awards and achieved an amount of commercial success. On 8 November 2005 the Department of Culture, Media and Sport had issued a certificate in relation to "Mrs Henderson Presents" to the effect that it was a qualifying British film for the purposes of section 42 of the 1992 Act and section 48 of the 1997 Act.
10. On 21 September 2005 Micro Fusion completed its tax return for the year ended 5 April 2005. As part of that return, it included a claim for expenditure in the tax year in respect of production costs relating to "Mrs Henderson Presents", claiming (among other things) relief under section 48 of the 1997 Act in the sum of £13,444,445 and under section 42 of the 1992 Act in the sum of £222,380. By closure notice dated 2 February 2007 HMRC among other things disallowed the claimed relief in its entirety. It was not in dispute that if such relief was available then the individual partners could set off that relief (pro-rated) against their other taxable income for the tax year in question.
11. In connection with the production, financing and distribution of "Mrs Henderson Presents" a quite remarkably elaborate and complex series of Agreements was made. It is not, fortunately, necessary for the purposes of this appeal to refer to all of them. It is, however, necessary to refer in some detail to the provisions of some of them. But before doing so it may be helpful to summarise the documentary overview provided by the Special Commissioners.
12. The documentary background is this:-

12.1 A film partnership proposal for the 2004/5 tax year was promulgated on behalf of Micro Fusion. The proposal was that individuals or companies "participate in limited liability partnerships that will produce, or commission the production of, and exploit feature films that are intended to be British Qualifying". The prospective tax incentives were emphasised as an attraction.

12.2 By a One Picture Licence Agreement dated 1 October 2004 Pathé Productions Limited ("Pathé") granted to Micro Fusion a licence in respect of the copyright and related rights in the screenplay provisionally entitled "Mrs Henderson Presents" for the purpose of production, exploitation, distribution and delivery of the picture "Mrs Henderson Presents".

12.3 On 1 October 2004 Micro Fusion entered into a Production Services Agreement ("the PSA") with a company called Mrs Henderson Presents Limited ("MHP Ltd"). The PSA, which was subsequently amended as to Annex A by a Deed of Amendment dated 28 January 2005 but stated to be with effect from 1 October 2004, in essence provided that Micro Fusion engage MHP Ltd to produce and complete the picture for Micro Fusion so as to enable Micro Fusion to effect delivery to Pathé. Under the PSA as amended Micro Fusion was also required to procure the advance of a sum equal to the Budget (as defined) to enable MHP Ltd to carry out the Production Services (as defined).

12.4 Also on 1 October 2004 Micro Fusion entered into a Distribution and Commissioning Agreement ("the DCA") with Pathé. Under the DCA Micro Fusion agreed to produce and deliver the film to Pathé in accordance with the terms of Schedule A to the DCA. The broad effect of the DCA – it will be necessary to come back to some of its actual terms – was to require Micro Fusion to transfer to Pathé the master negative for "Mrs Henderson Presents", and also distribution and intellectual property rights to enable Pathé to exploit the picture for a period of 21 years.

12.5 Under the DCA Pathé further agreed to make certain specified minimum payments to Micro Fusion: such payments being guaranteed by letters of credit (the issuing bank taking security from Pathé). The practical and tax rationale for such specified minimum payments, so far as the individual members of Micro Fusion are concerned, is helpfully set out in some detail in the Special Commissioners' determination but I need not repeat it here.

12.6 A number of agreements was then or thereafter entered into with Pathé by way of security or charge or disposition in respect of its rights and assets acquired under the DCA. HMRC place some reliance on those as illustrating what HMRC say was the true nature and effect of the arrangements (and, in particular, the PSA and the DCA).

13. I was informed by Miss Simler that no suggestion is made by HMRC for the purposes of this appeal that the arrangements, or any individual parts of the arrangements, were a sham. She also made clear that she was not seeking to invoke Ramsay principles in support of her contentions. Her case thus was primarily centred on the correct interpretation, and thereby effect, to be accorded to the Agreements in question and to the relevant statutory provisions.
14. One other feature of the arrangements may be noted. As the Special Commissioners found, the overall transaction prospectively enabled Pathé under what may broadly be described as sale and leaseback arrangements to dispose – as it did – of the master negative to another limited liability partnership: with that partnership then in turn claiming acquisition relief under the relevant provisions of the 1992 Act. Such arrangements are apparently known as a "double dip". As the Special Commissioners discreetly put it: "as such, they confer more tax relief or incentive than perhaps the underlying policy intended". At all events, the legislation has, I understand, subsequently changed to prevent this: it was this feature of the overall transaction, however, which seems first to have attracted the interest of HMRC. However, I am (as were the Special Commissioners) only concerned on this appeal with the production expenditure incurred by Micro Fusion.

The statutory provisions

15. The main statutory provisions by reference to which the tax reliefs are claimed (and to which the arrangements set out in the documentation were in part geared) are section 42 of the 1992 Act and section 48 of the 1997 Act.
16. Section 42 of the 1992 Act contains, as was accepted before me, fresh statutory provisions relating to taxation relief with regard to production or acquisition expenditure on films. One can deduce as a purpose behind the legislation a desire to enhance the British film industry and in consequence a desire to encourage investment in the British film industry, by granting appropriate tax incentives. It appears to be the case that film financing has over the years been a fertile source of litigation in taxation terms. At all events (speaking as one who has had little exposure to such matters prior to my hearing this case) I rather got the impression that from time to time Parliament grants special tax reliefs and incentives with a view to promoting financing for British films: and then, when the implications in terms of lost revenue are fully realised and the capacity for the exploitation of loopholes in the statutory drafting is brought home, seeks from time to time to modify or withdraw the previous legislation.
17. Section 42 is contained in a part of the 1992 Act headed "Films". Certain provisions were introduced by amendment with effect, for income tax purposes, for chargeable periods ending after 5 April 2001.
18. Section 40A reads as follows:-

"40A Revenue nature of expenditure on master versions of films

(1) Expenditure incurred on the production or acquisition of a master version of a film is to be regarded for the purposes of the Tax Acts as expenditure of a revenue nature unless an election under section 40D below has effect with respect to it.

(2) If expenditure on the master version of a film is regarded as expenditure of a revenue nature under subsection (1) above, sums received from the disposal of the master version are to be regarded for the purposes of the Tax Acts as receipts of a revenue nature (if they would not be so regarded apart from this subsection).

(3) For the purposes of subsection (2) above sums received from the disposal of a master version of a film include –

(a) Sums received from the disposal of any interest or right in or over the master version, including an interest or right created by the disposal, and

(b) insurance, compensation or similar money derived from the master version.

(4) In this section –

(a) "expenditure of a revenue nature" means expenditure which, if it were incurred in the course of a trade the profits of which are chargeable to tax under Case I of the Schedule D, would be taken into account for the purpose of computing the profits or loses of the trade, and

(b) "receipts of a revenue nature" means receipts which, if they were receipts of such a trade, would be taken into account for that purpose.

(5) For the purposes of this section and sections 40B to 40D below, a "master version" of a film means a master negative, master tape or master audio disc of the film and includes any rights in the film (or its soundtrack) that are held or acquired with the master negative, master tape or master audio disc."

Section 40B(1) reads as follows:-

"40B (1) In computing the profits or gains accruing to any person from a trade or business which consists of or includes the exploitation of master versions of films, expenditure which is -

(a) incurred on the production or acquisition of a master version of a film, and

(b) expenditure of a revenue nature (whether as a result of section 40A above or otherwise),

must be allocated to relevant periods in accordance with this section …."

Section 40C reads as follows:-

"40C Cases where section 40B does not apply

(1) To the extent that a deduction has been made in respect of any expenditure for a relevant period under section 42 below –

(a) that expenditure must not be allocated under section 40B above, and

(b) no other expenditure incurred on the production or acquisition of the master version of the film is to be allocated under section 40B above to the relevant period.

(2) Section 40B above does not apply to the profits of a trade in which the master version of the film constitutes trading stock, as defined by section 100(2) of the Taxes Act 1988."

Section 40D (1) and (2) read as follows:-

"40D (1) Sections 40A and 40B above do not apply to the expenditure –

(a) in relation to which an election is made under this section, and

(b) which meets the conditions in subsection (2) below.

(2) The conditions are that –

(a) the expenditure is incurred –

(i) by a person who carries on a trade or business which consists of or includes the exploitation of master versions of films, and

(ii) on the production or acquisition of a master version of a film,

(b) the master version is certified by the Secretary of State under paragraph 3 of Schedule 1 to the Films Act 1985 as a qualifying film, tape or disc for the purposes of this section, and

(c) the value of the master version is expected to be realisable over a period of not less than two years …."

These sections – while providing for alternative forms of relief not relevant here – may have a bearing on the interpretation of section 42, since, of course, an Act must be read as a whole.

19. Section 40A had its origins, I was informed, in section 68 of the Capital Allowances Act 1990. That provided in the relevant respects:-

"(1) Expenditure which (a) is incurred on the production or acquisition of a film, tape or disc and (b) would, apart from this subsection, constitute capital expenditure on the provision of machinery or plant for the purposes of this part shall be regarded for the purposes of the Tax Acts as expenditure of a revenue nature unless it is expenditure falling within subsection (9) below …

…

(9) Subsections (1) to (8) above do not apply to expenditure which is incurred ;

(a) by a person who carries on a trade or business which consists of or includes the exploitation of films, tapes or discs; and

(b) on the production or acquisition of a film, tape or disc which is certified by the Secretary of State under Schedule 1 to the Films Act 1985 as a qualifying film, tape or disc for the purposes of this section and the value of which is expected to be realisable over a period of not less than two years."

20. Reverting to the 1992 Act, section 41 provides as follows in the relevant respects:-

"41 Relief for preliminary expenditure

(1) Subject to the following provisions of this section and any other provisions of the Tax Acts, in computing for tax purposes the profits or gains accruing to a person in a relevant period from a trade or business which consists of or includes the exploitation of films, that person shall (on making a claim) be entitled to deduct the amount of any expenditure of a revenue nature payable by him in that or an earlier relevant period –

(a) which is expenditure to which this section applies,

(b) in respect of which no deduction has previously been made (whether under this section or otherwise) in computing for tax purposes the profits or gains accruing from the trade or business, and

(c) in respect of which no election has been made under [section 40D above].

(2) This section applies to any expenditure that –

(a) can reasonably be said to have been incurred with a view to enabling a decision to be taken as to whether or not to make a film,

(b) is payable before the first day of principal photography (where the decision that is taken is to make the film), and

(c) is not payable under any contract or other arrangement whereby it may fall to be repaid if the film is not made.

(3) A deduction shall not be made in respect of a film that has been completed unless the master negative of the film or any master tape or master disc of the film is a qualifying film, tape or disc.

(4) A deduction shall not be made in respect of a film that has not been completed unless it is reasonably likely that if the film were completed the master negative of the film or any master tape or master disc of the film would be a qualifying film, tape or disc …."

