HMRC defeats film scheme in ‘watershed’ ruling

HM Revenue & Customs has defeated in the Court of Appeal a tax avoidance scheme which made false investments into Disney films. Eclipse 35 LLP claimed to trade in film rights but has been defined as a tax avoidance scheme by UK courts. HMRC said an estimated £635m in tax has been "protected" by the scheme's defeat. Investors into the scheme borrowed money which qualified for interest relief claims because it was intended for trade use. Eclipse used the money to acquire the rights to Disney films before sub-leasing them back to a different Disney entity for a guaranteed income stream.

In reality, the borrowed money earned interest, which was then filtered through Eclipse as a tax-efficient trading transaction to pay the interest on investors’ loans. The Court of Appeal upheld its earlier tribunal decision, which ruled that investors were not eligible for interest relief and profits from Eclipse 35 because the partnership was not trading. There were 31 Eclipse partnerships that ran for between 11 and 20 years, but Eclipse 35 is the first to be taken into litigation.

Financial secretary to the Treasury, David Gauke, said: “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 £1bn into HMRC to track down and challenge tax dodgers, and they will continue to pursue the minority who do no play by the rules.”

The case will ensure that about £635 million in tax can be collected from Eclipse’s investors, HMRC said. Senior bankers, traders and sporting celebrities were among the 289 investors in Eclipse 35 when it was created in 2006 by Future Capital Partners Ltd. The British government has targeted dozens of partnerships that it says allowed investors to improperly benefit from tax reliefs intended to boost the film industry. Eclipse 35 bought the rights to Disney’s “Underdog” and “Enchanted,” both released in 2007, then paid Disney to distribute them, according to the appeals court ruling. Lawyers for the Eclipse investors argued it was a genuine business that negotiated with Disney and took part in the exploitation of the films.

Other Eclipse partnerships created by Future Capital made similar deals to distribute two of Disney’s Pirates of the Caribbean films, starring Johnny Depp as Captain Jack Sparrow, as well as “National Treasure: Book of Secrets,” starring Nicolas Cage, according to London court rulings. The ruling in the favor of U.K. tax authority means there will be “very serious fiscal consequences for the members of Eclipse 35,” Judge Terence Etherton said in the written decision Tuesday.