Has the future of film partnerships been called into question in light of the judgement in the Court of Appeal judgement case of Eclipse Film Partners No 35 LLP v HMRC  EWCA Civ95 (‘Eclipse 35’)?
The decision in this case is the latest development in the long running question of whether the acquisition and licencing back for 20 years of the rights to exploit and distribute two Disney films ‘Enchanted’ and ‘Underdog’ amounted to carrying on a trade.
This case has attracted a great deal of media interest, not least because investors were claiming tax relief on £293m of interest payments.
The facts of the case are complex and over 100 lever arch files were originally submitted as documentary evidence to the First-tier Tribunal (FTT) who found (in a decision that spanded 96 pages and 417 paragraphs) that what Eclipse 35 actually did was not a trading transaction. For this reason, the FTT dismissed Eclipse 35’s appeal.
Eclipse 35 appealed the decision to the Upper Tribunal (UT) on the basis that the FTT had erred in law and that Eclipse 35 was in fact carrying on a ’trade’. However, Sales J rejected the appeal and the case proceeded to the Court of Appeal.
The Court of Appeal’s judgement was to uphold the decisions of both the FTT and UT. The judges considered that ‘the proper characterisation of the business of Eclipse 35 depends upon the totality of its activity and enterprise’ and that the ‘possibility of obtaining a share of Contingent Receipts did not give the business of Eclipse 35, looking at it as a whole, a trading character: having regard to the business as a whole, the right to Contingent Receipts was no more than a potential additional return on a fixed term investment.’
As there was no trade, the partners are unable to claim that the interest payment paid on the loans were ‘qualifying’ and will therefore be required to pay back any income tax relief previously obtained.
Interestingly, the interest relief being sought by the partners would, if claimed now, be subject to the income tax relief –‘capping’ provisions and therefore the exposure to HM Treasury would now be limited.
If leave to the Supreme Court is denied, the appeal process would then have come to an end and the decision would become final. HMRC will then be able use the decision in this case to issue a Follower Notice where an enquiry or tax appeal is in progress on a case with similar circumstances. One of the effects of the receipt of a Follower Notice is that it will allow HMRC to then issue an Accelerated Payment Notices (APN).
Which leads us to the Ingenious Media film partnership case. The High Court has granted permission for a number of film investors in the this partnership to challenge the APNs they have received. At present the legislation enacted in Finance Act 2014 makes no provision to contest an APN through the Courts, leading the accountancy and legal professions to question the validity of the legislation by Judicial Review. The outcome will have far reaching impact on the 43,000 APNs HMRC intend to issue to ‘Scheme’ users, including film schemes.