How Captain Jack Sparrow Helped His Mate Cut U.K. Taxes

For someone who invested almost $10 billion of his clients’ money in films, Tim Levy doesn’t display much enthusiasm for show business.

No movie memorabilia greets visitors to his offices in London’s Mayfair district. Some of the films he backed were “turkeys,” Levy said. He struggles to remember others.

For Levy, 45, films offered something he could sell to his banker, hedge-fund-trader and sporting-world clients: legal tax breaks.

Now the U.K. government is saying the rules were abused -- and demanding some of the money back. A regulatory crackdown on tax incentives originally conceived to support British films has left tens of thousands of people facing requests for payment, tax authorities say. Levy says he didn’t break any laws.

“Tax has nothing to do with morality,” said Jamaica-born Levy, with an accent reflecting his years at an English boarding school. “I’m an entrepreneur. I was trying to build a business.” He spoke in a series of face-to-face and phone interviews and e-mails from May to this month.

Levy’s investment firm, Future Capital Partners Ltd., used leverage and accounting techniques to turn movie-distribution deals into lower taxes. The firm signed deals with Walt Disney Co., including for two “Pirates of the Caribbean” films, making it one of the biggest players in an industry that exploded after the tax relief for creative industries was approved in 1997.

Lawsuits Filed

Many of those deals did little to help British movie-makers, were formed principally for tax-saving purposes, didn’t do what parliament intended and shouldn’t have warranted deductions, according to Her Majesty’s Revenue & Customs, or HMRC, Britain’s version of the U.S. Internal Revenue Service.

The U.K. agency has filed civil lawsuits against investors in at least a dozen partnerships created by Future Capital, Levy told a parliamentary committee in December 2012. They were part of the agency’s broader campaign to tackle tax avoidance.

“The type of tax arrangements this firm were promoting are indicative of a pattern of behavior that needs to be confined to history,” said Toby Quantrill, an economic adviser at Christian Aid, a charity, and a former consultant at research group the Tax Justice Network. Escaping taxes angers the public, shifts the burden to others and threatens public services, he said in an e-mail.

Among the hundreds of members of those partnerships, according to public filings, were Sir Alex Ferguson, one of English soccer’s most-decorated coaches, Piero Novelli, global chairman of mergers and acquisitions at UBS AG and Eirik Winter, Citigroup Inc.’s head of Nordic region corporate and investment banking. The three declined to comment or didn’t respond to requests for comment.

Paying Upfront

Government pressure on tax breaks reached a new height in July. New rules came into effect then requiring anyone involved with tax-reduction structures being challenged by HMRC to pay the bill upfront, even if there’s an ongoing court case and the outstanding amount dates from years ago.

As many as 43,000 people who invested in a range of instruments can expect to receive payment notices by the end of 2016, HMRC said in a report published in July. Levy, who says he invested some of his own money in Future Capital funds, declined to say if he’d been contacted by tax authorities.

“This changes the game significantly for people who have used tax-avoidance schemes,” said Nick Skerrett, a London-based tax attorney with Simmons & Simmons LLP who has no connection to the film-finance deals. “If they can’t pay, they could go bankrupt.”

Closing Loopholes

Tax has pushed its way to the front of the global agenda. In the U.S., President Barack Obama’s administration is trying to stop businesses from using takeovers to move overseas in search of lower rates, a technique called inversion. In May, Credit Suisse Group AG agreed to pay $2.6 billion in penalties for helping Americans dodge taxes. French President Francois Hollande has stepped up the country’s efforts to pursue evaders.

Tax avoidance by corporations and individuals costs European economies as much as 1 trillion euros a year, the European Union estimates. Much of it is legal, or at least not clearly illegal, and governments spend a lot of time trying to close the loopholes that promoters such as Levy use.

Film tax breaks have proved controversial in the U.S. as well, for a different reason: states outbid each other in offering them. In September, California policy makers responded to production leaving the state by tripling the amount of money available each year, to $330 million -- despite an April 30 state report that faulted subsidies as ineffective and “a race to the bottom” between states.

