The Eclipse schemes, originally designed by HSBC and promoted by groups such as Future Capital Partners, have been widely used by celebrities such as Sir Alex Ferguson and Sven-Goran Eriksson, The Times reported this weekend.
In total, around 780 investors poured £2.2bn ($2.7bn, €2.56bn) into the schemes.
Once demands are sent out, members have 90 days to pay. Demands are likely to be sent out early in the New Year, though Eclipse is expected to seek a judicial review of the decision by HMRC.
A technical loss
The demands will not only include the back payment of any tax, but also a liability to income tax on the income paid by the film production company.
This could see investors with a £200,000 initial investment face a tax bill of £2m or higher.
The film partnerships were structured so that an upfront investment of, for example, £185,000 would be topped up by a loan of £815,000, making a total investment £1m. This would be used to “prepay” 10 years’ worth of interest on the loan used to buy the film, generating a technical loss of £1m to offset tax on other income.
Future payments from the film studio to rent the film back from the partnership paid down the loan. In addition to the unpaid tax, HMRC aims to tax all the income generated from renting the film back to the Hollywood studio even though investors will not have received any money from it.
Tax relief
The scheme started to unravel in 2013, when HMRC’s first tier tribunal challenged the validity of the Eclipse 35 partnership, arguing that the scheme was specifically structured simply to create a tax relief for the investors, rather than to further the promotion of the film.
Lawyers Pannone said: “The consequence of a successful HMRC challenge to a film scheme is that investors will lose the ability to offset the ‘loss’ of the partnership loan against their own personal tax liabilities. This means that the tax the investors sought to defer or shelter will then fall due. For most investors this is something that they understood and accepted.
“What many investors were not warned about, however, was that they would also then become liable for income tax on the income paid by the film production company to the partnership under the lease agreement. This ‘income’ is of course used to repay the loan part of the investment and is never actually received by the investor.
“This leads to a disastrous outcome where investors must pay, not only their own tax which they sought to shelter in the scheme, but also tax (usually at the highest rate) on ‘income’ they have never received.”
Adviser liability
Advisers have suggested that there may be bankruptcies as a consequence of the scheme.
Financial advisers may also find themselves liable. Investors can bring a claim within six years of the date of the investment into the scheme or within three years of the investors becoming aware of the challenge to the scheme.
However, for many investors the time may have passed.
