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Court of Appeal dismisses Eclipse appeal

Court of Appeal dismisses Eclipse appeal

The courts have dismissed an appeal from a film partnership, stating that it does not deliver tax relief, as it was not commercially trading with a view to make any profit.

In a judgement published today, the Court of Appeal found that Eclipse Film Partners No 35 LLP was never likely to generate ‘contingent receipts’ and as a result it held that Eclipse 35 was “not commercially trading with a view to make any profit”.

Due to this, it was not a trading business within the meaning of tax legislation, the court found.

Eclipse 35 was a limited liability partnership which claimed to enable 287 individuals to obtain tax relief on their general income. It is one of 31 related avoidance partnerships with over £600m tax at risk, according to HM Revenue and Customs. The scheme was first used in 2006-07.

Today’s decision follows a ruling in December 2013 by the Upper Tax Tribunal which said that the Eclipse 35 scheme did not deliver the tax relief it claimed, despite being marketed as a tax efficient way to invest in the film industry and it being recommended to many as a way to mitigate higher rate income tax.

In its written ground of appeal document, Eclipse 35 specified 11 grounds of appeal.

The organisation’s main skeleton argument in support of the appeal was based on eight ‘key’ steps which it previously identified before the upper tribunal as its main arguments. It then contended that 17 central findings of fact found by the first-tier tribunal meant that the only proper conclusion was that Eclipse 35 was trading.

In April 2012, HMRC won a court battle to stop Eclipse 35 from gaining tax relief, after it revealed a plan to claim relief on a complicated £1bn deal with Disney.

Martin Taylor, head of client relations at Rebus, said the decision quashes any remaining hope that the investor may have that they will be able to receive the vast majority of the tax relief they had expected.

Rebus represents investors that have been mis-sold complex investment schemes.

“Rebus’s view is that investors will now face tax bills that are greatly in excess of their initial investment,” commented Mr Taylor.

“The result of this will be that many investors will experience a dramatic change in their personal circumstances. It is likely to mean that some may have to sell their homes, delay their retirements or in the worst hit cases the consequences of the decision may push some individuals into bankruptcy.

“In our opinion this decision now sets the tone for all future litigation relating to tax avoidance schemes (whether actual or perceived). It is a watershed moment as an indicator as to how the courts are likely to consider these schemes in the future.”

ruth.gillbe@ft.com