UK Supreme Court rejects Eclipse 35 film partnership appeal
The UK Supreme Court has declined to hear an appeal by the users of the Eclipse 35 film partnership scheme.
The scheme was one of many promoted by Future Capital Partners, all of which purported to be trading partnerships set up to sub-license films for a commercial profit. The 287 partners in Eclipse 35 borrowed large sums to buy the licensing rights for some Disney films for GBP503 million, which they then immediately sub-licensed out to other divisions of Disney. 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 & Customs challenged the GBP117 million total of tax relief claims on the grounds that the partnership was not really a trading organisation but an investment. It claimed that the borrowed money simply earned interest which could then be returned to investors to pay the costs of their loans, and the apparent trading was mere window-dressing.
The investors challenged HMRC's assessments on them, but lost successively in both tax tribunals and then, in January last year, at the England & Wales Court of Appeal.
The appellants then applied to the UK Supreme Court. They pleaded: first, that the Upper Tribunal erred in law in treating the case of Edwards v Bairstow as delineating the scope of its appeal jurisdiction; and second, that both tribunals and the Court of Appeal had erred in law by not concluding that their licensing and disposal of film distribution rights was inherently trading.
Supreme Court findings and consequences for participants
However, the Supreme Court has now refused them permission to appeal. 'We have heard nothing that persuades us that the Court of Appeal went wrong in this case', commented Lord Neuberger at yesterday's hearing.
Members of the scheme will now have substantially larger tax liabilities than if they never participated, because the participants remain liable to tax on the income received by the partnership. It is estimated that they will now have to repay between four and six times their original stake.
The decision in Eclipse is likely to be seen as a watershed moment for tax avoidance litigation, putting the matter of 'fact' clearly back with the tribunal, says Michael Avient of accountancy firm UHY Hacker Young. 'It may with retrospect be the time when the Supreme Court called a halt to the massive backlog of cases seeking to appeal decisions in respect of tax avoidance. [[P]articipants in tax avoidance should be under no illusion regarding the Tax Tribunal’s view regarding the use of tax avoidance schemes.'
What it means for related Eclipse schemes
Members of the many related Eclipse schemes now have a difficult decision to make. Avient explains that members' legal representatives are looking for ways to re-characterise their arrangements ‘but with such a strong precedent from the courts it is difficult to see why HMRC would allow such attempts’. 'It is therefore likely that HMRC will start the process of seeking collection and issuing follower notices', he says. 'Participants in other Eclipse partnerships will need to decide whether they seek to pursue other basis of challenge, and suffer potential penalties or seek settlement.'
The alternative, being promoted by law firm Withers and others, is for the scheme users to sue their tax advisors. 'Schemes like Eclipse 35 were designed to create a loss and were too contrived to persuade the courts of their legitimate trading, or to escape HMRC's attention', commented Withers special counsel Tessa Lorimer. 'The mis-selling of these kind of schemes is a scandal and, rather than fighting HMRC, investors should be looking for redress from the promoters and intermediaries who sold them the schemes.'
- The Supreme Court is still considering a second appeal by Eclipse 35 investors regarding costs.
- UK Supreme Court (see video recording of hearing, at 57 min 30 secs)
- UHY Hacker Young
- FT Adviser
- STEP UK news story (19 February 2015): Eclipse 35 film partnership loses at Appeal Court
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