If we were to ask you “What links Lawrence of Arabia, Edgar Allen Poe, and AC/DC?”, we expect you might be left stumped. Yet there’s a perfectly plausible answer in the “horror/comedy/musical road movie” known as Eldorado, alternative title Highway to Hell: Peter O’Toole narrates the film, it opens with a reading of Poe’s poem “Eldorado”, and its alternative title shares its name with one of AC/DC’s most famous hits.
This is where our pursuit of information about British Creative Industry tax reliefs leads us today: to the depths of truly dreadful film-making, an attempt to defraud the UK tax system, and the impact it had on the roll-out of creative tax reliefs in other sectors.
Quick refresher: what exactly are the creative industry tax reliefs, and how do they work?
Film Tax Relief has been around longer than any other creative relief in the UK, and its current iteration, introduced in 2007, was actually predated in 1992 (Section 42 of the Finance (No. 2) Act 1992) for gradual tax relief over three years, and in 1997 (Section 48 of the Finance (No. 2) Act 1997) for immediate, maximum relief on production expenditure for lower (less than £15m) budget, certified British films.
In its existing form, if your UK-developed creative project (in this instance, a film) meets certain criteria, your company can submit a claim for a reduction to your company’s taxable income, meaning you pay less tax. If this relief pushes you into a loss-making position, you can actually surrender these excess losses for a payable tax credit, aka cash directly injected back into the business.
To summarise the government guidance on Film Tax Relief, your film requires certification by the British Film Institute by passing its cultural test, it must be intended for theatrical release, and at least 10% of the “core costs” must relate to activities in the UK; lower than the 25% required for Video Game Tax Relief, perhaps recognising the necessity for films to more readily be shot in multiple locations. There are other criteria involving the film production responsibilities and actions of the company submitting the claim, though we won’t bore you with them now – you can read up further on the principles of the Creative Sector Tax Reliefs here.
The successful submission of a claim allows you to reduce your profits or increase a loss (or both, if your production goes from profitable to loss-making once the claim is effected), reducing the company’s Corporation Tax liability. The deduction is to the tune of the lower of either 80% of total core expenditure, or the total amount of UK core expenditure. This means you can claim a maximum of 80% expenditure as an additional cost if at least 80% of the film’s costs were incurred in the UK, and significantly less if the film’s costs were incurred more evenly between the UK and other countries.
“So what’s this Eldorado thing you were banging on about?”
We’re glad you asked. So back in 2007, HMRC closed down the Sections 42/48 film relief in favour of the current system because they recognised that individuals could contribute towards intentionally loss-making British film productions as “silent partners”, and were then able to claim sideways loss relief against their other income if (i.e. when) these productions went on to make losses.
So, when the new Film Tax Relief rolled into town in January 2007, the government must have felt pretty good about their decision: the new scheme plugged the hole that allowed for wealthy individuals to avoid tax, whilst continuing to provide support and financial incentive for UK-based film productions. Thanks to Eldorado, however, the new system was put to the test and yielded an interesting outcome.
The film itself had been filmed, produced and was ready for theatrical release by early 2010, yet it never made it to the big screen. Instead, it went straight-to-DVD and seemingly disappeared in the annals of time. It stayed that way until June 2013, when Richard Driscoll was convicted of VAT fraud by HMRC for both generating fake invoices and inflating real invoices in order to claim £1.5 million in VAT repayments; he was ultimately sentenced to three years in prison. Some of the particularly egregious attempts to defraud the VAT system included claiming Daryl Hannah was paid for acting in the UK, having never left the United States, and a £400,000 invoice to David Carradine for a fortnight of acting, despite the fact that he had literally died before being able to work on the film.
What comes as a surprise then, perhaps, is that the Defendant “successfully argued that they had merely taken advantage of a tax loophole created by the Financial Act 2006 and the Corporation Tax Act 2009” and as such was able to utilise the Film Tax Relief scheme, regardless of the outcome of the VAT case uncovered by HMRC.
The acquittal of Richard Driscoll broadly stemmed from three poorly-worded qualifying conditions for Film Tax Relief that were introduced in the Finance Act 2006:
- The core production costs must be ‘used and consumed’ in the UK.
- The relief is calculated upon the cost of actually producing the film.
- Connected companies were able to transact so long as they operated at ‘arm’s length’ and charged each other open market value.
The exaggeration of minimal costs originating outside the UK occurred in relation to the CGI implemented in the film, touted as “Britain’s first 3D movie” – a perhaps dubious claim, but that’s the least of the issue. The CGI was outsourced to Bulgaria, costing the production a grand total of £35,000, and then brought back in-house to be finalised, fulfilling the first criterion. HMRC initially deemed Driscoll’s quoted costs of around £1 million to be absurdly inflated, though due to the rule of transacting these costs at “open market value” between connected companies, multiple experts brought in – by both the Defendant and the Prosecution – deemed this figure to actually underquote the expected market rate at the time.
The ‘market rate’ argument was again employed in multiple instances to successfully build their defence case: were Mr Driscoll not to have owned the studio where the film was largely shot, and had he not been an industry insider, able to secure multiple well-known actors at a significant discount, his costs would have been close to (if not in excess of) the inflated invoices that were charged between the connected companies in his structure. Despite convincing the jury of the legitimacy of the film abiding by the letter of the law and winning this case, Driscoll still ended up in jail for the aforementioned VAT fraud which he wasn’t able to worm his way out of.
Despite their ultimate victory in jailing someone responsible for over a million pounds of tax fraud, HMRC suffered a matter-of-fact defeat on their comparatively new creative sector relief through the unintended interpretation of the chosen wording. More worryingly still is that, in 2013, the other creative sector reliefs were on the precipice of being launched (Video Game Tax Relief came into force less than a year after this ruling), and these reliefs would adopt the film tax relief scheme as a framework on which to be based.
A Landscape of Lies, literally
This isn’t the only case of abuse of the creative sector tax reliefs system, but it is perhaps the most notorious as the defendants justified their position and it held up against HMRC’s scrutiny. Yes, it was acknowledged as an interpretation not as intended in FA 2006, but it held up, and that’s what matters.
Another notorious case includes the mess that was A Landscape of Lies, where four individuals were convicted for attempting to defraud the UK government for almost £3 million by never actually creating the film they were pitching and generating false invoices to the tune of over £19 million… but not before throwing the film together on a minimal budget when they realised that they were going to be discovered. The film actually exists out there somewhere though we’ve not seen it, and from our experience in watching low-budget tax fraud movies, we wouldn’t recommend it either.
Where are they now?
An ironic twist of fate has led to Richard Driscoll returning to direct questionable films, but he has been barred from ever becoming a (company) director ever again. He has since tried to push the exact same film (the shorter, Highway to Hell cut) under the title A Bad Night in Death Valley. Having seen the original, however, we’d much, much rather take a bad night in Death Valley over having to endure watching the film again…
This is the second of three exploratory pieces we are writing on tax reliefs for the creative sector – you can find the first piece here, looking into Video Game Tax Relief and how Rockstar North may just be getting away with perfectly legal “grand theft auto” (we’re sorry, we couldn’t help ourselves). There will be another one on the way next month, just after the new year.