Film Relief

Introduction

This Irish High Court case dealt with film relief. This is an important case which deals with a question on everyone's mind, how long do taxpayers have to wait to be comfortable that their tax returns (which were not fraudulent) cannot be queried by Revenue. The key issue in this particular case was whether Revenue could wait 8 years from the date of issuing a Film 3 certificate to the date of withdrawing the relief to the taxpayer, and thereby clawing back the film relief previously granted.

The Facts

In April 1995, the applicant (Mr. Fortune) invested the sum of IR£25,000 in five film production companies, namely, Stylefile Limited, Kavside Limited, Routeway Limited, Harlonian Limited and Newforge Limited by way of share investment. These five companies were established by the Merlin Film Group for the purpose of producing films in Ireland. Merlin Film Group promoted the investment in these companies to the applicant.

FA87 s35 (now TCA97 s481) introduced a special tax incentive scheme to encourage investment in “qualifying” film production companies by persons who were not connected with those companies. A number of conditions had to be satisfied for an investment to qualify for tax relief under this section. One of the conditions was that the company in which the investment was made had to be a company engaged solely in the production and distribution of a “qualifying” film. A “qualifying” film was a film in respect of which the Minister for Minister for Arts, Heritage, Gaeltacht and the Islands (the Minister) had issued a certificate. Another condition was that the investor seeking to claim relief required a certificate (“Film 3”) from the production company to confirm that the conditions for relief, insofar as they related to the film and the production company, were satisfied.

On 23 November 1995, the five production companies applied to Revenue for authorisations to issue “Film 3” certificates to them in respect of films they intended to make. The authorisations were granted and the “Film 3” certificates were issued. The production companies then forwarded the “Film 3” certificates to the investors so that they could claim relief.

Only one of the films in respect of which the five production companies applied for certificates was ever made. The production companies actually made six other films. While applications for certificates from the Minister in respect of these other films were made, the production companies did not apply to Revenue for authorisations to issue “Film 3” certificates to the investors in respect of the six new films.

The applicant was granted tax relief by Revenue in respect of the tax year 1994/1995 after submitting the “Film 3” certificates from the production companies in which he invested. Revenue subsequently wrote to the applicant by letter dated 26 April 2004, informing him that consideration was being given to the withdrawal of the relief that the applicant had been granted for the tax year 1994/1995 on the basis that the criteria set out in the legislation and in the certificate issued by the Minister were not satisfied.

The Revenue letter stated that “From the records and accounts of Concorde Anois it appears that part of the money paid to them was used in the production of the various films and part was transferred to Transpacific Corporation A.V.V. Philippines.” In order for the Minister to issue the certificate, not less than a specified percentage of the work on the production of the film be carried out in Ireland. The applicant received confirmation from Revenue that the tax relief was going to be withdrawn together with a notice of assessment.

The applicant appealed the said notice of assessment

The Issue

Whether Revenue were entitled to withdraw the film relief.

The Decision

The applicant appealed the Revenue decision on four grounds:

• Whether or not Revenue had the power to supervise and decide if there was compliance with the conditions outlined in the Minister's certificate – the “ultra-vires” issue;
• The extent to which Revenue could enquire into the expenditure of film production companies, in particular, whether they had the power to enquire into the accounts of Concorde Anois Teo, and into its payments to Transpacific Corporation A.V.V. Philippines.
• Whether the applicant had a legitimate expectation that the relief accorded to him would not be withdrawn in circumstances where he did not hear from Revenue for eight years after the relief was granted to him.
• Whether there has been inordinate and inexcusable delay on the part of Revenue which prejudiced the applicant, in resisting the 2005 assessment which purports to withdraw the relief granted almost 10 years earlier.

The High Court refused the reliefs sought by the applicant. The reasons are given in each of the categories below.

Ultra vires Issue

It was the applicant's contention that it was the Minister alone who was charged with determining the conditions upon which a film would be eligible for tax relief. Revenue's role in the process was authorising the “Film 3” certificate for the production company to the effect that the investment was a qualifying investment.

It was Revenue's contention that the legislation expressly allowed for the withdrawal of relief in the event of a failure of a production company to comply with any of the conditions issued to it by the Minister in the certificate and that a specific provision “envisaged” the withdrawal of relief being effected by the raising of an assessment on the investor by Revenue.

The Court held that Revenue had the power to monitor and ensure compliance with the Minister's certificate. Key to this decision was the wording in the Minister's certificate

“subject to the following conditions:-

... -the submission of the final documentation associated with the film project, including all contracts, agreements and Completion Bond, together with such other material as they may require, to the Revenue Commissioners.”

and the wording of the legislation

“... the inspector is satisfied that all the conditions for relief are, or will be satisfied”

Relevant/Irrelevant Material

The applicant contended that Revenue were not entitled to go behind the expenditure of the film production companies.

The Revenue submitted that in order for them to monitor the compliance by a production company with the conditions set out in the Minister's certificate, the actual expenditure by the production company had to be examined.

It was the Judge's opinion that Revenue had the power to ensure compliance with the Minister's certificate under the legislation and so were entitled to make enquiries into the final destination of the expenditure by the film production companies.

Legitimate Expectation

The applicant noted that tax relief was granted in 1996 in circumstances where a “Film 3” certificate had been granted and that he did not receive further communication from Revenue for over eight years. The applicant contended that this gave him a legitimate expectation that he was entitled to the relief as granted and that the matter was closed.

Revenue stressed that the statutory scheme for film investment relief was clear and unambiguous as to the circumstances where relief can be withdrawn and, as a result, a legitimate expectation that the relief would not be withdrawn could not arise.

The Judge stated that having regard to the legislative provisions, together with the numerous warnings of the potential for relief being withdrawn in the promotional material, he could not accept that Revenue's withdrawal of the relief was grounds for a claim for breach of a legitimate expectation. The key issue was that the relief was withdrawn on the grounds that the applicant was not entitled to the relief in the first place.

Delay

The applicant contended that the delay of over eight years on the part of the respondents in attempting to withdraw the tax relief was “inordinate, inexcusable and prejudicial”. The prejudice arose in the inability of the applicant to defend the assessment due to the fact that the film production companies, whose compliance with conditions for the relief were in question, no longer existed and from the fact that the applicant was forced to re-open accounts and re-visit his tax affairs of over eight years ago.

It was submitted on behalf of Revenue that the legislature expressly provided that relief may be withdrawn by the raising of an assessment at any time, notwithstanding any time limits that might otherwise have applied.

The Judge stated that he was quite satisfied that there was no evidence which could satisfy the Court that the delay involved has resulted in the loss of relevant material such as to prejudice the applicant in defending the assessment. Indeed the fact that the applicant had requested a delay in Revenue's decision to await a similar court decision did not help his argument.

The judgment is available online from the website of the Courts Service of Ireland.