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Supreme Court refuses appeal in Eclipse 35 case

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High profile investors in the Eclipse 35 film scheme are facing large tax bills and legal fees, following the Supreme Court’s decision to refuse appeal from the Court of Appeal judgment (Eclipse Film Partners No. 35 LLP [2015] EWCA Civ 95, reported in Tax Journal, 27 February 2015).

HMRC has hailed the decision as ‘£635m for the public’. The department said: ‘People borrowed significant sums of money, at interest, to invest in Eclipse. The capital was supposed to be used by the partnership for trade, so the individuals could make interest relief claims against their other income. The scheme operated by acquiring the rights to certain Disney films (Enchanted and Underdog) and licensed the same rights back to another Disney entity for a guaranteed income stream. In reality, the borrowed money simply earned interest, which was then filtered through the partnerships to investors to cover the interest on their loans. This was dressed up as a trading transaction in order to enable the partners to claim tax reliefs.’

Writing in this journal, Chris Bates and Judy Harrison (13 March 2015) explained that the Court of Appeal held that a film leasing partnership was not trading. ‘The court confirmed that in assessing whether an activity amounts to a trade, it is necessary to consider the totality of what is done. The court has indicated that the concept of trade has a variety of meanings or shades of meaning.’

There were 31 Eclipse partnerships that were designed to run for between 11 and 20 years from 2005/06. Eclipse Film Partners (No. 35) LLP is the first of the partnerships to be taken to litigation. The decision not only has consequences for Eclipse partnerships, but will also be of interest to the appellants in the other cases where trade is an issue, which are working their way through the courts.

Michael Avient, partner at UHY Hacker Young, said the Supreme Court’s decision is ‘likely to be seen as a watershed moment for tax avoidance litigation’. He added: ‘Attempts are being made to recharacterise 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.’

Withers' special counsel Tessa Lorimer said: ‘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. 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.’