21. The key sections of the 1992 Act, for present purposes, are sections 42 and 43. They read, in the relevant respects, as follows:-

"42 Relief for production or acquisition expenditure

(1) Subject to the following provisions of this section and any other provisions of the Tax Acts, in computing for tax purposes the profits or gains accruing to a person in a relevant period from a trade or business which consists of or includes the exploitation of films, that person shall (on making a claim) be entitled to deduct an amount in respect of any expenditure –

(a) which is expenditure to which subsection (2) or (3) below applies…

(2) This subsection applies to any expenditure of a revenue nature incurred by the claimant on the production of a film –

(a) which was completed in the relevant period to which the claim relates or an earlier relevant period, and

(b) the master negative of which or any master tape or master disc of which is a qualifying film, tape or disc.

(3) This subsection applies to any expenditure of a revenue nature incurred by the claimant on the acquisition of the master negative of a film or any master tape or master disc of a film where; -

(a) the film was completed in the relevant period to which the claim relates or an earlier relevant period, and

(b) the master negative, tape or disc is a qualifying film, tape or disc.

(4) Any amount deducted for a relevant period under subsection (1) above shall not exceed –

(a) one third of the total expenditure incurred by the claimant on the production of the film concerned or the acquisition of the master negative or any master tape or master disc of it,

(b) one third of the sum obtained by deducting from the amount of that total expenditure the amount of so much of that total expenditure as has already been deducted by virtue of section 41 above, or

(c) so much of that total expenditure as has not already been deducted by virtue of section 40B or 41 above or this section,

whichever is less. …

(8) This section does not apply to the profits of a trade in which the film concerned constitutes trading stock as defined in section 100(2) of the Taxes Act 1988.

(9) This section has effect in relation to expenditure incurred:

(a) on the acquisition of a film completed on or after 10th March 1992, or

(b) on the acquisition of the master negative, master tape or master disc of a film completed on or after that date.

"43. Interpretation of sections 41 and 42

(1) In sections 40A to 42 above and this section –

"expenditure of a revenue nature" has the meaning in section 40A(4) above,

"master disc," in relation to a film, means the original master film disc or the original master audio disc of the film,

"master negative," in relation to a film, means the original master negative of the film and its soundtrack (if any),

"master tape," in relation to a film, means the original master film tape or the original master audio tape of the film,

"qualifying disc," means a master disc of a film certified by the Secretary of State under Schedule 1 to the Films Act 1985 as a qualifying film for the purposes of section 40D above,

"qualifying film," means a master negative of a film certified by the Secretary of State under Schedule 1 to the Films Act 1985 as a qualifying film for the purposes of section 40D above,

"qualifying tape," means a master tape of a film certified by the Secretary of State under Schedule 1 to the Films Act 1985 as a qualifying tape for the purposes of section 40D above,

"relevant period" has the meaning given in section 40B(3) above, ....

(2) In sections 41 and 42 and this section –

(a) any reference to a film shall be construed in accordance with paragraph 1 of Schedule 1 to the Films Act 1985 and

(b) any reference to the acquisition of a master negative, master tape or master disc of a film includes a reference to the acquisition of any rights in the film (or its soundtrack) that are held or acquired with the master negative, master tape or master audio disc.

(3) For the purposes of sections 41 and 42 above a film is completed –

(a) at the time when it is first in a form in which it can reasonably be regarded as ready for copies of it to be made and distributed for presentation to the general public …"

22. It will be noted that section 43(2)(a) does not offer a strict definition, as such, of the word "film" as used in the 1992 Act: rather it provides that it "shall be construed in accordance with" paragraph 1 of Schedule 1 to the Films Act 1985.
23. So it is necessary then to refer to the Films Act 1985. Section 6(1) of that Act provides that schedule 1 has effect "with respect to the certification by the Secretary of State of a master negative, tape or disc of a film as a qualifying film tape or disc for the purposes of section 72 of the Finance Act 1982 …". As to Schedule 1 itself, however, it may be noted at the outset that while several words are given definitions the word "film" is not defined ("means") as such. What paragraph 1(1) says is this:-

"'film' includes any record, however made, of a sequence of visual images which is a record capable of being used as a means of showing that sequence as a moving picture."

Other provisions in Schedule 1 which may be noted are paragraph 2, which in part reads as follows:-

"2.(1) An application for the certification by the Secretary of State of a master negative, master tape or master disc of a film as a qualifying film, qualifying tape or qualifying disc for the purposes of section 72 of the Finance Act 1982 may be made by any person who has incurred expenditure on the production or acquisition of that negative, tape, or disc.

(2) In sub-paragraph (1) the reference to the acquisition of a master negative, tape or disc includes a reference to the acquisition of any description of rights in it …."

Paragraph 3(1) of Schedule 1 is in these terms:-

"3.(1) If the Secretary of State is satisfied that a master negative, tape or disc with respect to which an application is made under paragraph 2 is a master negative, tape or disc of a film which, in his opinion, is a British film for the purposes of this schedule, he shall certify that negative, tape or disc as a qualifying film, qualifying tape or qualifying disc for the purposes of section 72 of the Finance Act 1982 …."

Paragraph 5(1):-

"5.(1) A film is not a British film for the purposes of this Schedule by virtue of paragraph 4(1) –

(a) if parts of the film are derived, as regards the photographs comprised in it, from –"

(i) any film of which the master negative, tape or disc has already been certified under paragraph 3(1), or

(ii) any film the maker of which was not the maker of the first-mentioned film,

and the playing time of those parts exceeds 10 per cent of the total playing time of the film, …"

Paragraph 6(1) and (2) provide:-

"6.(1) For the purposes of this Schedule the labour costs of a film shall be taken to be, subject to paragraph 8, the total amount of the payments paid or payable in respect of the labour or services of persons directly engaged in the making of the film, in so far as those payments are attributable to the making of that film, but shall not be taken to include payments in respect of copyright unless it is copyright in a work created for the purpose of its use in the film.

(2) For the purposes of sub-paragraph (1) –

(a) the author of the scenario of a film shall be deemed to be a person directly engaged in the making of the film;

(b) a person shall not be taken to be directly engaged in the making of a film by reason only –

(i) that he is financially interested in the making of the film or is engaged in a clerical capacity as a servant of an undertaking concerned with the making of the film; or

(ii) that he supplies goods used in the making of the film or is in the employment of a person who supplies such goods;

(c) payments paid or payable to a person who is engaged in an administrative capacity as an officer or servant of an undertaking concerned with the making of a film shall not be taken to be attributable to the making of the film except in so far as they are payments in respect of services directly concerned with the making of that film."

24. Turning then to section 48 of the 1997 Act, that in the relevant respects provides as follows:-

"48. Relief for expenditure on production and acquisition

(1) Subject to subsection (4) below, section 42 of the Finance (No 2) Act 1992 shall have effect in relation to any expenditure to which this section applies as if the following subsection were substituted for subsections (4) and (5) (which for any period limit relief for film production and acquisition expenditure to a third, or a proportionately reduced fraction, of the relievable expenditure) –

"(4) The amount deducted for a relevant period under subsection (1) above shall not exceed so much of the total production expenditure incurred by the claimant on –

(a) the production of the film concerned, or

(b) the acquisition of the master negative or any master tape or master disc of it,

as has not already been deducted by virtue of section 40B or section 41 above of this section."

(2) Subject to subsection (3) below, this section applies to so much of any expenditure falling within paragraphs (a) and (b) of section 42(1) of the Finance (No 2) Act 1992 as is expenditure in relation to which each of the following conditions is satisfied, that is to say –

(a) the expenditure is expenditure incurred on or after 2^nd July 1997 and before 2^nd July 2005,

(b) the film concerned is a film with a total production expenditure of £15 million or less; and"

(c) the film concerned is a film completed on or after 2^nd July 1997.

(3) This section does not apply to so much of any expenditure falling within section 42(3) of the Finance (No 2) Act 1992 (acquisition expenditure) as exceeds the amount of the total production expenditure on the film concerned.

(4) Where this section applies to only part of any expenditure to which subsection (2) or (3) of section 42 of the Finance (No 2) Act 1992 applies in the case of any film, the amount deducted by virtue of subsection (1) of that section for a relevant period shall not exceed the sum of the following amounts –

(a) the maximum amount of expenditure to which this section applies that is deductible for that period in accordance with subsection (1) above; and

(b) the maximum amount specified in subsection (5) below.

(5) The amount mentioned in subsection (4) above is the maximum amount which would be deductible for the relevant period in accordance with subsection (4) of section 42 of the Finance (No 2) Act 1992 if –

(a) in paragraphs (a) and (b) of that subsection (but not in paragraph (c)) the references to expenditure incurred by the claimant did not include references to any expenditure to which this section applies; and

(b) the maximum amount mentioned in subsection (4)(a) above had already been deducted by virtue of that section.

(6) In this section "total production expenditure", in relation to any claim for relief under section 42 of the Finance (No 2) Act 1992 in the case of any film, means (subject to subsections (6A) and (7) below) the total of all expenditure on the production of the film, whenever incurred and whether or not incurred by the claimant.

(6A) For the purposes of this section the production expenditure on a film shall be taken not to include any amount that at the time the film is completed –

(a) has not been paid, and

(b) is not the subject of an unconditional obligation to pay within four months after the date of completion…."

25. As to the definition of "trading stock" (relevant to the second issue before me and brought in by section 42(8) of the 1992 Act), reference should be made to section 100 of the Income and Corporation Taxes Act 1988 which provides by section 100(2) as follows:-

"100.(2) For the purposes of this section "trading stock", in relation to any trade –

(a) means property of any description, whether real or personal, being either –

(i) property such as is sold in the ordinary course of trade, or would be so sold if it were mature or if its manufacture, preparation or construction were complete; or

(ii) materials such as are used in the manufacture, preparation or construction of any such property as is referred to in sub-paragraph (i) above; and

(b) includes also any services, article or material which would, if the trade were a profession or vocation, be treated, for the purposes of section 101, as work in progress of the profession or vocation, and references to the sale or transfer of trading stock shall be construed accordingly."

26. Finally – and relevant to the third issue – regard must be had to sections 60 and 61 of the Finance Act 2005 (contained in Chapter 6 relating to Film Relief). They are in these terms:-

"60 Deferred income agreements which exist when relief claimed

(1) This section applies where –

(a) in relation to a trade or business ("the relevant trade"), a company ("C") makes a claim on or after 2^nd December 2004 under section 42 of F(No 2)A 1992 for a deduction for a relevant period in respect of expenditure relating to a film ("the claim"), and

(b) when the claim is made, one or more deferred income agreements in respect of the film exist to which C is or has been a party and which C entered into on or after 2^nd December 2004.

(2) C is to be treated for corporation tax purposes as receiving, in the relevant period in respect of which the claim is made, an amount of income from the relevant trade equal to the amount of excess relief.

(3) If, at the time immediately after the end of the 15 year period, C is carrying on the relevant trade, C is to be treated for the purposes of section 40B of F (No.2) A 1992 (allocation of expenditure to periods) as incurring at that time relevant film expenditure of an amount equal to the amount of excess relief.

(4) The "amount of excess relief" is the amount given by the following formula –

D x (1 – T1 )

T2

where –

D is the amount which C is entitled to deduct under section 42 of F(No.2) A 1992 by virtue of the claim;

T1 is the number of days in the 15 year period;

T2 is the number of days in the period which begins with the operative date and ends with the final deferral dates.

