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Appeal court rules for HMRC in Eclipse case

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HMRC has announced that the Court of Appeal has ruled in its favour against Eclipse Film Partners (No 35) LLP, which it said ‘protected an estimated £635m in tax’. There were 31 Eclipse partnerships that were set to run for between 11 and 20 years from 2005/06, all claiming to trade in film rights but which HMRC said ‘in reality was a tax avoidance scheme’. Eclipse 35 is the first of the partnerships to be taken to litigation.

HMRC explained that the scheme operated by acquiring the rights to certain Disney films and then sub-leasing them back to a different Disney entity for a guaranteed income stream, and sought to generate large interest relief claims for Eclipse partnership investors.

Investors borrowed significant sums of money, at interest, to invest in Eclipse. The capital was supposed to be used by the partnership for trade, so individuals could make interest relief claims against their other income. However, the borrowed money simply earned interest, which was then filtered through the partnerships to investors to cover the interest on their loans. This was claimed as a trading transaction in order to enable the partners to claim tax reliefs.

The Court of Appeal upheld earlier tribunal decisions that Eclipse 35 was not trading. As a result, investors were not eligible for interest relief and profits from the partnerships were taxable.

Financial secretary to the Treasury David Gauke said: ‘The government is committed to tackling tax avoidance schemes like Eclipse. These schemes, which were all too common in the mid-2000s, are an affront to the vast majority of businesses and people who pay what they owe. The government has invested £1bn into HMRC to track down and challenge tax dodgers and it will continue to pursue the minority who do not play by the rules.’