A major film-making scheme exploited loopholes in the Noughties. Now HMRC wants its money Exclusive: A scam which cost the taxman £2m, in which no one ever planned on making a film

On the face of it, it was a curious trial that attracted little attention – a seemingly minor yet complex tax avoidance scheme surrounding a film about Formula 1 racing.

The defendants included a former Welsh international rugby star, an ex-police officer and a Monaco-based accountant. The scam, which cost the taxman more than £2m, saw investors take advantage of tax breaks for film-makers. Yet none of the men involved had any experience in film-making, and were spread so far across the country that they were unlikely even to have met.

So how were they all making a film together?

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An illusion of a film

During their trial in April at Southwark Crown Court in London, the prosecution showed the investors had been given “homework” – simply watching archive racing footage from the 70s. Trips to race tracks in Monaco were also arranged, as were fake diaries of their work – all to create the impression they were collaborating on a film. In fact, nobody involved ever planned on making a movie.

But the case, in which jail sentences were handed down to the guilty investors, was far from alone in its premise. In fact, it was part of an industry-wide scam stretching back over two decades – a scam, an i investigation can reveal, in which more than £10bn was channelled through film tax-avoidance schemes.

There were similar schemes that led to similar trials – often under-reported due to their complexity – and there are more trials to come.

These schemes, many of which were legal, sprang up in the early 2000s and were used to fund the majority of UK-made films throughout that decade. But they cost the taxpayer billons of pounds in lost revenue, which HMRC is now desperate to claw back.

Such was the ubiquity of the strategy that the Government initially even gave advice on how to claim as much tax relief as possible, by way of an HMRC statement of practice. As one industry insider put it: “At the start it was like the Wild West. The law had so many loopholes that it was asking to be exploited.”

Celebrity backers

Last week it was announced that more than 500 of Britain’s rich and famous who invested in one of the biggest film-finance firms, Ingenious, would sue the company, after they collectively faced a £700m tax bill, claiming that the firm misled them on the amount of tax they could reclaim.

Those who invested in the scheme include Wayne Rooney, Andrew Lloyd Webber, Robbie Williams, Geri Halliwell, Gary Lineker and Jeremy Paxman, although it is not known whether they are among the 500 suing.

These celebrities became partners in various legal schemes, allowing them to claim tax relief through the money they stumped up for films such as Girl with a Pearl Earring, Life of Pi and Avatar.

Ingenious’s chairman, Patrick McKenna, a former adviser to Ed Miliband, said the claims are “entirely without merit and would be vigorously defended”.

The schemes grew from a seed planted in 1997 under New Labour, which gave generous tax breaks to stimulate the film industry on the back of successes such as Trainspotting and Four Weddings and a Funeral.

Between 1997 and 2006, through a system called “sale and leaseback”, the number of films being certified for tax relief exploded to nearly 2,000 – yet not all of them were actually made.

One accountant, Charles Fry, who ran a sale and leaseback company, summed up the system: “Sale and leasebacks are only really for tax relief. The fact we’re investing in films is irrelevant. If we could get the same tax relief investing in cauliflowers, we’d do it. Nor does it matter whether the sales of the film are nil or £100m. The investor isn’t affected.”

HMRC eventually became wise and tightened the rules, but finance firms developed ever more elaborate ways of dodging tax.

Tax structures out of control

So how did they work? Like the complex – but often legal – financial mechanisms which led to the financial crash, accountants conjured a smoke-and-mirrors system to bamboozle officials.

It also didn’t matter if the film was a flop: budgets were often inflated far beyond what the film actually cost to make, thereby increasing their losses, enabling investors to claim greater tax repayments.

Add to the mix the glamour of the film world and a seductive cocktail was created.

At its height, sources said abuse of the system got out of control, with film finance firms collectively taking billions from the taxman. At the Cannes Film Festival, a row of yachts owned by the finance companies became known as “tax alley”, and film producers lined up to fund their films.

“Between 1997 and 2010, hundreds of films were financed using these tax structures,” a senior film industry source told i. “There were a handful of good movies made each year, but most of them were terrible, and many simply didn’t even exist.”

Little Wing

One of the biggest cases to go to trial involved a company called Little Wing. The trial judge described it as “one of the most complicated cases presented at the bar”.

The main players all received lengthy prison sentences. Keith Hayley, 64, Robert Bevan, 53, Anthony Charles Savill, 53, and Norman Leighton, 65, found more than 270 investors – including former England manager Sam Allardyce, Lord Sainsbury and former Royal butler Paul Burrell – who believed they were furthering the interests of the British film industry, while legitimately reducing their tax bill.

Little Wing claimed to have spent more than £250m on developing films, but HMRC found that it was closer to £4m. The group falsely inflated its expenses to over £275m, which enabled the investors to claim around £100m in tax repayments. Patrick Harrington QC, leading counsel for the prosecution in the criminal investigation dubbed Operation Bulkhead, told i: “It really was a case with an international dimension. They used companies in Monaco, Guernsey, the British Virgin Islands, the Philippines and India for various aspects of the activity and of course it makes the audit trail very difficult to follow.

“My favourite word from the whole case was ‘illusion’, because the movement of money was entirely illusory. They were moving it from place to place, creating the impression that the money was doubling in size with every movement: £400,000 would become £2m by the time it had gone through five jurisdictions.”

Now, HMRC is slowly recouping the money, but is unlikely to ever recover anywhere near the sum lost. There is criticism that some producers are being overly punished for their involvement. Documentary film-maker Chris Atkins became embroiled in a tax investment scheme to fund his acclaimed film Starsuckers.

He did not financially gain and all of the money from the scheme – £85,000 – was spent on funding the film. Yet he was found guilty of tax fraud in 2016, and sentenced to five years.

Ten other films were funded via the scheme – but no other film-maker was prosecuted.