(5) The "15 year period" means the period of 15 years which begins with the operative date.

(6) The "operative" date means –

(a) where the claim is only in respect of expenditure incurred on the acquisition of the original master version of the film, the date of that acquisition, and

(b) in any other case, the date upon which the film is completed.

(7) The "final deferral date" means –

(a) the last date of deferral in relation to the deferred income agreement mentioned in subsection (1)(b) (see section 61), or

(b) where there is more than one such agreement, the date which is the latest of the last dates of deferral in relation to those agreements.

(8) "Relevant film expenditure" means expenditure of a revenue nature on the production or acquisition of the original master version of the film.

(9) Any income received in a relevant period by virtue of this section is in addition to any other income received in that period.

(10) This section is deemed to have come into force on 2^nd December 2004.

61. Meaning of "deferred income agreement in respect of a film"

(1) For the purposes of section 60, a "deferred income agreement in respect of a film" means an agreement which satisfies condition A or condition B.

(2) Condition A is that the agreement (whether or not it supplements or varies another agreement) –

(a) guarantees to any person an amount of income arising from the exploitation of the film, and

(b) has the effect that the last date of deferral is a date after the end of the 15 year period.

(3) Condition B is that the agreement –

(a) supplements or varies another agreement ("the earlier agreement") which guarantees to any person an amount of income arising from the exploitation of the film, and

(b) has the effect that the last date of deferral is a date which is after the end of the 15 year period and after the last date of deferral (if any) in relation to the earlier agreement.

(4) The "last date of deferral" means the last date upon which an amount of the guaranteed income will or may arise.

(5) It does not matter whether any of the agreements mentioned in subsection (2) or (3) existed before 2^nd December 2004.

(6) For the purposes of this section –

(a) "agreement" means an agreement or series of agreements, and

(b) an agreement "guarantees" an amount of income if the agreement, or any part of it, is designed to secure the receipt of that amount (or at least that amount) of income.

(7) This section is deemed to have come into force on 2^nd December 2004."

The Agreements

27. Those, then, are the principal statutory provisions by reference to which the Agreements entered into by the various parties have to be considered for the purposes of the issues raised on this appeal. I turn then to the main provisions of the Agreements.
28. The form of the PSA, which was made as a deed, was to annex, as Annex A, the operative contractual provisions. These are very lengthy. The introductory provisions of Annex A contain extensive definitions. The following in particular may be noted:-

20.1 "Delivery Material" was defined to mean the delivery material in respect of the Film, particulars of which were set out in schedule II, and "all other physical materials" acquired or created by MHP Ltd. The Delivery Material specified in schedule II was extensively defined so as, in effect, to include all materials (including original negatives) and documentation of whatever nature related to the Film.

20.2 "The Film" was defined as, in effect, the film or motion picture to be produced in accordance with the PSA provisionally entitled "Mrs Henderson Presents".

20.3 "The Budget" was defined to mean the estimated cost of performance of the production services for the Film – then put at £12,240,230.

29. The following are the key operative provisions of the PSA for present purposes:-

"1. Production of the Film

1.1 In consideration of the undertaking of the Producing Partnership to advance or to procure the advance of a sum equal to the Budget, the Producing Partnership hereby engages the Production Services Company to perform the Production Services at the direction of the Producing Partnership, so as to enable the Producing Partnership to produce and complete the Film and to effect delivery to the Distributor. Subject to the Producing Partnership advancing or procuring the advance to the Production Account of a sum equal to the Budget the Production Services Company undertakes to perform the Production Services for the Film for the cost specified in the Budget in accordance with the Production Schedule, the Specification and with all the terms and conditions of this Agreement. The Production Services shall mean all goods and services necessary to undertake and complete the principal photography and post production of the Film and deliver the Delivery Materials to the Producing Partnership and to the Distributor. The Producing Partnership grants the Production Services Company a sole, exclusive and (save upon the occurrence of the Event of Default) irrevocable licence under copyright in the Screenplay solely to the extent necessary to perform the Production Services (and not otherwise to exploit or infringe such copyright) which licence will automatically terminate if an Event of Default occurs ….

2. Ownership of Delivery Material and Rights

2.1 Title absolute in respect of all Delivery Material and all other material relating to the Film shall vest automatically in the Producing Partnership whenever and wheresoever created on the date of the creation or acquisition of such Delivery Material or other material by or on behalf of the Production Services Company. To the extent title in the same shall not have vested in the Producing Partnership as aforesaid the Production Services Company shall hold all such Delivery Material and other material on trust for the Producing Partnership.

2.2 Without prejudice to the foregoing, the Production Services Company acknowledges that the Production Services are being undertaken at the direction of the Producing Partnership and that accordingly the Producing Partnership is the maker and author of the Film and the first owner of copyright in the Film and the Distributor is the Commissioning Producer of the Film (within the meaning of Section 101 Finance Act 2002). The Production Services Company with full title guarantee hereby assigns to the Producing Partnership and (and, so far as the same is applicable, by way of present assignment of future copyright) for the full period of copyright including all renewals, revivals, extensions and reversions thereof and thereafter, in so far as it is able, in perpetuity to hold unto the Producing Partnership absolutely (but subject to a licence hereby granted by the Producing Partnership to the Production Services Company to deal with the said copyright material in such manner as may be necessary to fulfil the Production Services Company's obligations in relating to the making of the Film hereunder) the entire copyright and all other rights in any and all media whether vested, contingent or future and when now know or in the future created throughout the universe in:

(a) the Third Party Material, the Film, and every part thereof and all rights of exploitation therein whatsoever.

(b) the benefit of the Production Contracts and all other agreements entered into and to be entered into by the Production Services Company in connection with the Film; and

(c) the products of the services of the Production Personnel in connection with the Film …."

It thus is to be noted that by these provisions Micro Fusion became both absolute owner of the copyright in the Film and had title absolute in all Delivery Material (which would include the master negative of the Film). Moreover, the drafting of clause 2 shows - which accords with basic principles – that the Delivery Material and the copyright were regarded as distinct assets: pains were taken to ensure that ownership of both vested in Micro Fusion.

30. Turning then to the DCA, that too was made as a deed, with the extensive contractual provisions annexed as Schedule A. Its provisions included (by clause 3.1.6) a provision that the Approved Budget was £14,116,700 and (by clause 4.2) a provision that there be a copyright notice (subject to exercise of rights under clause 9.1) for "Mrs Henderson Presents" in favour of Micro Fusion. Clause 7 provided that Micro Fusion (styled "the Partnership") would effect delivery of "Mrs Henderson Presents" to Pathé (styled "the Commissioner") on the basis set out. Of central importance to the present appeal is clause 8, which is headed "Grant of Rights". It provides, in the relevant respects, as follows:-

"8.1 Term

The "Term" shall commence on signature hereof and end the earlier of (a) 21 years from the first theatrical release of the Picture or (b) December 31, 2026.

8.2 Territory

The "Territory" shall consist of the entire universe.

8.3 Grant of Rights

8.3.1 The Partnership hereby sells and the Commissioner hereby purchases all the Partnership's right, title and interest in and to the Delivery Material (as defined in the Production Services Agreement) and the Commissioner shall become the absolute owner thereof. Further, insofar as Partnership creates or causes to be created any Physical Materials (meaning all tangible property constituting or associated with the Picture including but not limited to all pre-print sound and film materials and all still photographs, videotape and audiotape (in any form, whether digital or analogue, all exposed negative, all positive prints (including without limitation dailies) all trims, outs and cuts)) or is granted by the Producer the ownership interest in any of the Physical Materials Partnership hereby sells and assigns ownership to such Physical Materials to Commissioner with effect from the later of Delivery of the Picture or as soon as is reasonably practicable after such creation or transfer of ownership to Partnership, Further, Partnership agrees to deliver any such Delivery Materials to the Laboratory as soon as is reasonably practicable.

8.3.2 Partnership hereby licenses and assigns solely, exclusively and irrevocably to Commissioner, its successors, licensees and assigns, throughout the Territory and for the Term, the sole, exclusive and irrevocable right, licence and privilege (but subject to the contractual rights of or restrictions of third parties pursuant to agreements entered into by the Producer relating to the Picture and approved by the Commissioner) ("Third Party Rights") and with the Partnership reserving to itself the copyright (SAVE FOR the Underlying Rights (as defined in the One Picture Licence Agreement) which are retained by the Commissioner) in the Picture, to the full extent of Partnership's interest therein all rights to distribute, exhibit, market, exploit, sell, advertise, perform, dispose of, turn to account or otherwise deal within any and all media whether vested, contingent or future and whether now known or in the future created throughout the universe in the Picture (exclusive of the Partnership's copyright interest therein) and all ancillary and subsidiary rights therein and thereto, the Publicity Material (as defined in clause 8.3.2(k) below) and any and all material incorporated in the Picture by way of licenses from third parties or rights controlled by such third parties (the "Third Party Material") and all rights of exploitation therein whatsoever, including, but not by way of limitation, the following rights under copyright (but for the purposes of clarity, not the legal title to the copyright itself): theatrical, non-theatrical, videogram (all formats) and television (all forms) exploitation including without limitation the following sole and exclusive rights to the full extent of Partnership's interest therein: …

8.4 Reservation of Rights

For purpose of clarity and without derogating from Commissioner's right to acquire the Buyout Rights under clause 9 below and in each case subject to the retention by the Commissioner of the Underlying Rights, the Partnership specifically reserves:

8.4.1 during the Term the copyright in and to the Picture (subject always to the grant of rights in clause 8.3 above); and

8.4.2 after the Term (and to the extent the Buyout Rights have not been exercised) all rights in and to the Picture (including but not limited to the Partnership's copyright interest);"

"Picture", I should add, is defined in the DCA as meaning:-

"a new and original feature length motion picture of first class technical quality in the English language currently entitled "Mrs Henderson Presents" (or such other title by which such motion picture is now or may hereafter become known)."

