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Eclipse 35 loses film partnership tribunal

24th Apr 2012
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HMRC has won a court battle to stop a film investment partnership called Eclipse Film Partners No 35 LLP from gaining £117m in tax relief.

The partnership, which included wealthy football managers among its members, wanted to claim tax relief on a complicated £1bn deal with Disney.

Manchester United manager Sir Alex Ferguson and former England manager Sven-Göran Eriksson were members of the partnership alongside hedge fund managers, bankers and chief executives.

The partnership had taken out a large loan to acquire distribution rights to certain films and then leased them back to the same film producer, within a short period, for a payment spread over 20 years.

The members of the partnership then claimed interest relief on the loans taken out to fund the purchase of the distribution rights.

However, when it came to court a First Tier Tribunal ruled that the partnership was not carrying on a trade and as a result the members of the partnership could not claim tax relief for the interest on money borrowed to finance the acquisition of the rights.

This matches a first tier tribunal decision from November that found two film partnerships were not undertaken on a commercial basis and therefore not entitled to relief.

Had Eclipse 35 been successful at tribunal each of the investment partnership’s 289 members would have been in line for around £400,000 in tax relief on a personal investment of £173,000.

While this is seen as a victory against “aggressive” avoidance, the decision is subject to appeal in higher tribunals.

An HMRC spokesperson told AccountingWEB: "Nearly a billion pounds was made available to HMRC to tackle avoidance, evasion and fraud. We are focussing on closing down aggressive avoidance schemes which deny the UK vital finding by getting around the will of parliament.”

David Ingall, consultant, JWPCreers said: “There is no doubt that these artificial leveraged schemes are the unacceptable face of tax planning. The problem for other taxpayers is that they create an atmosphere in which genuine claims are treated with extreme suspicion by HMRC.

“They stretch the envelop of reality incredibly and there is little sympathy for those who have lost. Unfortunately it gives HMRC the chance to give the impression that all tax planning, however innocuous is evil.”

Cormac Marum, a consultant to Harwood Hutton, added: “Individuals in partnerships which are not trading have never been able to claim tax relief in respect of losses made against other income.  That would appear to be why the Eclipse 35 losses have been denied.  In recent years these rules have been extended so no tax relief has been available for tax-generated losses.

“This does not mean that partners who borrow funds to finance trading which proves unsuccessful cannot get tax relief for the losses they unfortunately suffer.”

In February officials from HMRC carried out several raids after looking into allegations that City bankers had taken part in a tax fraud that exploited a film finance loophole.

Around 16 people were thought to have been arrested in the Revenue’s clampdown. 

Replies (10)

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Mark Lee 2017
By Mark Lee
25th Apr 2012 00:24

What about Counsel's opinion?

I have long been cynical about the way such schemes are promoted. The promoters assure the accountants that 'Counsel's opinion supports the scheme' and that in the unlikely event that tax relief is ultimately denied, HMRC cannot impose a penalty. WoopDeDo.

Even now the promoters of this scheme are probably telling the accountants whose clients invested in it that Counsel reckons there is a good chance of a successful appeal. And maybe that's what will ensue. Maybe.

In the meantime I would simply note that the investments in this case date back to 2005 or 2006. That's at least 6 years ago. And we still don't have a final decision as to the success or otherwise of the tax claims involved.

This is just one of the reasons I have been blogging warnings over the last few years about tax schemes. The assurances that the promoters make re their past successes with HMRC are often not worth a bean.

Accountants who introduce such schemes, opportunities and investments to their clients need to ensure that their clients:

- understand the risks of adverse consequences 

- are offered a realistic assessment as to the chances of success

- are clear as to the time it can take before this will be clear

In practice schemes seem much less attractive to typical risk averse clients once they understand all this. Which is another reason I see little point in accountants spending time getting to grips with schemes in sufficient detail to discuss them with clients. So few finally go through with them once they understand all of the issues.

This case may not have involved a disclosable 'scheme' under DOTAS. Those schemes that are disclosable are even more at risk.

Mark (gets off hobby horse and goes back to write about practice related matters) 

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By gbuckell
25th Apr 2012 14:11

Counsel's opinions

The assurance that a favourable Counsel's opinion has been obtained should always, in my view, be treated with a degree of scepticism. I have seen too many opinions where the real issues are lightly or not even addressed at all.

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By david5541
25th Apr 2012 14:47


should the partners make a claim against the film partnership managers?

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By [email protected]
25th Apr 2012 15:20

Don't understand

I'm now long retired and have forgotten everything I ever knew.  But I don't think I ever did understand these schemes!  I'm obviously missing a vital point in my analysis - can someone put me out of my misery?

If this wasn't a proper commercial venture, it wasn't expected to make a profit. I guess it was designed to break even or even suffer a loss which would be more than compensated for by tax benefits.

So the partnership borrowed money to buy rights, then leased the rights back over a 20 year period.  Presumably they received enough in lease rental payments over the 20 years to repay both the loan and the interest. The interest payments would be allowable against the lease payments.  The capital cost would presumably also be written off against the lease payments.

If this were the model, they would be receiving income which would exactly match the outgoings, and there would be no net income, no tax liability, and no additional tax relief - the lease payment receipts would absorb all the available tax relief.  So where's the percentage?


