I dont quite understand this fully, Im sure there are some accountants out there who know exactly what this is about. Thanks to Mik Underdown, who sent me this about how the financing of the film led to a major change in UK law. Anyway here it is.

Did you know that the funding structure for the making of Escape to Victory led to a watershed legal decision in the UK courts? The string of appeals went all the way to the House of Lords.

Legal eagles should consult Ensign Tankers (Leasing) Ltd v. Stokes [1992] STC 226.

Ensign (let's call them E) formed a limited partnership (P) with some other companies and put up $3.25M. The general partner of the company borrowed a further $10.75M from a Lorimar company (L) (including $1M in overrun funding) to finance the film.

P, and therefore E, hoped that they would be able to gain capital allowances on the whole $14M, not just $3.25M, once the loans from L were paid off. As corporation tax was 50% at the time, and they thought the whole $14M was claimable, this seemed like a really good idea.

The Crown suggested that this was not a trading transaction at all, so nothing was allowable.

The UK courts system is rather like elephants having sex. Everything happens at a very high level, there's a lot of smoke, dust and screaming, then nothing happens for a couple of years. The film came out in 1981. The first case was brought in 1989, and the final appeal was resolved in 1992.

After the Commissioner's decision was reversed by Millet J, his decision was reversed by the Court of Appeal, and theirs was reversed by the House of Lords, it was held that this was a trading transaction, therefore the $3.25M was claimable but not the full $14M.

The Law Lords also punished E by making them pay all the costs, saying that the scheme brought no credit on them or their advisors. The Commissioners got most of their tax. The lawyers made another fortune.

The result: a new doctrine emphasising that the presence of a tax avoidance purpose does not mean that a scheme can simply be disregarded. The trick is to did down to the real transaction, and tax the consequences of that.