Clause 9 then deals with the Buyout Rights referred to in clause 8.4. In the relevant respects it is in these terms:-

"9.1 Option Period

"At any time between the date which is one (1) year prior to the expiry of the Term and the expiry of the Term (the "Option Period"), the Commissioner shall have the sole and exclusive right to acquire the Partnership's bare copyright interest and all other right title and interest of the Partnership in and to the Picture (and in any material upon which the Picture is based) throughout the Territory for a term commencing upon expiry of the Term and continuing thereafter in perpetuity (the "Buyout Rights"). The Partnership agrees to notify Commissioner in writing at the beginning of the Option Period and if Commissioner has failed to respond to the Partnership by 90 days prior to the expiry of the Option Period, the Partnership shall send a reminder notice in writing on or before two months prior to the end of the Option Period to ascertain whether or not Commissioner wishes to acquire the Buyout Rights. The Commissioner shall have the right to acquire the Buyout Rights by notice in writing to the Partnership during the Option Period (the "Buyout Notice"). Upon receipt by the Partnership of the Buyout Notice during the Option Period, the Buyout Rights will be assigned to the Commissioner effective upon expiry of the Term without the benefit of any warranty (save that the Partnership shall not have encumbered or otherwise disposed of the same or any part thereof or right therein except by way of the Commissioner Agency Agreement). …"

Clause 9.2 relates to determination of the Buyout price. Then by clause 9.3:-

"9.3 Failure to Exercise Buyout

If the Commissioner does not exercise its rights under this clause 9, then upon expiry of the Term the Commissioner shall not destroy any physical materials relating to the Picture but, that Commissioner shall with ten (10) business days of receipt of Partnership's written request thereof, return to the Partnership at Commissioner's sole cost and expense such physical materials relating to the Picture (other than the Excluded Materials) as the Partnership may request and will continue to store any preprint and print film elements until such request(s) is made or may, in its discretion physically deliver the same to Partnership"

31. Clause 11, headed "Consideration", provides for the consideration payable, by a series of elaborate provisions in effect designed to secure to Micro Fusion a share of the receipts by Pathé to cover additional costs; then after payments of Adjusted Gross Receipts (as defined) (if any) due under clause 11.2.1 an amount equal to 10% of "Adjusted Gross Receipts" (as defined) as earned by Pathé and paid each year; but with a requirement for payment of "Minimum Guaranteed Amounts" (as defined). This, as the Special Commissioners found, was designed to give Micro Fusion, and thereby its investing members, its fixed return on its investment. Finally there was potentially payable a 5% share of "Gross Receipts" (as defined). As the Special Commissioners put it:-

"In broad terms the effect of those provisions is to give Micro Fusion a guaranteed income regardless of the commercial success of the film but also a share of the revenues earned by Pathé from its distribution of the film should the film prove to be successful."

(Clause 15, it may be noted, included provisions relating to Default and Termination, and whereby, in certain circumstances on termination, the master negative and all other materials and rights reverted to Micro Fusion.)

32. Of particular relevance to the third issue on this appeal is clause 11.2.2. That provides as follows:-

"11.2.2 After payments of Adjusted Gross Receipts (if any) due under clause 11.2.1 above, an amount equal to ten percent (10%) of one hundred percent (100%) of Adjusted Gross Receipts (which, for avoidance of doubt shall commence from the first dollar of Adjusted Gross Receipts). The Commissioner agrees that in each twelve (12) month period, commencing with the twelve (12) month period ending in 2006 and continuing until the twelve (12) month period ending in 2025 (in each case, on the dates set forth in Exhibit "D"), the Partnership's share as aforesaid will be not less than the respective amount for such twelve (12) month period set out in Exhibit "D" which is attached hereto and incorporated herein by this reference (in this Agreement, "Minimum Guaranteed Amounts" means the amounts set forth in Exhibit "D"). Accordingly, within thirty (3) days of the end of each such twelve (12) month period, Commissioner shall pay Partnership the Minimum Guaranteed Amount for such twelve-month period. Payment of Minimum Guaranteed Amounts as aforesaid shall be secured in a manner satisfactory to the Partnership by an irrevocable letter of credit or bank guarantee from a bank approved by the Partnership (Société Générale being hereby approved) in the form of Exhibit "E" which is attached hereto and incorporated herein by this reference (the "Bank Guarantee") and the Partnership shall be deemed to have received each Minimum Guaranteed Amount due and payable under Exhibit "D" in the event that it is paid in accordance with the terms of the Bank Guarantee (including any acceleration of such payments in accordance with the terms of such Bank Guarantee) or any replacement repayment structure. The balance of the Adjusted Gross Participation shall be paid to the Partnership at the end of each accounting period as set forth in Exhibit "C". For the avoidance of doubt, any amount paid to the Partnership pursuant to the letter of credit or the bank guarantee during any twelve (12) month period shall reduce the payments due to the Partnership from the Adjusted Gross Receipts under this clause 11.2 for the same twelve (12) month period by an equal amount."

Turning then to Exhibit D, that is in fact blank. No Minimum Guaranteed Amounts are there set out. It is common ground that this was not a slip or oversight – rather at that time those amounts (or, indeed, the Approved Budget) had not yet been determined or agreed. I will have to come back to the potential significance of that in dealing with the arguments on the third issue. In this context, also of potential relevance are further provisions contained in the DCA. Thus clause 17 provides as follows:-

"17. Further Assurance

Each of the parties hereto agrees to take or cause to be taken such further actions to execute deliver and file or cause to be executed delivered and filed such further instruments as may be necessary or requested by the other party in order fully to effectuate the purposes, terms and conditions of this Agreement."

And clause 18.2 provides as follows:-

"18.2 Supplemental Documents

Each party will from time to time, upon the other's reasonable request and at their own expense, execute, acknowledge and deliver such instruments, documents and deeds consistent with the terms hereof, as may be required to give full and further effect, evidence, maintain, effectuate or defend any and all of the rights granted under any provision of this Agreement."

33. Accordingly the ostensible effect of the DCA, by clause 8.3.1, was that on delivery Pathé became absolute owner of the Delivery Material, without, on the face of it, any restriction in point of time. Further, it acquired the fullest rights of distribution and exploitation, by clause 8.3.2, albeit limited in point of time to a term of 21 years and albeit with the ownership of the copyright (described as the "bare copyright" in clause 9.1) being reserved to Micro Fusion. Further again, by clause 8.4, after the 21 year term all rights in and to "the Picture" were reserved to Micro Fusion unless Pathé had, under its option contained in clause 9, exercised the rights conferred under clause 9. If it did not exercise the option, Pathé was to return all physical materials relating to "Mrs Henderson Presents" as Micro Fusion might in writing request at the end of the 21 year term.
34. For completeness on aspects of the transactional history, on 1 December 2004 by a Pre-release Sale and Purchase Agreement ("the PRSPA") between Pathé and Future Screen Partners No.1 LLP ("Future") in relation to "Mrs Henderson Presents" – and it was not disputed that such a transaction was in contemplation at the time of the PSA and the DCA – Pathé entered into a sale with Future. The recitals state that Pathé is "the legal and beneficial owner" of the original master negative of the Film (as defined) subject to the Prior Agreements (as defined). By clause 2.2 Pathé represented and warranted that it would immediately prior to execution be "sole and exclusive owner of the Delivery Material and licensee of the Rights free from any proprietary claims of third parties … subject to the Prior Agreements" and that upon execution Future should become "the legal and beneficial owner of the Delivery Material and licensee of the rights free from any proprietary claims of third parties. …". No Prior Agreements, it is to be observed, were listed in the applicable schedule (schedule 4). "Delivery Material" was defined to mean the physical material referred to in schedule 1 – in effect, the master negative of the Film fully synchronised with the music and soundtrack. "Rights" had the meaning ascribed in schedule 3 – that, in effect, conferred the sole and exclusive licence of exploitation, in the widest possible terms "for the period of the Seller's interest therein": but excluding all copyright and other intellectual property rights "all of which are expressly reserved to the Seller [Pathé]".
35. Clause 3.1 of the PRSPA is in these terms:-

"3.1 Subject to satisfaction by the Seller or waiver by the Purchaser of the Conditions Precedent, the Seller shall sell and the Purchaser shall purchase the entire legal and beneficial interest in the Delivery Material and the Seller shall license the Rights (subject to and with the benefit of the Prior Agreements) for an amount equal to the certified cost of the Film, as evidenced by the production cost statement delivered pursuant to Clause 2.1(viii) above (subject to a maximum of £15,000,000) (the "Purchase Price") plus Value Added Tax and any stamp duty (if applicable)."

36. Following the PRSPA Future leased back to Pathé the master negative and relevant rights. By this route, I gather, Pathé was still enabled to distribute the Film but Future had been put in a position to seek to claim the acquisition expenditure by way of tax relief.
37. Miss Simler also sought to rely on other subsequent Agreements entered into by Pathé (and to some of which Micro Fusion was party) as casting light on the true interpretation and effect of the PSA and DCA. Although one might query the legitimacy of seeking to rely on some of such subsequent documents (which were not necessarily part of the initial overall documentary package contemplated) Mr Peacock did not suggest that she was disentitled from seeking to do so. The principal purpose of Miss Simler's reliance on this further documentation was to seek to emphasise that the DCA had been designed and intended to constitute a sale of the master negative or print of and associated rights in "Mrs Henderson Presents" to Pathé in order for Pathé, as legal and beneficial owner, itself both to use it as a security with financing parties and also in due course to sell it on to Future.
38. Thus by a Security Assignment and Charge dated 18 October 2004 Pathé charged in favour of the UK Film Council and the British Broadcasting Corporation all its rights, title and interest in "Mrs Henderson Presents". The assignment and charge, by clause 3, included the "entire copyright throughout the Universe in the Film" and all physical materials including the master negative. Miss Simler noted that such charges were given expressly "with full title guarantee". She also noted that, by clause 5.1(i), Pathé represented and warranted that it "is the sole, lawful and beneficial owner of the mortgaged property free from any encumbrance other than the security constituted herein, other than the security in favour of [Micro Fusion] … ."
39. Amongst other documents, Miss Simler further referred to a Charge and Security Assignment made on 28 January 2005 between Pathé and Micro Fusion, designed to provide security for the payments due to Micro Fusion under the DCA. Among other things, by clause 2.2 Pathé "with full title guarantee" charged all its rights, title and interest in the Film pursuant to the DCA "for the full period of copyright". By an Interparty Agreement also dated 28 January 2005, made between a number of financing parties, Micro Fusion, Pathé and others, the parties agreed by clause 11.3 that they would release their security interests to enable Pathé to "sell and assign" the master negative to conclude the sale and leaseback free of all encumbrances.
40. Finally, on the documentation, I should refer to the Deed of Amendment to the Distribution and Commissioning Agreement made on 28 January 2005 between Pathé and Micro Fusion ("the DCA Amending Agreement"). The DCA Amending Agreement was made, as the Special Commissioners found, on the day fixed for financial closure of the transaction. The DCA Amending Agreement was stated to have effect from the date of the DCA itself, 1 October 2004. It operated to make certain amendments to Schedule A of the DCA and substituted a replacement Schedule A for that purpose; but, subject to that, the DCA and the original terms of Schedule A identical to the new terms were to "continue in full force and effect". One particular matter, it may be recalled, which had been left open in the original DCA was the amounts of the Minimum Guaranteed Amounts for the purposes of Clause 11.2.2. Those had by now been determined and agreed and were set out in Exhibit D of the DCA Amending Agreement: being amounts starting at £648,889.02 payable on 26 January 2007 and rising to £1,639,7210.25 payable on 28 January 2026.
41. Another amendment to the DCA was the insertion of a new clause 8.3.3. That provided as follows:-

"The above irrevocable grants of rights shall be without prejudice to (i) the Commissioner's reservation of the Underlying rights (as defined in the One Picture Licence) and (ii) the Partnership's reservation to itself of the copyright in the Picture, it being acknowledged by the Partnership that all rights of exploitation in the Picture are vested exclusively in the Commissioner further to the grant of rights above, and that the Partnership shall have no right to control, hinder or otherwise impede any rights of the Commissioner to exploit the Picture pursuant to the terms of this Agreement."

