The high profile Eclipse 35 film partnership scheme, which was made up of wealthy individuals, has lost its appeal after the Upper Tribunal finally ruled that the arrangement which had been marketed as a tax-efficient way to invest in the industry, does not deliver the tax relief it claimed.
Eclipse 35 was a Limited Liability Partnership (LLP) which claimed, through a complex series of financial transactions, to enable its 287 partners to obtain tax relief on their general income.
The scheme used circular flows of funds to create an upfront interest payment on which investors could claim tax relief. The Upper Tribunal confirmed the First Tier Tribunal's decision that these claims were not allowed, and that the profits generated by the scheme were still taxable.
The firm, which first operated the scheme in 2006/7, is one of 31 related avoidance partnerships with over £600m tax at risk.
Those who are set to be hit by the final outcome include the likes of Sir Alex Ferguson and Sven-Goran Eriksson.
In its initial ruling, the Tribunal judges did not deny that the loans taken out by the partners were used to provide capital to the partnership. However, they determined that the partnership itself was not trading, trading being one of the criteria to be satisfied in order to claim the tax relief.
At the time, the scheme's promoters, Future Capital Partners, said the trade was the exploitation of the rights to two Disney films, 'Enchanted' and 'Underdog', and the partnership was expected to make a profit over a 20-year period.
Exchequer secretary David Gauke welcomed the judgement, saying the government wants to support and encourage genuine business investment through the tax system, which is why we have tax reliefs.
'However, we will not stand for abuse of those reliefs and HMRC will come down hard on anyone who tries. In this case, anyone who used the scheme to try to avoid tax will have to pay tax on the income from the scheme, meaning they are worse off than if they'd never used it. The message is clear - if it looks too good to be true, it probably is,' said Gauke.
The First Tier Tribunal's decision is HERE
