UK and International Tax news
Court Of Appeal Decision In Eclipse Film Partners Case
Wednesday 4th March 2015
The Court of Appeal has recently issued its decision in Eclipse Film Partners No 35 LLP v HMRC upholding earlier tribunal decisions in favour of HMRC.
Eclipse 35 had argued that in the relevant year of assessment it carried on the trade of acquiring and exploiting film rights. HMRC’s case was that Eclipse 35 had never carried on a trade but had merely organised a sophisticated financial model involving licensing and distribution rights in respect of two Disney films designed to give a series of pre-determined cash flows and with the ultimate object of giving rise to interest payments by the members, accelerated by prepayment, on borrowings for which they can claim tax relief to set against other income they have which is otherwise taxable.
The FTT had decided that what Eclipse 35 actually did was not a trading transaction at all but rather it carried on the business of exploiting films not amounting to a trade, i.e. a “non trade business” of film exploitation within s.609 ITTOIA 2005.
The Appeal Court held that “the proper characterisation of the business of Eclipse 35 depends upon the totality of its activity and enterprise. Stripping the business down to its essential elements, the transactions on which Eclipse 35 was engaged had two aspects. One aspect was that a payment by Eclipse 35 of £503 million would be repaid with interest over a 20 year term and would produce a profit unrelated to the success or otherwise of the exploitation of the Rights sub-licensed. That aspect had the character of an investment….. The second aspect was the possibility of Eclipse 35 obtaining a share of Contingent Receipts and the activity on the part of Eclipse 35 to secure such a share. The FTT considered that this second aspect was in real and practical terms insufficiently significant in the context of Eclipse 35’s business as a whole to lead to a proper characterisation of Eclipse 35’s business as one of trade within the meaning of the tax legislation. In our judgment, that was a conclusion which the FTT were entitled to reach and, indeed, with which we agree”.
Subject to any further appeal, the investors will not be eligible for tax relief on interest payments but fully taxable on the profits of the partnership. HMRC has said that the ruling has protected £635m in tax.Contact Us