HMRC announced on 6 September 2021 a settlement opportunity for current and former members of the Eclipse Film Partners (numbers 1 to 40) limited liability partnerships (the Eclipse LLPs), under which HMRC will agree not to impose a ‘dry tax’ charge in exchange for members settling historic tax liabilities (with interest) and abandoning litigation against HMRC in relation to the Eclipse LLPs. If accepted by each taxpayer, approximately £1.6bn of ‘dry tax’ will not be pursued by HMRC.
Background
Members of the Eclipse LLPs claimed relief for substantial interest payments incurred on bank borrowings used to purchase film rights by the Eclipse LLPs. The licensing arrangements gave the Eclipse LLPs the exclusive right to distribute and exploit the films. At the same time as they entered into the licensing agreements with the studio, they entered into distribution agreements with a distributor owned by the film studio. Under these distribution agreements, the distributor agreed to perform all the Eclipse LLPs’ obligations under the licensing agreements, save for the payment of the licence fee to the studio, in exchange for which the distributor agreed to pay the Eclipse LLPs variable royalties and fixed annual amounts.
A substantial proportion of members’ capital contributions to the Eclipse LLPs (94% in the case of Eclipse Film Partners No. 35 LLP (Eclipse 35)) was funded by bank debt. The loans matched the term of the licensing agreements, at a fixed rate of interest, and members were required to make a prepayment of interest (10 years in the case of Eclipse 35), in respect of which they claimed interest relief against their tax liabilities for the year in question.
HMRC disputed the effectiveness of this planning, and the transaction involving Eclipse 35 was litigated up to the Court of Appeal (Eclipse Film Partners No. 35 LLP v HMRC [2015] EWCA Civ 95), which held that Eclipse 35 had not been trading. The result was that HMRC denied the members of Eclipse 35 (and other Eclipse LLPs) interest relief with respect to the borrowing used to finance members’ capital contributions.
As a consequence, not only was interest relief denied on the prepayment of interest (which was designed to provide the initial tax advantage sought), members also faced a potential ‘dry tax’ charge in respect of the Eclipse LLPs’ income under the distribution agreements, which was never received by individual members. Members were therefore faced with potential tax liabilities that dwarfed the initial tax advantage sought.
The settlement opportunity
The settlement opportunity is open for six months from the date on which members/former members of the Eclipse LLPs are contacted by HMRC. It involves members:
giving up interest relief claims related to the Eclipse LLPs and paying the tax liability that they sought to mitigate by means of those interest relief claims;
paying interest on the tax liability; and
giving up any claims that are part of other Eclipse-related litigation involving HMRC (which would include contesting accelerated payment notices and follower notices and other claims brought in a public law forum).
In exchange, HMRC ‘will not pursue individuals for tax on income treated as paying back borrowings, including for periods after individuals had exited the LLPs’.
This settlement opportunity will no doubtless come as a welcome relief for those who have faced many years of uncertainty (and potential financial ruin) relating to their participation in the Eclipse transactions.
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Eclipse film partnerships settlement opportunity
HMRC announced on 6 September 2021 a settlement opportunity for current and former members of the Eclipse Film Partners (numbers 1 to 40) limited liability partnerships (the Eclipse LLPs), under which HMRC will agree not to impose a ‘dry tax’ charge in exchange for members settling historic tax liabilities (with interest) and abandoning litigation against HMRC in relation to the Eclipse LLPs. If accepted by each taxpayer, approximately £1.6bn of ‘dry tax’ will not be pursued by HMRC.
Background
Members of the Eclipse LLPs claimed relief for substantial interest payments incurred on bank borrowings used to purchase film rights by the Eclipse LLPs. The licensing arrangements gave the Eclipse LLPs the exclusive right to distribute and exploit the films. At the same time as they entered into the licensing agreements with the studio, they entered into distribution agreements with a distributor owned by the film studio. Under these distribution agreements, the distributor agreed to perform all the Eclipse LLPs’ obligations under the licensing agreements, save for the payment of the licence fee to the studio, in exchange for which the distributor agreed to pay the Eclipse LLPs variable royalties and fixed annual amounts.
A substantial proportion of members’ capital contributions to the Eclipse LLPs (94% in the case of Eclipse Film Partners No. 35 LLP (Eclipse 35)) was funded by bank debt. The loans matched the term of the licensing agreements, at a fixed rate of interest, and members were required to make a prepayment of interest (10 years in the case of Eclipse 35), in respect of which they claimed interest relief against their tax liabilities for the year in question.
HMRC disputed the effectiveness of this planning, and the transaction involving Eclipse 35 was litigated up to the Court of Appeal (Eclipse Film Partners No. 35 LLP v HMRC [2015] EWCA Civ 95), which held that Eclipse 35 had not been trading. The result was that HMRC denied the members of Eclipse 35 (and other Eclipse LLPs) interest relief with respect to the borrowing used to finance members’ capital contributions.
As a consequence, not only was interest relief denied on the prepayment of interest (which was designed to provide the initial tax advantage sought), members also faced a potential ‘dry tax’ charge in respect of the Eclipse LLPs’ income under the distribution agreements, which was never received by individual members. Members were therefore faced with potential tax liabilities that dwarfed the initial tax advantage sought.
The settlement opportunity
The settlement opportunity is open for six months from the date on which members/former members of the Eclipse LLPs are contacted by HMRC. It involves members:
giving up interest relief claims related to the Eclipse LLPs and paying the tax liability that they sought to mitigate by means of those interest relief claims;
paying interest on the tax liability; and
giving up any claims that are part of other Eclipse-related litigation involving HMRC (which would include contesting accelerated payment notices and follower notices and other claims brought in a public law forum).
In exchange, HMRC ‘will not pursue individuals for tax on income treated as paying back borrowings, including for periods after individuals had exited the LLPs’.
This settlement opportunity will no doubtless come as a welcome relief for those who have faced many years of uncertainty (and potential financial ruin) relating to their participation in the Eclipse transactions.
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