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Eclipse appeal to the Supreme Court fails

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The Supreme Court has turned down the application to appeal the decision in Eclipse 35. The decision not to hear the appeal will have significant implications for those who participated in the Eclipse 35 LLP and its similar incarnations.

The decision of the Court of Appeal therefore stands with the result that the claimed tax relief is not effective but the participants remain liable to tax on the income received by the LLP. As a consequence participants will have substantially larger tax liabilities than if they never participated in the scheme.

Attempts are being made to re-characterise the arrangements of other LLPs in the Eclipse series of LLPs 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. Participants in other Eclipse partnerships will therefore need to decide whether they pursue other bases of challenge, and suffer potential penalties or seek settlement.

For those in other structures where the question of trading is raised, the issue is now clear. If they are unable to win the trading argument at the tribunal stage not only will a successful appeal be unlikely, they may not even receive permission to appeal.

The decision in Eclipse is therefore likely to be seen as a watershed moment for tax avoidance litigation. 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. The decision puts the matter of ‘fact’ clearly back with the tribunal and participants in tax avoidance should be under no illusion regarding the tax tribunal’s view regarding the use of tax avoidance schemes.