Cricket Player

Levy didn’t start out looking for a career in tax. After arriving in England from Jamaica in the early 1980s, he played on the cricket team at Sherborne School. Realizing he wasn’t good enough to play professionally, he skipped university and came to London to work in insurance. He did various jobs, selling policies to taxi drivers and arranging natural disaster insurance, before deciding in 1996 the trade didn’t suit his ambitions.

Just after quitting his job, he met a Danish entrepreneur named Bjorn Stiedl. Together they came up with the idea of starting a business to take advantage of a tax write-off for the cost of making smaller films, announced in 1997 by then-Chancellor of the Exchequer Gordon Brown, Levy said. The tax break allowed money spent on low-budget British films to qualify for an upfront tax deduction.

At their simplest, many of the deals created by Levy and rival promoters allowed investors to invest in film-finance partnerships, using mostly borrowed money along with their own capital.

Partnership Investments

After raising capital from hundreds of investors, the film partnership typically would buy the right to distribute a new British movie. The partnership then would lease the film rights back to a specialist distributor, which would arrange for it to be shown in theaters or broadcast on television.

Investors could pay off the borrowed funds with the proceeds and perhaps make a profit. In addition, investors got the tax deduction for the amount of their investment, including the borrowed money, reducing the tax owed.

By 2000, Levy had parted company with Stiedl –- who later went to prison on unrelated fraud charges and couldn’t be reached for comment via several channels -- and founded his own firm, Future Capital.

Bonus Bonanza

It and competitors such as Patrick McKenna’s Ingenious Media Holdings Plc found there was no shortage of takers for investments that promised tax breaks during the years before Lehman Brothers Holdings Inc. filed for bankruptcy in 2008. New fortunes were being minted almost daily in London’s financial districts of Mayfair, Canary Wharf and Square Mile, north of the Thames River. McKenna, who testified before the parliamentary committee along with Levy in 2012, declined through a spokesman to comment.

Levy said he rarely met his customers. Instead, his firm relied on accountants and wealth advisers who recommended its products to their clients -- in return for a commission from Future Capital.

“This is perfectly normal human behavior,” said Sylvester Vince-Odozi, a former Future Capital employee who now runs his own investment firm. “If you are making 300 grand a year and you are paying 100 grand of tax, that’s life. If you are making $5 million a year and you are paying $2 million a year in tax, that’s a b-tch.”

Fee Income

Future Capital’s fee income jumped to 37 million pounds by 2005 from 141,000 pounds three years earlier, according to corporate filings at the U.K. companies’ registry. The firm started renting a yacht at the Cannes Film Festival on the French Riviera, which it used to host annual parties. Financial advisers and movie producers would sip Champagne, while Levy would hunt for new film projects.

Levy, who said he paid himself an average of about 2 million pounds a year at Future Capital, made enough money to fund a 2010 boat trip with reality-television star Bear Grylls across the previously frozen Northwest Passage to raise awareness for climate change.

Eventually, investor demand outstripped the supply of British-made movies that Future Capital could invest in. To keep growing, Levy needed more films, he said.

He started flying regularly to Los Angeles, hiring lawyers and accountants to enable him to apply a British tax break to Hollywood films.

“We worked out ways to get round the limitations of the British tax relief,” he said. “And we did it entirely within the confines of the law.”

Disney Deals

In the Golden State, Future Capital found its biggest deal ever. It raised about 840 million pounds through an entity it founded called Eclipse Film Partners No. 35 LLP. It bought rights to distribute “Underdog” and “Enchanted,” two Disney movies released in 2007, according to a December court ruling from the subsequent dispute with HMRC.

Court rulings show that other Eclipse partnerships made similar deals to distribute two of Disney’s Pirates of the Caribbean films, starring Johnny Depp as Captain Jack Sparrow, as well as “National Treasure: Book of Secrets,” starring Nicolas Cage.

A Disney spokesman didn’t respond to a phone call or an e-mail seeking comment.

