Last week the Court of Appeal, England and Wales, in Micro Fusion 2004-1 LLP v Revenue & Customs Commissioners [2010] EWCA Civ 260 (not yet on BAILII, but noted on Lawtel), had to consider the meaning of the word "film" for the purposes of the Finance (No. 2) Act 1992, section 42 -- the film in question being Mrs Henderson Presents.This was an appeal by Micro Fusion against a decision relating to the deduction of film production costs. In its tax return for the year ended 5 April 2005 Micro Fusion had sought to deduct from its profits and gains from trade or business the costs it incurred in the production of a film, under the Finance (No. 2) Act 1992 section 42 and the Finance (No. 2) Act 1997 section 48. The commissioners rejected this claim on the grounds that Micro Fusion's trade or business did not consist of or include "the exploitation of films" for the purposes of section 42 and that, even if it did, the film in question constituted "trading stock" as defined in the Income and Corporation Taxes Act 1988 section 100(2).
Micro Fusion appealed and the commissioners raised an additional ground: that the Finance Act 2005 section 60 reduced the amount of any relief to which Micro Fusion was otherwise entitled. The commissioners submitted that the concept of "films" in section 42 comprised only the physical record on or in which the sequence of images was embodied and that the substance and effect of a distribution and commissioning agreement (DCA) entered into by Micro Fusion was that it had sold the master negative of the film for at least a 21 year period. This being so, it was not exploiting the film. Micro Fusion disagreed, arguing that a "film" included the intellectual property rights in it and that, by entering into the DCA, under which it retained a residual or reversionary interest in the master negative, Micro Fusion had exploited its interest in the rights it held in the film.
The Court of Appeal (Sir Andrew Morritt, Lords Justices Rimer and Etherton) allowed Micro Fusion's appeal. In its view,
* the word "film" in section 42 was to be construed in accordance with the definition of the same word in the Films Act 1985 Sch.1 para.1. In that context "film" was not confined to the master disc, negative or tape and included the intellectual property rights -- it was a compendious word and its meaning was not confined to, and did not require, the inclusion of ownership of the original physical record;
* it was self-evident that the value in a film susceptible of exploitation lay in the copyright, not in the physical embodiment of the sequence of images.
* it was not the case that the intellectual property rights could only be exploited through ownership of the original physical record.
* Micro Fusion did exploit the film under the DCA since the concept of exploitation did not exclude an outright disposal.
* whatever the position in respect of the master negative, under the DCA Micro Fusion had not made an outright disposal of the copyright and exploitation of the film was its trade or business within the meaning of section 42(1).
* the film was not actually "trading stock" because Micro Fusion retained the copyright in it, and the only disposals were a 21-year licence under the copyright and an option to buy it at the expiration of the term of the licence. Accordingly section 42 did not operate so as to preclude the deduction of expenditure from the profits of Micro Fusion's trade or business.
