UK: Eclipse 35 Court Of Appeal Decision

Last Updated: 29 April 2015
Article by Michael Avient

The Eclipse 35 Court of Appeal decision leaves no doubt that where a tax avoidance scheme is found not to be trading by the Lower Courts, on appeal this will only be overturned in exceptional circumstances.

In seeking to alter behaviour, HMRC have found the perfect case, as participants in Eclipse not only failed to reduce their tax bill but now face catastrophically larger tax liabilities than if they had never participated in the scheme.

The Court of Appeal yesterday ruled that the Eclipse Film Partners No.35 LLP was not trading. No doubt HMRC will quickly publicise their success and the dire consequences of pursuing such litigation.

For those involved in other Eclipse LLPs the future looks bleak. The Court reaffirmed the decision that whether or not a trade exists is a question and decision for the tribunal of fact, namely the First Tier Tax Tribunal. The Court, in a carefully considered judgement, saw no reason to overturn this finding. In doing so it directed a strong message to cases currently under appeal regarding the availability and chances of success of any final appeal to the Supreme Court.

Participants in the other Eclipse LLPs, therefore, now face the realisation that, unless they can differentiate the activities and contracts entered into by their specific LLPs from those of Eclipse 35, they are likely to face a similar fate. Suddenly, HMRC's original settlement opportunity of receiving income tax relief on the cash contribution seems like an offer that should have been taken.

However, the decision has far wider implications. One of the main challenges facing many of the marketed tax schemes either awaiting litigation or appeal is whether or not they are carrying out a trade, and as such, rely on obtaining income tax relief from losses generated from such a trade.

Many of those awaiting appeal have lost at the First Tier Tax Tribunal because they were found to be not trading. Therefore, for those cases awaiting their first hearing, where little or no productive trading activity was undertaken by the LLP, the decision of whether litigation rather than settlement should be pursued ought to be objectively re-evaluated.

A common thread in many of the 'trading' tax avoidance structures identified by HMRC is that the partnership, LLP, individual or company undertook minimal activity other than a supervisory role with little or no actual control. As identified by the courts in the case of Eclipse 35, if this is linked by only a remote prospect of generating a profit then the most likely outcome on the finding of fact is that there was not a trade.

No doubt HMRC will now see the trading argument as a 'magic bullet' and will focus on this in all ongoing litigation and enquiries. However, as Eclipse 35 demonstrates, each case must be decided on its own facts. Therefore, cases may still be brought in the hope that based upon factual evidence the Court may be persuaded that a trade was carried on.

However, as HMRC have publicised, they have won 80% of all tax avoidance cases over the past few years. In the past advisers have been quick to point out that many of these successes have been in the lower courts and the hope was that subsequent appeals to the higher courts would see a more favourable outcome for the taxpayer. The Court of Appeal has now made it clear that, on the question of trading where the original decision went in favour of HMRC there is little hope of this being overturned.

The well publicised tax litigation relating to the Ingenious business models is ongoing and investors will be anxiously awaiting the outcome of the current hearing. Like Eclipse, the tax relief relied upon the basis that the LLPs were trading and many of the films invested in were 'studio' movies. There must now be concern that if the Court finds that the LLPs were not trading any subsequent appeals on this point may not be successful.

A precedent may have already been set as it is understood that the decision in the Working Wheels case, where the participants were found not to be trading, has not been appealed.

The decision in the appeal heard by the Upper Tax Tribunal in respect of Degorce, a sole trader, is also awaited where again the issue of the existence of a trade was central. If this reaffirms the view stated by the Court of Appeal in respect of decisions relating to the existence of a trade then this may be the final nail in the coffin for similar appeals.

A simple lesson can be learnt. The devil is in the detail and the most complex and carefully engineered tax structures can be undone by overlooking the simple requirement to undertake a trade. The seed of its ultimate failure was buried deep in the detail of long and complex contracts and it is unlikely that investors or their advisers would ever have had access to these documents. As with many tax avoidance structures, both the investor and their adviser need to rely on those implementing the structure to get things right.

In their unrelenting campaign to challenge and change behaviour, HMRC are now likely to use their new powers to issue follower notices to members of other Eclipse LLPs. There may be grounds to challenge their validity but decisions will need to be made as to whether or not the risk of penalties warrants the risk of further litigation.

THE NEXT STEP

Our tax investigations team at UHY Hacker Young can provide objective advice regarding participation in these and similar tax schemes. We also have an unrivalled record of assisting clients who find they are unable to immediately pay tax found to be due.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.