One of London's most successful hedge fund managers, Patrick Degorce, has been forced to part with millions of pounds in tax after Revenue and Customs persuaded the courts to throw out a complex film financing investment which sought to shelter earnings of almost £19m.
The discredited scheme was marketed to the Kensington-based fund manager, best known for co-founding the Children's Investment Fund with Chris Hohn, by financiers from Goldcrest Pictures. Goldcrest was behind films such as Gandhi, The Killing Fields, Chariots of Fire and A Room with a View.
The treasury minister David Gauke said the Goldcrest structure was a "dubious avoidance scheme" and that HMRC was getting increased powers and resources to clamp down on such activities. "The government has made it clear that we will not allow marketed avoidance schemes to deprive the UK of vital tax revenues."
It is the latest in a long line of film investment schemes to be challenged by the taxman. Desperate to get on top of the backlog of such cases, in December Revenue and Customs wrote to investors in certain film financing structures – many of them among the UK's wealthiest bankers, financiers and celebrities – urging them strongly to settle. Settling was "the best opportunity to resolve these disputes in a way which was cost-effective and consistent with the law", investors were told.
HMRC said its victory over Degorce underlined how weak the credibility of many tax avoidance structures were that involved, or purported to involve, film investments. "Sadly, many people have been tempted by similar schemes which we also believe don't work, and we have opened a settlement opportunity to get them back on the straight and narrow," said Jim Harra, HMRC director general. "I would urge anyone in this position to sign up for this facility quickly."
Goldcrest is owned by the veteran film financier John Quested, 77, who lives in Switzerland. Its outlawed scheme had been sold to 11 other wealthy investors in addition to Degorce who had sought to reduce income taxes by incurring combined losses of £47.6m. If successful, they would have benefited by £17.7m.
Artificial "losses" of £18.8m created for Degorce by the Goldcrest-devised investment structure would have benefited the fund manager by £7.5m. In a statement, a spokesperson for Degorce – who set up a $700m (£466m) hedge fund called Theleme Partners, based in Mayfair, three years ago – said he was disappointed that the tax tribunal had thrown out his appeal against HMRC's decision and would appeal against the judgment at the earliest opportunity. "HMRC's public statement ... is riddled with errors," the spokesman said.
"Mr Degorce believes his film business has been conducted in full accordance with UK tax rules. He devoted substantial resources and time to create this successful business, which will pay several millions in tax in the coming years. As soon as HMRC first questioned the business arrangements in 2009, Mr Degorce suspended his film activity pending clarity on the taxation issue."
During the dispute, it emerged that Degorce, a former Merrill Lynch banker and one-time French naval officer, had also participated in separate film financing schemes devised by Ingenious Media which were also under investigation by tax inspectors, though the tribunal was not asked to consider their merits. Further investments by him in other Goldcrest schemes were also being examined. The tribunal only considered investments in 2006-2007, involving the purchase and assignment of rights in two Hollywood comedies – Mike Myers's The Love Guru and Ben Stiller's Tropic Thunder.
Tax avoidance schemes involving film finance have attracted the ire of MPs on the public accounts committee, with the chair, Margaret Hodge, describing some as "immoral" when representatives from the industry appeared before parlliament in December.
The Ingenious Media founder and chief executive, Patrick McKenna, told MPs: "I can tell you categorically that we are not involved in the business of tax avoidance or the marketing of tax avoidance schemes. We are in the business of creating much-needed commercial investment for the creative industries."
Hodge responded: "For heaven's sake, Mr McKenna, have a little bit of common sense. I was involved, as culture minister, in that film tax. I was involved in trying to encourage a lot of film production here in the UK, and it was the most disappointing thing, particularly from a company such as yours that pretended to be at the heart of supporting the creative industry … Actually you were exploiting a well-intentioned tax relief to try to get individuals, and God knows who else, to mitigate their taxes."
McKenna said this was not correct.