The Court of Appeal has ruled in favour of HMRC against Eclipse Film Partners (No 35) LLP which it said protected an estimated £635m in tax.
Although Eclipse 35 claimed to trade in film rights, the court ruled that it was in fact a tax avoidance scheme.
HMRC said the scheme operated by acquiring the rights to Disney films and then sub-leasing them back to a different Disney entity for a guaranteed income stream.
It sought to generate large interest relief claims for Eclipse partnership investors.
The case,Eclipse Film Partners No 35 LLP v HMRC, reaffirmed that Eclipse 35 was never likely to generate “contingent receipts” and therefore was not commercially trading with a view to making a profit.
Almost 300 investors, including Sir Alex Ferguson and Sven-Göran Eriksson, poured money into the scheme. If it had worked, members could have enjoyed an average of more than £400,000 in tax relief on a personal investment of £173,000.
The court upheld earlier tribunal decisions that Eclipse 35 was not trading and as a result investors were not eligible for interest relief and profits from the partnerships were taxable.
Investor capital was supposed to be used by the partnership for trade, so individuals could make interest relief claims against their other income. However the borrowed money earned interest, which was then filtered through the partnerships to investors to cover the interest on their loans.
This was claimed as a trading transaction in order to enable the partners to claim tax reliefs.
David Gauke, financial secretary to the Treasury, said: “The government is committed to tackling tax avoidance schemes like Eclipse. 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 it will continue to pursue the minority who do not play by the rules.”
Eclipse 35 is one of 31 Eclipse partnerships and is the first scheme to be taken to litigation.