Hundreds of investors in failed Eclipse film tax avoidance schemes, including accountants, bankers, businessmen and celebrities, could face bankruptcy after HMRC revealed plans to issue payment demands which far exceed their original investments
A total of 780 individuals are believed to have put £2.2bn into film investment schemes, which involved claiming tax relief on interest payments. Typically an investor in a scheme like Eclipse 35 put in £185,000 and took out a loan of £815,000, giving a total investment £1m which was used to purchase film rights.
With that they would ‘prepay’ 10 years’ worth of interest on the loan used to buy the film. This would generate a £1m loss, which was then used to reduce the investor’s income tax bill. The payments from the film studio, made to rent the film back from the partnership, would help pay off the loan.
In April this year the Supreme Court upheld a judgement that the Eclipse 35 scheme was a tax avoidance scheme. HMRC has used that judgement to issue demands for investors in the other 38 similar partnerships.
Now Nick Woods, a tax advisor who represents some 300 investors, has reported that HMRC is set to issue payment demands for tax far in excess of the sums put in. An investor placing £200,000 in one scheme, for example, is expected to face a tax bill of between £2m and £4m.
Rather than seeking only to reclaim the tax benefit to investors, which would represent about £400,000 in a typical case, the reason HMRC’s repayment demands are so high is because it is demanding repayment of the full amount generated by the scheme even though the studio payments went to paying off the loan.
‘My expectation is, out of the 780 people involved, I’d think it highly likely that up to 600-700 would go bankrupt. At least 70% would be forced into bankruptcy,’ Woods said.
Demands are expected to be sent out by HMRC within two months. Once received, members have 90 days to pay.
An HMRC spokesperson, while declining to discuss individual schemes, said: ‘Avoidance schemes are often highly contrived and almost invariably fall flat when trying to deliver a tax advantage never intended by Parliament. The fact is the majority of schemes simply don’t work and can put avoidance users in a significantly worse financial position than if they had never used the scheme in the first place.
‘In the last two years, we have collected over £3bn from users of avoidance schemes, and have helped many people to enter into payment arrangements where they could not immediately pay the amount due.’
