The Supreme Court is set to hear an appeal from Eclipse Film Partners 35, the partnership which is challenging HMRC’s view that a tax avoidance scheme involving the rights to two Disney films amount to an investment, rather than a trading venture, and as such in HMRC's view does not qualify for £117m in film tax relief
The 300 members of the Eclipse 35 scheme are believed to include football managers Sir Alex Ferguson and Sven Goran Eriksson, plus a host of celebrities and City figures. Investors put £50m into the partnership which, together with substantial bank loans, was used to buy the distribution rights to the Disney films Enchanted and Underdog in April 2007.
At the same time, the Eclipse vehicle sub-leased the rights to another part of Disney in a complex deal that generated income over 20 years, enabling it to claim film tax relief.
In 2012, HMRC denied Eclipse members’ claims for £117m in tax relief, which saw the beginning of a series of legal challenges over the decision. HMRC argued that Eclipse 35 did not carry on a trade, as required to qualify for the tax reliefs, but was ‘merely organised a sophisticated financial model involving licensing and distribution rights’ in relation to the films.
The Upper Tribunal (UT) ruled the partnership to be an ‘aggressive’ avoidance scheme, and the Court of Appeal agreed with this decision.
Now Eclipse 35 has taken the case to the Supreme Court, where a hearing will start this morning in front of judges Lord Neuberger, Lord Mance, Lord Sumption, Lord Toulson and Lord Hodge.
According to the case summary, they will consider whether to give Eclipse 35 permission to argue two legal points and, if they do, then how those issues should be answered.
The first concerns whether or not the UT erred in law in treating Edwards v Bairstow as delineating the scope of its appeal jurisdiction. The second issue is whether the First Tier Tribunal, UT and the Court of Appeal all erred in law by not concluding that Eclipse 35's acquisition (by licence in) and disposal (by licence out) of specified rights to distribute and/or exploit two films produced by Disney was inherently trading.
The Supreme Court summary says Eclipse 35 paid £503m to acquire specified rights to distribute and/or exploit two films produced by Disney.
Under the same transaction, these rights were then passed on to another member of the Disney group for consideration comprising the guaranteed right to payments over 20 years totalling £1.02bn and the possibility of further payments dependent on the success of the two films. The Court of Appeal dismissed the appellant's appeal that the transaction was an adventure in the nature of trade, holding that it had instead made an investment.
The hearing is expected to last for two days, ending on 14 April.
Details on the Eclipse 35 hearing at the Supreme Court are available here