The Special Commissioners' decision

42. As I have indicated, the decision is conspicuously detailed and thorough, extending to 232 paragraphs over 73 pages (and dealing also of course with a number of issues no longer live on this appeal).
43. (a) On the first issue, that is to say, whether Micro Fusion was carrying on a trade or business which consisted of or included the exploitation of films for the purposes of section 42(1) of the 1992 Act, the Special Commissioners decided that Micro Fusion was carrying on such a trade or business. They accordingly held in favour of Micro Fusion. In approaching that question of interpretation, the Special Commissioners indicated that a "broader view gives a sense of perspective". Reviewing the overall effect of the arrangements, as they saw them, the Special Commissioners said this at paragraph 59 of their determination:-

"Seeing the arrangements in this way, and putting to one side the finer points, we are compelled to reach the view that Micro Fusion is exploiting the film, that is to say, turning it to account for the income which can be derived from it. It is difficult to see in what other way the arrangements could be characterised consistent with their overall commercial effect. The question then is whether any of the finer points displace the conclusion reached by taking the broad view."

44. Turning then to what they styled "the finer points", they concluded that the word "film" as used in section 42 extended to more than the master negative and was capable of extending to relevant intellectual property rights. They said this at paragraph 63:-

"… In our view, if a person holds distinct intellectual property rights in a film and exploits those rights by turning them to account, he can be regarded as carrying on a business consisting of the exploitation of films: in the narrow (and we would say overly-legalistic) sense, he is exploiting intellectual property rights, but applying a common sense approach (which we think it is the correct approach in looking at the scope of a trade) he is exploiting the film by means of his interest in it."

They went on to say this in paragraph 64:-

"If required, we would therefore be prepared to hold that Micro Fusion is carrying on a trade or business which consists of the exploitation of the film Mrs Henderson Presents even if it holds no interest in or right to the master negative or other physical record of that film. However, in our judgment the rights which Micro Fusion has under the arrangements it entered into with MHP and Pathé are such as to retain for itself a continuing interest in the physical record of the film, albeit of a residual or reversionary nature, being subject to the distribution and related rights it conferred on Pathé. That being so, even if the narrower view of the concept of the trade of exploitation of films for which HMRC contend is correct, that is the trade in which Micro Fusion is engaged."

45. (b) On the second issue (which is whether the film constituted trading stock) the Special Commissioners understandably commented that this was closely linked to the first issue. They noted that it was common ground that Micro Fusion was carrying on a trade. They concluded (in paragraph 77) that:-

"The transfer of title to the master negative and other physical film material under the Distribution Agreement was not an outright disposal nor was it a sale (a transfer of ownership and title for consideration) since title and ownership reverts to Micro Fusion without payment at the end of the 21 year licence period (or earlier in certain events of default) unless Pathé exercises its Buyout Rights".

They thus concluded that the film had not been "sold" and that it did not constitute trading stock. They rejected, however, an alternative argument on behalf of Micro Fusion to the effect that, even if there were a sale, there was not a course of conduct sufficient to constitute the film as trading stock ("property such as is sold in the ordinary course of trade"). I gave Micro Fusion permission to seek to challenge, out of time, that particular finding by way of Respondent's Notice.

46. (c) As to the third issue (by reference to section 60 of the 2005 Act), it was common ground that the DCA ostensibly was a deferred income agreement within the ambit of section 60. The principal question was whether it took effect prior to 2 December 2004 in the relevant respects. The Special Commissioners decided that it did notwithstanding the absence of the details of the Minimum Guaranteed Amounts in Exhibit D of the DCA (in its unamended form); and that the entry into the DCA Amending Agreement on 28 January 2005 (that is, after the 2 December 2004) did not have the effect that last date of deferral was a date after the end of the 15 year period. The Special Commissioners thus decided this point also in favour of Micro Fusion. As I have said, they left the jurisdictional point open and expressed no conclusion on it.

The first (Nature of Trade) Issue: submissions and disposition

47. Miss Simler's principal submission was that, for the purposes of section 42 of the 1992 Act, a "film" meant the master negative or print and the master negative or print only – it did not extend to intellectual property rights. She said that Parliament was concerned with expenditure by way of production expenditure or acquisition expenditure on the master and had no reason to extend relief to intellectual property rights. She further observed, in general terms, that ownership of the copyright is not sufficient for there to be exploitation of a film. Exploitation, she said, requires the master negative as well. With that last point I can agree; but it can also be pointed out that, conversely, ownership of the master negative is of limited value in the absence of the relevant intellectual property rights (by way of ownership or licence): for the core right of a copyright owner is to be able to prevent the unauthorised exploitation of a protected work. Miss Simler's alternative argument at all events was that, even if a film could comprise both master negative and the copyright nevertheless a film could not for the purposes of section 42 be "exploited" as to the copyright alone: it necessarily also required exploitation of the master negative. Miss Simler went on to submit that under the DCA Micro Fusion had disposed of ("sold", as she said) the master negative of "Mrs Henderson Presents" to Pathé; and to the extent that Micro Fusion had retained the copyright ("the bare copyright", as it was styled), subject to the exclusive rights granted to Pathé for the 21 year term, that could not alter that outcome or show that Micro Fusion was "exploiting the film". Nor, she said, could the provisions whereby, subject to the option in favour of Pathé to exercise its Buyout Rights, the master negative was, on request, to be returned to Micro Fusion at the end of the 21 year term.
48. In support of, and by way of laying a foundation for, aspects of her argument Miss Simler undertook an extensive review of previous legislation relating to "plant" and previous legislation relating to film relief under the capital allowances regime. It can of course be accepted that the draftsman of the 1992 Act would have been well familiar with such provisions, and I am not prepared to regard them as wholly irrelevant to the question of construction of section 42. Even so, in agreement with the Special Commissioners, I think such previous legislation is only of limited assistance. It is of limited assistance just because, as was common ground before me, section 42 was an entirely new statutory provision and afforded new statutory relief.
49. At all events, Miss Simler was able to point out that under the Copyright Act 1956 and the Copyright, Designs and Patents Act 1988 the copyright is clearly distinguished from the film, in that the film is regarded as the physical material comprising the recorded visual images and (broadly speaking) it is the "maker" of the physical record who, subject to agreement to the contrary, is to be regarded as copyright owner. From this she went on to refer me to section 72 of the Finance Act 1972. That relates to "expenditure … on the production or acquisition of a film, tape or disc". It was provided in such section (2) among other things that subject to subsection (8) "any reference to a film is … a reference to an original master negative of the film and its soundtrack (if any)"; and that any reference to the acquisition of a film "includes a reference to the acquisition of any description of rights in a film …". Subsection (3) makes reference to profits or gains accruing which consisted of or included "the exploitation of a film" – according to Miss Simler, this is the first statutory reference to "exploiting" films. Subsection (5) precludes application of the section where the film constitutes trading stock. Subsection (8) provided that the Secretary of State should not certify "a film, tape or disc" as a qualifying film, tape or disc unless satisfied that "it is a master negative, master tape or master disc" which satisfies the specified eligibility criteria. Overall Miss Simler submitted, and I accept, that the drafting connotes that under that Act a film is to comprise a master negative: and where the statute wishes to extend the meaning to include other rights it specifically so provides. A similar approach is adopted in section 68 of the Capital Allowances Act 1990, a successor as I understand it to section 72 of the Finance Act 1972.
50. Miss Simler reinforced her argument by referring to the decision of Vinelott J in Barclays Mercantile Industrial Finance Ltd v Melluish [1990] STC 314. That was a case where capital allowances were claimed for film related expenditure under statutory provisions not by any means on all fours with section 42 of the 1992 Act. In the course of his judgment, however, Vinelott J (at p.346) commented:-

"There seems to me to be much to be said for the view that the "plant" consists of the physical material: the copyright and other intellectual property rights are not part of the plant though they may render it more valuable. Even in the absence of these rights the plant would not be wholly valueless …. However, I do not think that it makes any difference for the purposes of this case whether the plant is to be taken to be the physical material itself or the physical material cum rights."

She also referred me to a series of cases culminating in the well-known case of Munby v Furlong [1977] Ch.359. She observed that while "plant" can be extended to objects required for intellectual use – a lawyer's books in that case – still there had to be the physical objects (the books) even if not used in a physical way. Plant, she therefore said, could not extend to rights in gross.

