Eclipse 35 is a film partnership scheme which described itself as a trading partnership set up to sub-license films at a profit. The idea was that individuals borrowed large sums to buy the rights for Disney films. These films were then immediately sub-licensed on to other divisions within Disney. The “partners” could then claim the special tax relief introduced to encourage investment in the British film industry on the losses created by their loans. There was a healthy return involved: the tax relief was calculated to be more than twice the sum loaned to Eclipse.
Unfortunately for the partners, the £117 million claimed in tax relief attracted HMRC’s attention. HMRC challenged the film partnership scheme on the basis that it was not a trading partnership but an “aggressive tax avoidance scheme”. The First Tier Tax Tribunal, the Upper Tribunal and the Court of Appeal all agreed that the film partnership was not carrying on a trade. The scheme therefore stood to be unravelled.
The Supreme Court last week refused the film partnership scheme Eclipse 35 leave to appeal, finding no reason to doubt the Court of Appeal’s decision on the validity of the scheme. The individuals concerned now face a tax bill for income received by the partnership which will far outweigh any benefit they obtained from the scheme – together with their legal costs associated with fighting the HMRC’s assessments all the way to the Supreme Court.
This clear endorsement by the Supreme Court of the Tax Tribunals’ views on using tax avoidance schemes has implications for many more individuals who were advised to enter into similar structures. These taxpayers will now face a choice: waiting to see whether some fancy fiscal footwork can reframe their particular scheme as tax efficiency rather than avoidance; negotiating a settlement with HMRC; or seeking compensation from the advisers and intermediaries who sold them these schemes.
Penningtons Manches acts for a group of over 70 high net worth individuals - including celebrities from the worlds of entertainment and sport - who invested in controversial film finance schemes against the accountants and financial experts who advised them. Investors are recommended to take advice now about the merits of and timescale for any mis-selling claims and to seek an immediate standstill with their advisers as is necessary.