Among the 289 investors in Eclipse 35 when it was created were Karl Robijns, a former head of oil trading and ex-partner at Goldman Sachs Group Inc., as well as Ferguson, Novelli, Winter and dozens of junior bankers, traders and money managers, according to a June 2 filing with the U.K.’s Companies House.

No Comment

Novelli declined to comment, as did Robijns, who left Goldman earlier this year. Winter didn’t respond to several requests for comment sent by e-mail and instant message, and calls to his phone weren’t answered. Phil Townsend, a spokesman for Manchester United, where Ferguson coached for more than 26 years, said the retired soccer manager didn’t want to comment.

Future Capital made about 80 million pounds of fees in 2007. Levy said at least half that went to pay lawyers, advisers and experts. It was the company’s best year and Levy said he awarded himself a 5 million-pound bonus.

It was also the beginning of the end for Future Capital. That year the British government replaced existing film tax breaks with far more restrictive rules. HMRC also became increasingly aggressive in challenging movie deals.

The old tax provisions “were abused by some people seeking to gain a personal large tax deduction for a small outlay,” HMRC spokesman Michel Rubini said in a statement. The new regime has been successful in attracting investment and popular with filmmakers, he said.

Not British

The tax agency held inquiries into 127 Future Capital deals including Eclipse 35, Levy told British lawmakers at the parliamentary committee hearing in 2012.

While HMRC didn’t base its case against Eclipse 35 on the fact that the films it funded were American, parliament members at the hearing weren’t pleased.

“The whole purpose was to invest in the making of films in Britain,” said Public Accounts Committee Chair Margaret Hodge. “This is just potty.”

In 2009, HMRC determined that Eclipse 35 wasn’t a genuine business and shouldn’t get relief, according to a Dec. 20, 2013, ruling by a specialist tax court rejecting the partnership’s bid to overturn that decision.

Legal Battle

When the ruling against Eclipse 35 came in December, David Gauke, a junior Minister at the British Treasury, said that its partners would probably end up paying more in tax than if they had never invested at all. Eclipse’s lawyers have appealed the ruling.

Maurice Nadjar-Primack, a former equities trader at Barclays Plc in London, said he regretted investing in the Eclipse fund. “Looking for tax optimizations, it wasn’t the best thing to do,” he said in a phone interview. But, he said, HMRC had “moved the goalposts.”

Levy says he spent a lot of money on lawyers to make sure his funds didn’t abuse the rules.

Other promoters have been criminally prosecuted by HMRC for fraudulently abusing the film relief. Next year, 13 people, including former Royal Bank of Scotland Group Plc and Jefferies Group LLC bankers, are scheduled to go on trial, accused of investing in their personal capacity in a film-production venture to avoid paying a combined 2.5 million pounds of tax.

Managing Out

All of the defendants, apart from two who couldn’t attend the hearing, pleaded not guilty to the charges in September.

As the pressure on his funds intensified, Levy tried to move Future Capital away from film into property and green energy projects. Then in April he announced the firm would stop issuing new products and would manage out its existing investments because of “unprecedented moves by HMRC to tackle marketed tax planning structures.”

He has a new London-based entity called Cocoon Wealth LLP that he says will pursue more traditional venture-capital investments, while employing some of the same people as Future Capital and using the same business address.

“Nothing we are going to do going forward will be tax-motivated,” he said.

Asked in a Sept. 25 e-mail how he felt about Future Capital investors facing losses, Levy responded: “The world changed in a way none of us could have predicted –- and we have all been seriously impacted by this.” He said neither he nor Future Capital “carry any responsibility for the way things have developed.”

On Oct. 8, Levy sent an e-mail to clients about Cocoon’s Green Energy Solar Fund. It’s a low-risk and environmentally friendly investment that will deliver inflation-proof returns, he said in the message, seen by Bloomberg and verified by Levy.

The first of the seven benefits listed for the fund: “Reduce or eliminate your exposure to inheritance tax.”