Eclipse 35 claimed to trade in film rights but has been defined as a tax avoidance scheme by UK courts. HMRC said an estimated £635m in tax has been “protected” by the scheme’s defeat.
Investors into the scheme borrowed money which qualified for interest relief claims because it was intended for trade use.
Eclipse used the money to acquire the rights to Disney films before sub-leasing them back to a different Disney entity for a guaranteed income stream.
In reality, the borrowed money earned interest, which was then filtered through Eclipse as a tax-efficient trading transaction to pay the interest on investors’ loans.
The Court of Appeal upheld its earlier tribunal decision, which ruled that investors were not eligible for interest relief and profits from Eclipse 35 because the partnership was not trading.
There were 31 Eclipse partnerships that ran for between 11 and 20 years, but Eclipse 35 is the first to be taken into litigation.
Financial secretary to the Treasury, David Gauke, said: “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 they will continue to pursue the minority who do no play by the rules.”
“Very serious”
Rebus Group, which provides legal services to investors who may have been mis-sold investments, said the Court of Appeal’s decision represents a “watershed moment” in how the courts are likely to consider tax avoidance schemes in the future.
It added that the ruling “surely quashes any remaining hope that investors into the scheme may have had that they will be able to receive the vast majority of the tax relief they had expected”.
It said that, even though the errors were made by those who created the scheme, its investors will suffer “very serious consequences” and “tax bills that are greatly in excess of their initial investment”.
