Eclipse 35 film partnership loses at Appeal Court
The England and Wales Court of Appeal has unanimously rejected the Eclipse Film Partners No.35 tax-planning scheme.
The Eclipse schemes, promoted by Future Capital Partners, purported to be trading partnerships set up to sub-license films for a commercial profit (the numeral 35 reflects the fact that there were many such partnerships; this is the first to reach the Court of Appeal).
The 287 partners borrowed large sums from Barclays Bank to buy the licensing rights for a number of films. The interest on these loans created losses, for which they could then claim the special sideways tax relief introduced in 2005 to encourage investment in the British film industry. Each investor obtained GBP400,000 of tax relief for an investment of GBP173,000.
However, HM Revenue and Customs challenged the GBP117 million total of tax relief claims on the grounds that the partnership was not really a trading organisation. It claimed that the borrowed money simply earned interest which could then be returned to investors to pay the costs of their loans: 'This was dressed up as a trading transaction in order to enable the partners to claim tax reliefs.'
The First-tier Tax tribunal agreed with HMRC and disallowed the relief. The Eclipse members then went to the Upper Tax Tribunal, where it was again held that the partnerships were not trading (although Eclipse's appeal was partially allowed on technical grounds – Eclipse Film Partners No.35 LLP v HMRC, 2013 UKUT 0639 TCC).
The case has now been decided at the Court of Appeal, where Eclipse 35 advanced two arguments. The first, according to tax accountants Ernst & Young, was that the only reasonable conclusion from the facts was that it was trading. The second was that the activity of acquiring film rights and sub-licensing them for profit was inherently a trade as a matter of law.
The court rejected both arguments. On the first point, the court decided that the activity of Eclipse 35 was of the character of a fixed-term investment, though some contingent receipts might be due later, depending on the success of the film. On the second point, the court found that there were no decided cases that justified the view that Eclipse 35's activity was inherently a trade.
Individuals who invested in the scheme may now have to repay between four and six times their original stake.
Future Capital Partners has since decided not to issue any similar tax-planning products.
- A point of interest is that the taxpayers in the case were represented by Graham Aaronson QC - whose report for HM Treasury in November 2011 formed the basis of the new general anti-abuse rule.
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