Substance Over Form in Media LLPs: The “30:30” Principle, Realistic “View to Profit”, and GAAP-Consistent Accounting — Ingenious Games LLP & Ors v HMRC [2016] UKFTT 521 (TC)

Introduction

This landmark decision of the First-tier Tribunal (Tax Chamber) in Ingenious Games LLP; Inside Track Productions LLP; and Ingenious Film Partners 2 LLP v HMRC reshapes the tax and accounting landscape for media-sector limited liability partnerships (LLPs) that financed films and video games. At stake were claims for more than £1.6bn of losses, tax repayments of approx. £620m, and the validity of a widely used “Commissioning Distributor Model” that sought to treat LLPs as bearing 100% of a film’s budget while conceding, at most, a little over 54% of the distributable income stream.

The decision sets three enduring propositions: (1) for tax and GAAP, composite arrangements must be analysed by the rights and liabilities that actually arise when read as a whole (substance over form); (2) where studios contribute around 70% of production finance and LLP investors contribute around 30%, the LLP’s true economic liability is “30:30” (30% of budget for 30% of the post-distribution income (GDI)), not “100:54.55”; and (3) “with a view to profit” is satisfied only where a realistic prospect of profit exists measured against the correct economic deal, not a construct driven by tax and accounting optics.

Background and Parties

Appellants: Inside Track Productions LLP (ITP), Ingenious Film Partners 2 LLP (IFP2), and Ingenious Games LLP (IG).
Respondent: HM Revenue & Customs.
Activity: Financing and commissioning the production of films (ITP, IFP2) and video games (IG) under a “Commissioning Distributor Model” involving:
- LLP members (individuals and a corporate member (CM)) subscribing capital;
- a distributor/studio (CD) providing c. 70% of production cash, typically via a “loan” to the CM;
- a production services company (PSC) making the film/game to an agreed budget and specification;
- a distribution “waterfall” splitting gross distributable income (GDI) (after fees and P&A) between LLP and studio under sliding “participation steps” and with “BDR/BR” retentions (amounts notionally due to the LLP but directed to reduce the CM’s indebtedness).
Core issues:
1. Were the LLPs carrying on a trade?
2. Were they carrying on that trade with a “view to profit” (ITTOIA 2005 s.863; CTA 2009 s.1273)?
3. What expenditure was incurred: 100% of budget, or only 30%/35%?
4. Were expenditures wholly and exclusively for the purposes of the trade?
5. Were profits/losses computed in accordance with GAAP?
6. Did the LLPs and studios form separate partnerships for each film?

Summary of the Judgment

Trading: ITP and IFP2 were trading; IG (video games) was not trading.
With a view to profit:
- Not with a view to profit on the Appellants’ “Ingenious basis” (as if the LLP incurred 100% of budget for up to 54.55% of GDI);
- Yes with a view to profit on the true “30:30” basis (LLP economically at risk for 30% (or 35%) of budget for 30% (or 35%) of GDI): a realistic possibility existed on that basis.
Expenditure incurred: The LLPs incurred only their true economic outlay: 35% (ITP) and 30% (IFP2 and IG), not 100% of budget.
Wholly & exclusively:
- To the extent of the EP fee (5% of budget), not wholly and exclusively for the trade—disallowed;
- Operator’s fee: a trade cost, but partially capital (20%) and to be spread appropriately.
GAAP: The accounts did not comply with GAAP. FRS 5 required accounting for substance: initial liability 30%/35%, asset as a fixed intangible (the right to GDI), and income excluding BDR/BR (which never belonged to the LLP). The NRV methodology was overly conservative; an upper cap of around 66% of cost for Studio-film NRV was indicated as a sanity check.
Partnership with studios? No. The arrangements did not amount to partnerships for each film.
Outcome: Appeals by ITP and IFP2 were partly allowed (computations to be adjusted); IG’s appeal was dismissed.

Detailed Analysis

1) The Commissioning Distributor Model: rights and obligations in substance

The Tribunal deconstructed the suite of documents (Members’ Agreement, Loan, PSA, CDA, Deed of Acknowledgement/Payment Instruction, security and pledge agreements) and insisted they be read as a composite. Key consequences in law and economics:

Legal obligation to fund: The LLP was liable to fund only its “Initial Funding” (approx. 30%/35%) and had no obligation to procure the studio’s 70%/65% funding (which was paid directly by the CD to the PSC). The LLP never assumed a liability to transfer value equal to 100% of the budget.
Right to income: From inception, by the Deed and Payment Instructions, the LLP never acquired an entitlement to BDR/BR; that portion belonged to the studio/lender. The LLP’s enforceable right was to the balance of GDI after deduction of BDR/BR. There was never a moment when the LLP was beneficially entitled to 100% of the schedule 7 amounts.
Rights in the film: The LLP’s rights during production were, in effect, those of a constructive trustee with “iron fetters”: it could not exploit or divert the film and was subject to studio approvals and completion guarantor override. On delivery, any residual vesting merely perfected the studio’s already-substantive exploitation position.
Corporate member’s “capital” and drawings: The CM had no pre-existing obligation to contribute; any recognition of capital on CD payment conferred no rights to drawings or winding-up distributions under the Members’ Agreement. Entitlements to drawings were reduced by the structured diversion of BDR/BR.

