The Supreme Court has dismissed an appeal by Future Capital Partners, the creator and a group of investors of the Eclipse 35 film scheme. The tax avoidance scheme failed because its activities never amounted to a trade.

  • Film tax relief was created by a past government with the intention of encouraging investment in the British film making industry.
  • Tax planners used the relief to create tax breaks for clients, schemes such as Eclipse 35 were created with the intention of obtaining tax relief and not really making films.
  • In 2015, the Court of Appeal dismissed an appeal by the Eclipse Film Partners No 35 LLP (Eclipse 35), upholding the earlier findings of the FTT, that it was not carrying on a trade. Eclipse appealed to the Supreme Court.

Background

As we previously reported, Eclipse 35 was a film partnership was set up to secure income tax relief for its investors in 2006/07. It entered into a complex set of transactions with the Disney Group of Companies to licence to film rights and sub-license rights to distributor.

Under the financing arrangements, members of the LLP advanced small sums of their own cash (which were largely spent on advisers' fees) and took loans from Barclays Bank in order to contribute to the LLP's capital. The members claimed an estimated £293 million in loan interest; almost three times the amount that they invested.

According to the findings of the FTT, the mechanics of the scheme meant that the main risk centred on Barclays' solvency, and the main business activity of the LLP was of investment. There was also the possibility that the LLP could obtain Contingent Receipts, whilst this activity could be treated as trading, in real and practical terms it was insufficiently significant to the business as a whole and so the FTT denied tax relief on the basis that the LLP was not carrying activities that amounted to a trade.

The case went to the UTT, the Court of Appeal and then there was an application to appeal to the Supreme Court. The Supreme Court is now deciding on the issue of costs.

The case has continually made the national press because a number of celebrities invested over £118 million in the scheme. They now will face higher tax bills than the savings that they had hoped to make..

Links

Eclipse Film Partners Supreme Court [2016]

Eclipse Film Partners No 35 LLP v HM Revenue and Customs [2015] EWCA Civ 95 (17 February 2015) 

Upper Tier Tribunal decision: Eclipse Film Partners No 35 LLP [2013] UKUT 0639 (TCC)

First Tier Tribunal decision: Eclipse Film Partners No 35 LLP TC 01963

 

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