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By JeremyNewman
25th Apr 2012 15:33

Counsel's Opinion

A couple of problems:


The Opinion is invariably a generic one, not tailored to the circumstances of the individual investor, and so really of limited value.


Secondly, if it goes to court, HMRC will also have an Opinion saying the scheme doesn't work. If the tax reliefs being relied on are not designed to be (ab)used as a scheme wishes, my money would be on HMRC likely being on the winning side.


There is also the problem of Opinion shopping. I wonder how many Counsel were approached before the promoters got the Opinion they wanted?


Also, as Mark has alluded to, the taxpayers will have had their returns under enquiry for years. The interest charges will be pretty big by now, and no doubt the legal and professional fees incurred in defending the scheme will be rather large. Disputes with HMRC on matters such as this take yonks to sort out. I hope the promoters gave the investors realistic health warnings, but somehow I doubt it.

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By andrewdiver
25th Apr 2012 15:48

Insured risk

I find providers are offering insurance with their schemes now.   The fees within the schemes include insurance to cover legal fees, but also in many instances now also the tax potentially at stake if HMRC challenge. 

In those instances you have to question whether they really believe they would win if challenged?  Is this an indication of confidence that they can get someone to insure the risk, or a huge admission that there is a risk.  

Most people who are involved in these types of schemes are the perennial risk takers with tax avoidance schemes so they are usually versed in the pro's and con's and take them because the downside is their investment is usually maintained and only the tax relief is limited upon which they have to pay interest? Not usually a huge downside risk for them.  The rates charged are reasonably high but not as penalising as they would not manage to achieve elsewhere, or not paid for by the tax savings on the other 2 schemes that did work! 

As for counsels opinions as JeremyNewman states you can get one to fit most situations.  I recall many moons ago a client of mine when told an arrangement would be taxed said he would pick up the phone and quoted some notable tax counsels saying he was sure he could get one to support his view.  Sadly I don't doubt his claim.

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By sdphilpott
25th Apr 2012 23:56

Tax mitigation

In respect of these planning opportunities there is no doubt there are some poor operators around and so it is vital the accountants who introduce their clients have done some due diligence on the provider they are using. I think it's a mistake not to make your clients aware of the opportunities available to them because if you don't you're doing them a disservice and risking someone else making them aware - any decent solutiions provider will clearly go through the risks with the client so they can make an informed decision.

Most clients who participate in these opportunities are entrepreneurs used to taking risks - some even go into them with the view that the chances are they won't work but recognise it gives them a window of 5 years plus in which to keep the cash and generate a return on it that will far exceed the fees and any interest incurred!

The points on counsel's opinion are valid as counsel will only answer the questions asked - again decent providers will allow you to read the opinion so you can get a sense as to its completeness.

Regarding insurance, in my experience most clients do not take it out - the important point is that if a product is insurable at reasonable cost then the insurer will have done some due diligence on the product so they don't lose out and will have made sure the provider has insurance for defence costs so even if the client does not want the insurance they have more comfort on product due diligence and adequacy funds to defend the planning.

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By justsotax
26th Apr 2012 10:00

Clearly the Revenue are getting something wrong

in regard to anti avoidance when it is seen by some that the revenue at worst is seen as a bank who offers low interest/penalty charges on cash that could then be used to invest in 'high growth activities'.


Tax schemes in general appear to be (are) completely artificial in nature - only in place to create large  amounts of tax relief for little investment and offer no benefit to the economy.  As for risk.....put in £173k, get back £400k - (and would the £173 come back eventually?) - at worst you have just got a loan for over best you have doubled your money with no risk.  Not really sure how they are allowed to continue....but then again I guess GO/DC and a few others on the bench have no doubt dabbled in these......     

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By hazeljohnson
26th Apr 2012 12:12

I don't think that just because the scheme is uncommercial that it means that it will just break even or make a loss. These schemes can be blocked for uncommerciality in the sense that there is a guaranteed return and that there is no real risk to the investor.


Counsel's opinion will usually deal with the technical issues, and deal with them well, but Counsel won't be aware of the totality of the commercial aspects of the deal, and won't necessarily be able to offer an opinion on whether these will satisfy HMRC. Their opinion would be caveated to that effect as well.



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By RobertG
04th May 2012 13:44


Partnerships were bound to fail  where there was no commercial purpose other than tax avoidance. That many have been unravelled is unsurprising but many of the scheme creators have risked legitimate UK film investment where potential investors have seen such often highly publiised cases.

We have been involved in film financing and structuring for film productions for a number of years and the only legitimate way for investors to get legitimate tax breaks is by using HMRC pre approved schemes such as an EIS or the new SEIS. 

These schemes allow 30% (EIS) and 50% (SEIS) tax credit  for equity investors, tax free profits (after 3 years) CGT deferral and full loss relief if the film fails. Because investors are still worse off if the film does not work there is a real incentive in making commercial projects which stimulates the economy and rewards the risk takers in a fair not inflated way.

But the objective is a commercial one i.e. to make successful British films and for the investors to make money.  It is not uncommon for investors on carefully selected projects (that is the key) to make 100-200% tax free.

As EIS based schemes are approved by HMRC and have to be continually compliant they are not subject to the risk of being torn apart years down the line.

Rob Graham

Graham Associates (International) Ltd

Independent Moving Pictures Ltd



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