Commercial summary: The studio contributed ~70% and retained 70% of GDI; the LLP contributed ~30% and was entitled to ~30% of GDI. This matched the economic reality, regardless of labels such as “loan”, “assignment”, or interim characterisations in the documents.

2) Trading

Films (ITP and IFP2): The Tribunal found trading, distinguishing sale-of-income cases (Eclipse 35, Samarkand, Degorce) on three crucial grounds:

The revenue flows were inherently speculative across a slate of films (no fixed return) and the LLPs were engaged in organised, repeat, negotiated production-distribution deals balancing risk and reward;
Activity went beyond mere investment: negotiating complex commercial terms and waterfalls, monitoring costs, interfacing with completion guarantors and distributors, receiving and checking distribution statements, and administering revenue share over years;
Contextualised within the industry, the activity resembled trading in the financing/production of films, not the purchase of a “bond-like” income stream.

Games (IG): Not trading. IG’s involvement in video games was materially thinner: late insertion into projects already in development, minimal creative or production involvement, limited aftercare, and only a handful of transactions. The Tribunal likened it more to acquiring financial assets than operating a trade (and compared it unfavourably with a bookmaker or bank’s organised, large-scale activity).

3) “With a view to profit” — the hybrid objective/subjective test anchored in realism

The Tribunal carefully unpacked “with a view to profit” (LLP tax transparency condition) drawing on Partnership Act analogues and case law (including Dextra, Vodafone). Core principles:

Profit means commercial profit (expenditure vs. income) before tax, not “tax profit”, and not tied to any specific accounting period;
The test imports an element of subjective purpose, but must be verified against objective reality; intentions found from conduct and evidence, not assertion;
If the chosen accounting/economic basis makes profit unrealistic, the condition fails regardless of professed hopes; conversely, if profit is almost inevitable, that implies a profit view even if not consciously articulated.

Application:

Ingenious basis (100% cost/≤54.55% of GDI): unrealistic for profit across the slates. The waterfalls handicapped the LLPs; even a blockbuster like Avatar did not produce sufficient LLP profit on this basis over the relevant horizon (and in any event its income mix and completion overrun recoupment deferred LLP returns).
30:30 basis (30% cost/30% GDI): realistic prospect of profit. On this basis, the LLPs’ position broadly tracked the studio’s production-side economics. While the slates were risky and profit was not assured, a realistic prospect existed.

Outcome: ITP and IFP2 satisfied “with a view to profit” only on the true 30:30 basis; they did not on the Ingenious basis. IG did not satisfy the condition.

4) Expenditure incurred; “wholly and exclusively”

Expenditure incurred: The Tribunal held that only the LLP’s true economic outlay was “incurred”: 35% (ITP) and 30% (IFP2/IG). The remainder (70%/65%) was spent by the studio; routing the cash via CM to PSC (or not) did not change the LLP’s liability. “Incurred” tracks economic burden, not labels or hypothetical flows.

Wholly and exclusively:

To the extent the model’s form aimed at generating enhanced losses (e.g., characterising “100% cost” while diverting BDR), any putative “100%” expense would have had a non-trade purpose (tax avoidance) and fail the test.
Given the true 30%/35% incurred base, the trade purpose was not impugned by the model’s form—except:
- Executive Producer (EP) fee (5% of budget): disallowed. It was not a fee for production services to the PSC; it was in substance a fee to the Ingenious group for bringing the LLP’s finance to a film. The LLP imposed it for the group’s benefit, not to further the LLP’s trade.
- Operator’s fee (2.81% of capital): a genuine trade cost (management, promotion, administration), but 20% capital in nature. It should not be taken fully in year one; fair spreading over time required.

5) GAAP: accounting for substance (FRS 5, SSAP 9), not narrative

Central to the decision is an orthodox but rigorously applied GAAP analysis:

Asset: The LLP’s asset is the fixed intangible right to receive its share of GDI under the CDA, not “stock/WIP of films”. The LLP never controlled the economic benefits of the film itself; during production it had no meaningful ability to exploit or divert rights.
Liability: The LLP’s unavoidable obligation is only its Initial Funding (30%/35%). There is no obligation to procure the studio’s 70%/65% or repay it.
Income recognition: BDR/BR never belonged to the LLP and must be excluded from LLP turnover and from NRV computations. The LLP’s income is only the net balance under the waterfall.
NRV / Onerous contract:
- Where the film right is recognised as a fixed intangible, impairment or an onerous contract provision may be needed if expected proceeds fall below cost;
- The LLPs’ “virtually certain income” approach was overly conservative: discounts (e.g., 50% haircuts to sales agents’ low estimates), heavy P&A assumptions (uplifts up to ~175% of benchmark), and time-value discounts were excessive;
- As a practical cap for Studio films, the Tribunal signposted that NRV should not be reduced below ~66% of true cost by ignoring the likely “buy-back” price a studio would pay to remove the LLP from the deal.
Spreading costs: The Operator’s fee must be spread over an appropriate period (e.g., 3 years with front-loading reflecting early effort), not fully expensed in year one.