51. All this no doubt is very interesting, but it still leaves open the question of whether section 42 – a new provision – was intended in its reference to the "exploitation of films" to confine itself to the physical master negative. I do not think there necessarily can be any starting presumption that it was simply because different earlier statutory provisions, relating to plant and capital allowances, apparently proceeded on that basis.
52. For his part Mr Peacock submitted that the phrase "exploitation of films", as used in section 42, can extend to intellectual property rights in a film on their own. This argument was, as I have indicated, accepted by the Special Commissioners. But I cannot agree with them.
53. I have to say that I am a little wary of adopting the approach of the Special Commissioners in taking, as a starting point, a "broader view" and then seeing if it is displaced by what they style "the finer points". One can have no quarrel with an approach to statutory construction of a revenue statute (as any other) which tests an interpretation by assessing whether its consequences make commercial and realistic sense and accord with the statutory purpose, provided a statutory purpose can be clearly identified: see for example the remarks of Lord Hoffmann in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311. But in the present case no one suggests that either of the competing statutory interpretations gives rise to a result which is senseless: it is a question of how far Parliament has gone in making available the intended reliefs. I am not sure it does justice to the need to analyse closely the relevant statutory provisions and the precise terms of the various Agreements which the parties have entered into, in order to assess both what Parliament intended and the parties have achieved, to style such analysis as being of "the finer points".
54. In my view "the exploitation of films", for the purposes of section 42, cannot be taken as extending to dealings solely with intellectual property rights in a film and the turning of them to account. Indeed it may at least be queried whether Parliament could really have intended to extend the available relief to acquisition expenditure in respect of copyrights as well as to acquisition or production expenditure in respect of the master negative. In my view, and contrary to the Special Commissioners' view, quite simply – and I do not even think it is a particularly "narrow" approach - that is indeed dealing in intellectual property rights (sc. in the film): it is not dealing in the film itself. There is nothing in sections 40A-D which supports such an approach as adopted by the Special Commissioners: on the contrary those explicitly (for example, by section 40A(1); section 40B(1); section 40D(2)) refer to expenditure incurred on "the production or acquisition of a master version of a film" and "exploitation of master versions of films" respectively. Further, section 40A(5) deems it necessary to make clear that "master version" includes any rights in the film held or acquired with the master negative. So does section 43(2)(b). Further again section 41(4), consistently with section 43(3), contemplates that there must be a master negative for there to be a completed qualifying film. This is also reflected in the terms of section 42 itself which clearly (for example by the terms of section 42(2) and (3)) contemplates that there must be a master negative. I therefore cannot agree with the view of the Special Commissioners that Micro Fusion is capable of carrying on a trade or business which consists of the exploitation of "Mrs Henderson Presents", even if it holds no interest or right in the master negative.
55. The next question is whether "film" as used in section 42 relates solely to the master negative. In my view, the terms of section 42(2) and (3) and (9) provide powerful support for such a proposition. Further, the terms of section 43(3) in providing, for the purposes of sections 41 and 42, that a film is completed at a time when "it" is first in a form when it can be regarded as ready for "copies of it" to be made, connote that the film is in essentials regarded as a physical object. In addition, such an interpretation would fit well with the provisions of sections 40A, 40B, 40C, 40D and 41(1) – (4) and with the provisions of section 43(2)(b). Moreover, such an interpretation cannot be said to be without sense or purpose – indeed it would in this respect be consistent with the earlier legislation.
56. Mr Peacock, however, powerfully pointed out that, for example, section 40A(1) talks of the production or acquisition of a "master version" of a film; and section 40D(2)(a) talks of the "exploitation of master versions of films". But section 41(1) and – crucially, he submitted – section 42 of the same part of this statute expressly, he observed, relate to the "exploitation of films": those provisions, therefore, do not in terms refer to the exploitation of "master versions" of films: which is what Miss Simler's argument connotes. Moreover as a matter of linguistics section 42 in places refers to the "master negative of a film": see section 42(2); section 42(3). That connotes that a "film" is something over and above the master negative: which also, he submitted, would accord with the language of the definition provisions, "in relation to a film", in section 43(1) of "master disc", "master negative" and "master tape".
57. No definitional solution is given in the 1992 Act: for section 43(2), as I have already said, does not give a definition, but rather says that any reference to a film "shall be construed in accordance with" paragraph 1 of Schedule 1 to the Films Act 1985. Schedule 1 to the Films Act 1985 itself also provides no definition, as such, of "film". Miss Simler is, in my view, nevertheless, entitled to point out that in paragraph 1 of Schedule 1 to the Films Act 1925 the word "film" includes a physical record; and that when other rights are to be included that is expressly provided for by the Schedule (see, for example, paragraph 2(2) of Schedule 1). She can further point to paragraph 6, which deems the scenario writer to be "directly engaged in the making of the film": she also points to the emphasis generally in Schedule 1 on the "making" of a film. Mr Peacock, on the other hand, points to the word "includes" as contained in paragraph 1 – and after all it is to paragraph 1 that section 43(2)(a) refers - which, he submits, is consistent with something more than a physical record being intended to be connoted by the word "film".
58. I do not find the answer to this particular question of statutory interpretation at all easy, given that the language used in relation to "film" in the 1992 Act tends, on occasion, in different directions. But on the whole I prefer the submissions of Miss Simler. It seems to me that the exploitation of a film contemplated by section 42(1) is designed to extend to a master negative. In my view that accords both with the language of the statutory provisions of the 1992 Act and with the description of "film" as contained in the Films Act 1985. I think that the word "includes" is capable of conveying a cautious anticipation of some future means of physical recording not heretofore used, notwithstanding the wide wording of "any record, however made, of a sequence of visual images ….", and perhaps also can extend to include such matters as the soundtrack.
59. Even if that is wrong, and the word "film" as used in section 42(1) of the 1992 Act is not be confined to the master print or negative, then in any event I accept Miss Simler's alternative formulation. That is, if "film" extends both to the master negative and to the intellectual property rights then there must be exploitation on the part of the business of both elements for there to be available relief by reference to section 42 of the 1992 Act (and section 48 of the 1997 Act).
60. Against those conclusions, one then has to see whether the Agreements entered into by the parties constituted the exploitation of a film. The word "exploitation" is not defined. I think it would be unwise, even if possible, to try to give some kind of judicial definition by way of gloss of the statute. Better, I think, to look at the particular arrangements – and the particular trade or business – in question and see if, viewed objectively, they consist of or include "the exploitation of films".
61. Mr Peacock did, however, suggest – an argument not adopted by the Special Commissioners – that a single outright sale of the film could in itself be exploitation of a film. I do not accept that. It seems to me that in this context exploitation at least carries with it the notion of a transaction designed to derive income from an asset on a continuing basis. That, for example, was the broad approach adopted by the European Court of Justice in Van Tiem v Staatssecretasis van Financiër [ 1993] STC 91 (albeit in terms of construing Article 4(2) of the Sixth Directive which by its language pointed to such a conclusion). I think that is the broad approach applicable here. It would, for example, be consistent with what was evidently contemplated by section 43(3)(a) of the 1992 Act. Further, as Miss Simler submitted, section 42(8) itself acknowledges the distinction between stock, which can be sold, and an asset which may be plant, which is not to be sold – that is to say, is turned to account in the course of business. That, I agree, is what "exploitation" connotes in this context. Consequently, in my view, an outright disposal of the film cannot be exploitation for this purpose. Indeed in the present case the draftsman of the arrangements seems so to have assumed, given that the Agreements contemplate both the retention of the copyright and the potential reversion after 21 years of the Delivery Material, coupled with the annual payments over the 21 year period payable (I will have to come on to the actual effect of these arrangements). Mr Peacock referred me to a passage of the first instance decision of Millett J in Ensign Tankers Ltd v Stokes [1989] 1 WLR 1222 (the case itself ultimately went to the House of Lords, with a differing result: [1992] 1AC 655). There, in the context of section 41 of the Finance Act 1971 and of the particular transactions there in question, Millett J said (at p.1240): "By entering into the various distributorship agreements, the partnership did not part with the rights to exploit the films, but exploited them". But that comment was not made by reference to the word "exploit" in any relevant applicable statutory provisions such as the one before me: in any event, as I read the report, although the partnership had parted with the distribution rights it had retained the master negative of the films concerned.
62. However, the principal argument of Mr Peacock – and to me really the main point on this first issue - was that there was here no "sale" of the film: rather, he submitted, it was "exploited" by Micro Fusion, deriving annual income from it, it having retained not only the copyright interest but also (in reversion, as it were) the right to the Delivery Material – that is, including the master negative – after the 21 year term. Miss Simler's argument was to the contrary. It will be appreciated that on the conclusion I have reached above it is critical to assess whether Micro Fusion had retained a continuing interest in the master negative (and not just the copyright) sufficient to show a business or trade in the exploitation of films.
63. Here too I take a view different from the Special Commissioners.
64. It might be thought that after a 21 year period the value of "Mrs Henderson Presents" would be nugatory. However, evidence was given by a Mr Levy before the Special Commissioners to the effect that the copyright in and master negative of "Mrs Henderson Presents" would still have commercial value and that "Mrs Henderson Presents" would still have an income-producing life after that period. The Special Commissioners accepted that, and found as a fact that "Mrs Henderson Presents" still had value after 21 years; and there can be no challenge to that finding of fact in this court. I proceed on that basis. All the same it is difficult not to think that the primary reason for the inclusion of the relevant provisions in the Agreement was to seek to bring the transaction within section 42.
65. I conclude that the substance and effect of the provisions of the DCA is that Micro Fusion had indeed sold the master negative to Pathé and that, at least for the 21 year period, Pathé was in truth the owner: which incidentally accords with the way it approached matters in some of the subsequent security documentation it entered into. My reasons are as follows.
66. The Special Commissioners at paragraph 67 reasoned (after setting out their view in paragraph 63 and paragraph 64 of their determination, which I have set out above):

"By entering into the Distribution Agreement Micro Fusion has exploited its interest in the rights it holds in the film (its ownership of the physical record and intellectual property rights). Micro Fusion has retained an interest not only in the copyright in the film but also in the master negative."

And a little later on at paragraph 70 they said this:-

"But looking at the Distribution Agreement as a whole we consider that it has the effect we have set out above, namely that in conjunction with the distribution licence rights granted to it and for the term of that licence only Pathé had possession of the master negative as owner subject to its obligation to transfer it back if it fails to exercise the Buyout Rights: there was not an outright disposal, by way of sale of the master negative such that Micro Fusion ceased to have any right or interest in the master negative."

67. I can agree that Micro Fusion had retained an interest in the master negative in the very limited sense that – provided it made a written request – it could secure return of the Delivery Material after the 21 year term had expired (if Pathé had not itself exercised the Buyout Rights). To that extent I reject Miss Simler's submission that the disposition of the physical materials to Pathé was "unreserved". But I do not see why the prospect – and it was no more than that – that Micro Fusion could after 21 years contractually secure, on request, the return to it of the master negative compels a conclusion that it had in the meantime generated income by exploiting its ownership of or rights over the master negative. Even if Pathé was not entitled to be considered absolute and outright owner and possessor of the master negative in perpetuity – in the sense that its right of possession was defeasible - in my view the substance and reality was that it was absolute owner at least for the 21 year term (as indeed the Special Commissioners themselves seem to have accepted). Further, Pathé had the entire distribution and exploitation rights and copyright licences therefor for that term. The draftsman of the scheme had clearly anticipated that exploitation of the master negative (not just the copyright) might be needed for the purposes of section 42(1): but at the same time he had to meet the commercial imperative that Pathé be, and be seen to be, the absolute owner of the master negative (and rights) sufficient to enable it to obtain the necessary financing and enter in the necessary charges and also to enter into the "double dip" transaction: in the way that in due course it indeed did. The wording of clause 8.3.1 of the DCA precisely reflects that. The new clause 8.3.3, inserted by amendment, also emphasised that "all rights of exploitation of the Picture are vested exclusively in [Pathé]".
68. Thus while I agree with the Special Commissioners that Micro Fusion can in one sense be said to have retained an interest in the master negative, by reason of the provisions of clause 9.3 of the DCA, I regard it as completely artificial to say that the purported income stream arising under clause 11 can be said to be by reason of "exploitation" of the master negative. The substantive reality was that Micro Fusion had entirely disposed of such master negative, and copyright rights, for the 21 year term: the purported income stream cannot be attributed to the retention of the bare copyright or to the residual prospect of reobtaining possession under clause 9.3 of the master negative: those payments in truth are the consideration for the sale.
69. I add that I also agree with the contention of HMRC that the Reservation Rights contained in clause 8.4.2 only extended to the copyright and related exploitation rights; for it is to be noted that clause 8.4.2 provided that at the end of the term, if the Buyout Rights were not exercised, all "rights" in and to "the Picture" (including but not limited to the copyright interest) were reserved to Micro Fusion. The clause is dealing with "rights" – in what is a very closely drafted Agreement - and does not refer to the Delivery Material at all. Nor does clause 9.3 refer to any transfer of property or title on "return" of the "physical materials" as opposed to the restoration of possession (consistent with bailment). However, this is perhaps not necessary to my overall conclusion on this point. Even if title and property in the master negative do, on written request, revert to Micro Fusion after the 21 year term I would still regard the transaction effected by the DCA as a sale: the consideration being payable by deferred instalments. Putting it another way, that the disposition – which I would regard as a sale to Pathé – may be defeasible in certain circumstances after 21 years does not entail that it was not at the time an outright disposition. When, in clause 8.3.1, it was stated that "[Micro Fusion] hereby sells and Pathé hereby purchases the right, title and interest in the Delivery Material" so that Pathé "shall become the absolute owner thereof" the language was apt: those words are to be read precisely in accordance with their tenor and they reflect the substance and reality of the transaction. Clause 9.3 neither displaces that nor is inconsistent with that.
70. Since I have also concluded that the retention of the bare copyright in "Mrs Henderson Presents" could not of itself bring Micro Fusion within the ambit of section 42 - indeed I take the view that the relevant copyright rights were in substance also "sold" for the 21 year term - it follows that I conclude that the appeal of HMRC on the nature of trade issue succeeds. The reality and the legal effect of the DCA was that the "film" was to be, upon delivery, exploited by Pathé; Micro Fusion was not itself carrying on a trade or business which consisted of or included the exploitation of films.

