HMRC wins important Court of Appeal decision
HMRC has welcomed a unanimous decision by the Court of Appeal to uphold the decisions of the First-tier Tribunal and the Upper-tier Tribunal both of which ruled in favour of HMRC. The ruling related to a particular scheme known as the Eclipse 35 partnership that was the subject of the Court of Appeal decision. The partnership had 289 members, many of whom were bankers, business people, and figures from the footballing world.
The scheme itself concerned a deal in film distribution rights and the establishment of a partnership to take advantage of new rules introduced by the last Labour Government to encourage investment in the UK film industry. The Eclipse 35 partnership used the money raised from the members together with additional loans to buy the distribution rights to certain films produced by Disney. The rights were then sub-leased back to a different Disney entity for a guaranteed income stream.
The partnership claimed they were trading in film rights but the courts were clear that it was not commercially trading and that 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 not a trading transaction but rather a tax avoidance scheme.
This decision will have a substantial impact on the investors, who will now be in a significantly worse position than if they had never invested in the scheme. As a result of the decision, the investors are not eligible for interest relief and the profits from the partnerships remain taxable.
We are told that this decision will protect an estimated £635 million in tax. The Eclipse 35 case was the first of some 31 Eclipse partnerships that ran for between 11 and 20 years from 2005/06 and was the first to be taken to litigation.
Financial Secretary to the Treasury David Gauke said:
‘The Government is committed to tackling tax avoidance schemes like Eclipse. These schemes, which were all too common in the mid-2000s, are an affront to the vast majority of businesses and people who pay what they owe. The Government has invested £1 billion into HMRC to track down and challenge tax dodgers and they will continue to pursue the minority who do not play by the rules.’