Bottom line: The LLPs’ published accounts did not comply with GAAP. Correct GAAP accounting yields losses/profits computed by reference to the “30:30” economics and excludes BDR; EP fees are disallowed; and over-cautious NRV must be corrected.

6) Partnership with studios? No

Although the waterfall can be reframed as the studio and LLP sharing net film profits/losses roughly in proportion to their cash at risk, the Tribunal declined to find a partnership as a matter of law. Distribution was controlled by studios; the LLP was effectively a co-financier with limited say, not a co-venturer carrying on a business in common. The explicit non-partnership clauses and structural allocation of responsibilities reinforced this conclusion.

7) Precedents and their influence

Ensign Tankers (Leasing) Ltd v Stokes:
- The leading authority on reading composite film-financing contracts. The Tribunal adopted its two-stage method: first, determine the rights and obligations that actually arise after all documents are signed; then characterise them for tax/accounting. Like Ensign, the LLPs here contributed only their true slice (~30%) and had rights to the matching share of receipts.
Peterson v CIR: Confirmed non-recourse finance does not deny that the borrower incurs cost, but the Tribunal stressed here that incurrence tracks economic burden; the LLP bore only 30%/35%.
Eclipse 35, Samarkand, Degorce: Distinguished. Those arrangements resembled purchases of pre-shaped income streams or near-fixed returns; here there was a slate of speculative projects, active negotiation, industry-standard risk allocation, and no fixed returns.
Dextra (“with a view to”): Used to frame the notion of realistic possibility and future orientation of the test; the Tribunal did not simply transpose Dextra but applied its spirit.
Accounting standards (FRS 5, SSAP 9, FRS 12, FRS 18): Drove the substance-over-form and measurement conclusions—rights to payment, unavoidable obligations, and cautious but reasonable NRV.

Impact and Practical Consequences

Accounting for film/game LLPs: LLPs must recognise only their real liability (30%/35%), carry a fixed intangible for their rights to GDI, exclude BDR/BR from income, and compute NRV with reasonable prudence but without “loading the dice”.
Tax losses and sideways relief: Losses are limited to the true economic exposure and further reduced by any disallowances (e.g., EP fee). Marketing of schemes premised on large year-one tax losses computed on “100% budget” will not survive the substance analysis.
Transaction engineering: Payment short-cuts, assignments and labels cannot conjure rights or expenses into existence. Studios’ desire to retain control is consistent with substance; LLPs cannot re-characterise that into 100% ownership/cost.
Game finance vs film: The Tribunal’s refusal to find trading in IG underlines that thin late-stage participation with few transactions and little operational substance will struggle to qualify as a trade or to meet “view to profit”.
Partnership assertions: Even where economics show proportional sharing, the legal and functional allocation of control can defeat any partnership analysis.

Complex Concepts, Explained Simply

GDI (Gross Distributable Income): What remains after cinemas’ share, distribution fees, and P&A are deducted. The waterfall then allocates GDI between studio and LLP.
BR/BDR: Borrower’s Receipts / Borrower’s Distributable Receipts—amounts that would otherwise be credited to the LLP but are directed to the studio/lender to reduce the CM’s “loan”. The LLP never owned these; they are excluded from LLP income.
“30:30” principle: If the LLP puts in ~30% of a film’s budget, it is entitled to ~30% of GDI. This is the real economic deal and the only correct basis for both tax and GAAP.
NRV (Net Realisable Value): The estimated amount that will be realised from an asset. It must be prudent but anchored in reality; it is not a licence to assume worst-case outcomes by rote.
Completion bond: An insurer-like guarantee that a film will be delivered within budget (or abandoned and funds returned through agreed priorities). Its recoupment can defer LLP income.
Fixed intangible asset: Here, the LLP’s right to a share of GDI, not the film itself. The LLP never controlled the film’s exploitation benefits, so it cannot treat the film as stock.

Concluding Observations

This decision is a model of disciplined legal and accounting analysis. It confirms that for tax and financial reporting purposes, courts will:

look past complex document choreography to the rights and obligations that truly arise;
restrict “incurred” expenses to the amounts the taxpayer has unavoidably to pay;
measure profits by the real deal (here 30:30), not an engineered construct (100:54.55);
require GAAP to follow substance: recognise the right to GDI as a fixed intangible, exclude BDR, and set NRV by realistic estimates, not loaded pessimism;
apply a “view to profit” test that is part subjective and part objective—ultimately anchored in realistic commercial prospects on the correct economic basis.

For the media finance sector, Ingenious Games delineates what is permissible and what is not. LLPs can be trades and carry on business with a view to profit—but only if their activity has sufficient operational substance and their profit case stands up on the true economics. Accounting must reflect that same reality. Engineering form to inflate year-one tax losses or to re-label revenue will not prevail.