The Trading Stock issue: submissions and disposition

71. Strictly this issue does not fall for decision in view of my conclusion in favour of HMRC on the first issue. But this case may go higher; and as I heard detailed argument on the point, and as I was asked to express my conclusion on this issue whatever my conclusion on the first issue, I will do so – albeit in relatively short form.
72. As the Special Commissioners, very understandably in my view, observed, this issue is closely related to the Nature of Trade issue. It is unsurprising that the Special Commissioners, in the light of their conclusion on the first issue in favour of Micro Fusion, also reached a conclusion in favour of Micro Fusion on this second issue. It is in consequence perhaps unsurprising that, having reached a conclusion in favour of HMRC on the Nature of Trade issue, I also reach a conclusion in favour of HMRC on the Trading Stock issue.
73. The Special Commissioners proceeded on the footing that if the film was sold (to Pathé) - it being common ground that Micro Fusion was carrying on a trade – then it was property such as is sold in the ordinary course of the trade. I agree with the Special Commissioners that such a conclusion is to be reached even though Micro Fusion had no other history of selling or dealing in films: its trade or business relating solely to "Mrs Henderson Presents". Mr Peacock accepted that a single transaction comprising a sale of property was at least capable of causing that property to be trading stock. However he said that ordinarily recurrent sales were needed and he disputed that was so here. However the Special Commissioners held that (if, contrary to their view, there was a sale here) then that sale was here in the course of Micro Fusion's trade (the production and sale of films) even if it was a "one-off" transaction; and that the film would have been "trading stock" in relation to that trade. I would shortly say that I agree with that conclusion and the reasoning for it: an asset sold in a one-off transaction can constitute "trading stock" and that was the position here.
74. It will be gathered from what I have said earlier that I consider that the film was "sold" by Micro Fusion to Pathé. The Special Commissioners held, as I said, that the transfer of title in the master negative was "not an outright disposal nor was it a sale (a transfer of ownership and title for consideration)" since, as they said, title and ownership "reverted" to Micro Fusion at the end of the 21 year period if the Buyout Rights were not exercised . Leaving aside the argument that under clause 9.3 – if written request was made – possession, but not title, strictly reverted to Micro Fusion, I take the view that there was here under the DCA a transfer to Pathé of ownership and title of the master negative for consideration. Moreover, if it be relevant, entire and exclusive exploitation rights in intellectual property terms were granted for the 21 year period. That too is consistent with a sale. It is perhaps not necessary or appropriate to apply a strict sale of goods approach, for the purposes of s.100(2) ("such as is sold …"); but in any event the very use by the Special Commissioners in paragraph 77 of the determination of the word "reverts" seems to me to betray the argument. The legal effect, and reality, of the DCA was that Pathé acquired title to and ownership of the master negative, as well as all relevant exploitation rights: that it was defeasible, in certain circumstances, after 21 years, does not negate that. I repeat that the wording of clause 8.3.1 of the DCA – and reflected by the way in which Pathé subsequently treated its position for the purposes of its granting charges over the film – in my view has that legal consequence, which also reflects the reality. This was a sale – both of the master negative and also, if it be necessary so to find, of (for 21 years) the exploitation rights – objectively viewed. I agree with HMRC that an objective approach is the right approach here (cf. General Motors Acceptance Corporation Ltd v IRC [1987] STC 122).

The third issue: submissions and disposition

75. The provisions of sections 60 and following of the 2005 Act are designed to cover agreements relating to films where the income stream arising from the exploitation of a film may be payable over a period in excess of 15 years. Parliament, it can be inferred, did not continue to wish to extend annual relief for a period exceeding 15 years – hence the legislation introduced. The scheme of the legislation in this respect, as neatly summarised by the Special Commissioners, is to accelerate the income payments contractually payable as though they arose over the 15 year period and not the contractually prescribed longer period: the acceleration is in effect achieved by applying a mathematical formula to determine what is styled "amount of excess relief", treating that amount as received as income in the relevant tax year for which the section 42 relief is claimed.
76. This point also does not strictly arise in the light of my conclusions on the first two issues: but again I will accept the parties' invitation to express my own conclusions on it, full argument having been advanced.

(a) Jurisdiction

77. The first time the point was raised by HMRC by reference to section 60 was by amended statement of case submitted prior to the hearing before the Special Commissioners. It was on behalf of Micro Fusion objected at the hearing, as it is now, that the Special Commissioners had no jurisdiction on the point.
78. By his closure notice dated 7 December 2007, relating to the tax return for year ended 5 April 2006, the Inspector of Taxes had written to Future (on behalf of Micro Fusion) saying, among other things, this:-

"I have now completed my enquiry into your Partnership Tax Return for the year ended 5 April 2006. My conclusion is that an adjustment is required to the losses claimed. I am amending your return to reflect this. Thank you for your help during my enquiry.

My amendment

Your return is amended as follows. The partnership loss before my enquiry was £2,238,646. My amendment results in a £2,238,646 decrease in the loss and an increase in profits by £768,510. The amended partnership profit is now £768,510. I attach a sheet showing how the figures are calculated and each partner's share of the profit.

Your right of appeal

You have the right to appeal against this amendment or the conclusions within 30 days of the date of this notice …."

The attachment then set out the proposed amended profit shares for individual members, giving the total overall of £768,510.

79. A closure notice with regard to a partnership tax return is required by the terms of section 28B(1) of the Taxes Management Act 1970 to "state the conclusions" of the officer concerned. By section 28B(2) the notice "must either (a) state that in the officer's opinion no amendment of the return is required, or (b) make the amendments of the return required to give effect to his conclusions". Section 28B(3) provides that a closure notice takes effect when it is issued. Section 31(1)(b) provides that an appeal may be brought against "any conclusion stated or amendment made by a closure notice under section 28A or 28B of this Act (amendment by Revenue on completion of enquiry into return)".
80. The legislation thus distinguishes between a conclusion stated and an amendment required to give effect to the conclusion. The closure notice in this case is drafted accordingly, although the legislation prescribes no form. It is also to be noted that, under the statute, no reasons for the conclusion stated are required to be given. It also follows that an appeal must be by reference to the conclusion so stated and/or amendment made to the return.
81. Mr Peacock's short point here was that in this case the conclusion stated, and the consequential amendments made, do not extend to section 60 of the 2005 Act. He elaborated on that by saying that the way in which section 60 operated was to bring into the tax return the relevant amount of excess relief, treating that amount as income in the relevant tax year for which the return was submitted.
82. Mr Peacock placed reliance on the decision of Henderson J in Tower McCashback LLP v Revenue and Customs Commissioners [2008] STC 3366. That case extended to many issues: one such issue was whether the appeal in that case went beyond the subject matter of the conclusions and amendments stated in the closure notice. Henderson J (at paragraphs 101-128) decided that, in the circumstances of that case, it did. As, speaking generally, he put it: "Issue of the notice is an irrevocable step and once it has been taken the battle ground on any future appeal will be defined by reference to it".
83. As Henderson J noted, the statute does not require any reasons to be given in a closure notice: what matters are the conclusions, not the process of reasoning by which the conclusions are reached (paragraph 113). He further held – and I agree - that, in circumstances where it is in dispute whether the taxpayer has paid the appropriate amount of tax, the Special Commissions are generally free to entertain legal arguments which played no part in reaching the conclusions set out in the closure notice (paragraph 115): even though the subject matter of the appeal is defined by the conclusions or amendments in the closure notice.
84. In that particular case the closure notice had stated:-

"As previously indicated, my conclusion is: the claim for relief under s.45 CA 2001 is excessive"

and went on to amend the partnership return to show nil Capital Allowances and nil Allowable Losses. Henderson J ruled that the introduction of the words "As previously indicated" - which he described as "the crucial words" -referentially brought into the conclusion another previous communication which had expressly stated among other things that "the McCashback scheme failed on the section 45(4) CAA 2001 point alone". He took the view that that would have conveyed to a reasonable recipient that HMRC's challenge to the effectiveness of the scheme was confined to the section 45(4) point; and that the compass of the appeal thus had to be confined to the facts relevant to the section 45(4) point alone.

85. In my view, that decision is distinguishable. In the case before me there is, in this closure notice, no such referential statement bringing in any other asserted ground of conclusion - the closure notice here simply sets out the stated conclusion (and amendments required to give effect to such conclusion). In my view the position here is more in line with the situation in Revenue and Customs Commissioners v D'Arcy [2006] STC 543, a decision of Dr Avery Jones sitting as a Special Commissioner. Dr Avery Jones indicated that the tribunal must form its own view of the law without being restricted to what the Revenue stated in their conclusion or what the tax–payer stated in the notice of appeal. I agree with that. It seems to me that, while it remains the case that the subject-matter of the appeal must be by reference to the conclusion or amendment in the closure notice, the courts should not be astute to graft on to that requirement a further limitation as to the reasons (if any) stated in the closure notice or elsewhere, if the matter is a legal point and no unfairness is raised by the point being pursued.
86. In the present case, as I say, the conclusion in the closure notice stated no bases for the conclusion. It was not suggested that fresh facts would arise required to deal with the section 60 point or that any unfairness could be or was caused to the taxpayer by the point being argued before the Special Commissioners. That, for the purposes of section 60, the form the restriction on the relief takes is by way of bringing in the relevant amount of excess relief as income does not, in my view, affect the substance of what the stated conclusion in the closure notice here is: for the practical effect of such addition is to adjust the losses and so an adjustment was required to the losses claimed (which is what the closure notice by way of conclusion states). Further, while the section 60 point may have a bearing on the amendments proposed in the closure notice, the amendments are not to be equated with the conclusion. In my view, to deny jurisdiction in this case would, in effect, be tantamount to introducing, by implication, reasons for the conclusion set out in the closure notice and then to restrict the appeal to such implied reasons. But the statutory provisions are not so confined.
87. I thus hold that the Special Commissioners, and I, had, and have, jurisdiction to entertain the point.

(b) Substantive issue

88. There can be no question but that the DCA took effect on 1 October 2004. There can be no question but that it purports to be a deferred income agreement as defined by section 61 of the 2005 Act. But it also follows that section 60 cannot apply to it, in that it was entered into before 2 December 2004. I did not understand Miss Simler to pursue before me an argument (apparently raised before the Special Commissioners) that to the extent that the DCA Amending Agreement substituted a new Annex A then the original DCA itself, and its Annex A, could not be said to have come into effect on 1 October 2004.
89. The question thus is whether "one or more deferred income agreements in respect of the film exists" to which [Micro Fusion] was a party and which it entered into after 2 December 2004. It is the submission of HMRC that there is: namely the DCA Amending Agreement, which was made on 28 January 2005. HMRC submits that such Amending Agreement "has the effect" that the last date of deferral was a date after the end of the 15 year period for the purposes of Condition A, as set out in section 61, if not also (if relevant) for the purposes of Condition B. Consequently, it is said, the provisions of section 60 are satisfied.
90. On behalf of Micro Fusion it was, rightly, accepted that the fact that the DCA Amending Agreement was stated to take effect from 1 October 2004 did not of itself mean that it was not entered into on the date it actually bears: (viz. 28 January 2005).
91. Mr Peacock, in essential summary, submitted that clause 11.2.2 of the DCA had in terms provided that the payments be made in 12 monthly periods ending in 2025: and that the DCA Amending Agreement in no way adjusted that as being the last date of deferral: it simply, in the relevant respects, completed Exhibit D by filling in the (now agreed) Minimum Guaranteed Amounts. Thus, he said, the DCA itself had already had the effect of setting the last date of 2025. He further pointed out that by the terms of clause 17 and clause 18.2 of the DCA itself, the parties were required to enter into a further Agreement to give effect to the DCA and to maintain all of the rights granted under the DCA.
92. I see the force of that argument: and it was accepted by the Special Commissioners. But, on reflection, I do not feel able to accept it. It was an essential part of the operation of the second sentence of clause 11.2.2 – which could only itself bite after payment of the Adjusted Gross Receipts (if any) – that the deferred income payments made in the period ending in 2025 be in the amounts specified in Exhibit D as the Minimum Guaranteed Amounts. This was drafted as a composite obligation: I do not think one can somehow sever away the prospective period of payment as a contractual obligation independent of the amounts to be paid. At that time the Minimum Guaranteed Amounts (indeed the Adjusted Gross Receipts) had not been agreed: possibly, even if unlikely, they might never have been. In my view, absent such agreement, and with Exhibit D being left blank, clause 11.2.2 gave rise to no contractually enforceable obligation with regard to Minimum Guaranteed Amounts. It was left as a matter which the parties had agreed to agree: conventionally unenforceable in legal terms: see, for example, BJ Aviation Ltd v Pool Aviation Ltd [2002] P&CR at pages 373-4, per Chadwick LJ. Consequently, further agreement, if it could be achieved, was essential before payment of any amount could be guaranteed.
93. It follows, as I see it, that what made these deferred income payment arrangements, as to the Minimum Guaranteed Amounts, legally effectual was the agreement enshrined in the DCA Amending Agreement, by the revised clause 11.2.2 containing the completed Exhibit D: which came into existence after 2 December 2004. The DCA Amending Agreement in my view is itself a deferred income agreement satisfying Condition A and within the definition of section 61 of the 2005 Act, and it supplements the DCA. It is by virtue of the DCA Amending Agreement that clause 11.2.2 "has the effect" that the last date of deferral of an amount of income arising from the exploitation of the film was a date after the end of the 15 year period. Consequently, in my judgment, section 60 applies.
94. Mr Peacock also, by way of Respondent's Notice, raised a query as to whether the DCA Amending Agreement "guaranteed" an amount of income, for the purposes of section 61(6)(b) of the 2005 Act. In my view, however, such agreement read as a whole clearly is designed to secure the receipt of an amount of income, as is borne out by the wording of clause 11.2.2 itself.
95. Thus on this issue also I would conclude in favour of HMRC.

The Halcyon appeal

96. The issues relating to the appeal of Halcyon Films LLP ("Halcyon") were entirely distinct from those concerning Micro Fusion. However, because the issues also related to film financing (Halcyon, I gather, being a partnership seeking relief for acquisition expenditure on a "double dip" transaction) it was heard by the Special Commissioners at the same time as the Micro Fusion appeal. The Special Commissioners determined a number of complex issues in the Halcyon appeal: but only one such issue – itself a relatively short point of law - has been pursued on appeal before me.
97. The factual background, in summary, is this. Halcyon, as was found, was a partnership established on 25 March 2003. After a change of name it carried on a trade or business which consisted of or included the exploitation of films. For its accounting period ending on 5 April 2004, and in its tax return for the year ended 5 April 2004, Halcyon among other things claimed, pursuant to section 42 of the 1992 Act), relief totalling £12,183,932 in respect of expenditure on the acquisition of three films called "Asylum", "Method" and "Samantha's Child". (Each of the three films had been in due course certified a British Qualifying Film). By closure notice dated 18 January 2006 an Inspector of Taxes on behalf of HMRC amended such return, disallowing among other things the claim to relief under section 42.
98. Section 101 of the Finance Act 2002 provided for restrictions on relief for successive acquisitions of films. It is in these terms:-

Restriction of Relief for successive acquisitions of the same film

"(1) Relief under section 48 of the Finance (No.2) Act 1997 (relief for expenditure on production or acquisition of film with total production expenditure of £15 million or less) in respect of acquisition expenditure is available only in relation to an acquisition –

(a) by the producer, or

(b) directly from the producer,

and not in relation to any subsequent acquisition (or in relation to any acquisition within paragraph (a) or (b) other than the first).

(2) For this purpose –

(a) "acquisition expenditure" means expenditure to which subsection (3) of section 42 of the Finance (No 2) Act 1992 (c 48) applies (relief for acquisition expenditure);

(b) "acquisition" means acquisition of the master negative of a film, or any master tape or master disc of a film, within the meaning of that section; and

(c) "the producer" means the person who commissions the making of the film and is entitled to control its exploitation."

99. Section 101 is contained in a part of the 2002 Act headed "Films". It is necessary, for the purposes of considering the construction arguments advanced to have regard to some of the provisions of preceding sections. Thus section 99(1) is in these terms:

"99. Restriction of relief to films genuinely intended for theatrical release

(1) Relief under the following provisions is available only for a film that is genuinely intended for theatrical release –

(a) section 40D of the Finance (No 2) Act 1992 (c 48) (election to claim capital allowances for production or acquisition expenditure);"

(b) section 41 of that Act (relief for pre-production expenditure);

(c) section 42 of that Act (three year write-off for production or acquisition expenditure);

(d) section 48 of the Finance (No 2 ) Act 1997 (c 58) (relief for expenditure on production or acquisition of film with total production expenditure of £15 million or less)."

Section 100 amends section 48 of the 1992 Act by way of exclusion of deferments from production expenditure.

100. It was common ground between the parties that Halcyon (not itself a producer) did not incur acquisition expenditure in acquiring any of the films directly from the producer: it acquired them from an intermediary (the distributor in each case). The question then is to what extent the provisions of section 101 – clearly a provision designed to counteract "double-dipping" – operate to restrict the reliefs available.
101. By the provisions of section 48, as amended, production or acquisition expenditure could be claimed as a relief in any one year if the expenditure was incurred on or after 2 July 1997 and before 2 July 2005; if the film was a qualifying film with total production expenditure of £15 million or less; and if the film was completed on or after 2 July 1997. Thus, for example, a film where the total production expenditure or acquisition exceeded £15million could not fall within section 48; any claim for relief, if otherwise available, would need to be made under section 42, which confines the claimed relief to a maximum of one-third for each relevant period.
102. The core question was whether, by reason of section 101, Halcyon was precluded not only from claiming relief under section 48 but also from claiming relief under section 42. The Special Commissioners decided that Halcyon was not so precluded.
103. It is, I think, reasonably clear – and I understood Mr Peacock to accept – that section 48 does not of itself confer a "self-standing relief" (in the Special Commissioners' words): it clearly, as the references in subsection (2) and (6) show, provides an extension of the relief in principle available under section 42. Thus for section 101(1) to refer to "relief under section 48" of the 1997 Act is not strictly apposite.
104. Miss Simler's argument, paraphrasing, thus in essence came to this. There is no such thing as relief "under" section 48: the only relief is "under" section 42, albeit as capable of being extended in its application in the prescribed circumstances by section 48. Accordingly in circumstances where section 101 applies – and the Halcyon appeal is such a case – the taxpayer loses the right to claim relief not only by reference to section 48 but also by reference to section 42. In other words not only is there lost the possibility of claiming the more generous phasing of relief by reference to section 48 but also there is lost the possibility of claiming the (relatively) less generous relief by reference to section 42.
105. It is rather hard to see an entirely convincing rationale or purpose to compel such a conclusion: why, it may be asked, should such prospective relief be lost altogether in the case of a acquisition relating to a film costing say £14,500,000 but not to one costing £15,500,000? No admissible evidence was placed before the Special Commissioners (or me) to identify that as being the intention. Miss Simler asserted from the Bar that historically "double-dipping" abuse was more prevalent in the case of small films and so a more serious deterrent consequence could be taken to be intended for such films: but I am afraid I cannot have much regard to such assertion. It is, at all events, perfectly plausible that, in the circumstances set out in section 101, small films were now intended to be treated no differently from big films.
106. But the fundamental point is that, quite simply, I do not think Miss Simler's submissions accord with the statutory language. One initial point is that section 101 is headed "Restriction of relief for successive acquisitions of the same film": if Miss Simler is right, it perhaps might better have said: "Removal of relief …". More importantly, it is, to my mind, clear that by using the phrase "relief under section 48" the draftsman was intending to refer to the circumstances whereby a tax-payer came within the ambit of section 48 and was able to claim extended relief accordingly. That is confirmed, as Mr Peacock submitted and I accept, by reference to the terms of section 99, which section potentially applies to all films: for there the draftsman expressly, by subsection (1) refers to "Relief under the following provisions": then separately specifying them as section 40D; section 41; section 42; and section 48. Thus the draftsman was plainly proceeding on the basis that relief "under" section 48 was not to be taken as being relief "under" section 42. That is further confirmed, in my view, by the descriptive words, set out in brackets in section 99(1), connoting the draftsman's understanding of section 42 and section 48. It is also consistent with the use of such descriptive wording in section 100. In short, the draftsman in referring in section 101(1) to "relief under section 48" was, as it were, using a convenient statutory shorthand.
107. It follows that section 101 does not, where its terms are otherwise fulfilled, have the effect of precluding the taxpayer from reverting to reliance on the (less generous) relief provisions of section 42 taken on their own.
108. In support of his argument that that is indeed what Parliament intended Mr Peacock also sought to rely on the provisions of a subsequent statute, the Income Tax (Trading and Other Income) Act 2005. That in the relevant respects sets out in fresh language – in a way not regarded in the Explanatory Note as connoting any change in the law but as, in effect, being a consolidating provision – the erstwhile provisions of sections 42 and 48: in such a way as to indicate that section 101 of the 2005 Act was indeed not intended to remove the availability of relief by reference to section 42 (now section 138 of the Income Tax (Trading and Other Income) Act 2005). I very much doubt, however, if it is legitimate to look at this subsequent statute for such a purpose. At all events it certainly cannot be right that one can seek to rely on the fact – as Miss Simler sought to do – that the provision of sections 138 to 140 of the Income Tax (Trading and Other Income) Act 2005 were themselves, without ever coming into effect, swiftly replaced in the Finance Act 2005 so as to exclude all such relief for double-dip acquisition expenditure. Indeed, if it could be (and I do not think it can) then the fact that Parliament has, by the new provisions in the Finance Act 2005, expressly so provided could only tell against Miss Simler's argument on the interpretation of the previous, and different, section 101 of the 2002 Act.
109. Be that as it may, I accept as correct Mr Peacock's submissions as to the true meaning and effect of section 101: and I consider that the Special Commissioners reached the right conclusion on this point.

Conclusion

110. I allow HMRC's appeal in the Micro Fusion case. Presumably the matter will need to be remitted to the Special Commissioners for a final disposal on the figures (unless they can be agreed). I dismiss HMRC's appeal in the Halcyon case. I will hear Counsel on any consequential matters, including costs.