HMRC wins £635 million for the public in landmark case

15 April 2016

Following a lengthy legal battle, The Supreme Court has ruled in favour of HMRC, refusing the Eclipse Film Partners (No 35) LLP, permission to appeal last year’s Court of Appeal decision, protecting an estimated £635 million in tax.

Eclipse claimed to trade in film rights but was in reality a tax avoidance scheme, seeking to create substantial interest relief claims for investors.

People borrowed significant sums of money, at interest, to invest in Eclipse. The capital was supposed to be used by the partnership for trade, so the individuals could make interest relief claims against their other income.

The scheme operated by acquiring the rights to certain Disney films (Enchanted and Underdog) and licensed the same rights back to another Disney entity for a guaranteed income stream.

In reality, the borrowed money simply earned interest, which was then filtered through the partnerships to investors to cover the interest on their loans. This was dressed up as a trading transaction in order to enable the partners to claim tax reliefs.

There were 31 Eclipse partnerships that were designed to run for between 11 and 20 years from 2005/06. Eclipse Film Partners (No 35) LLP is the first of the partnerships to be taken to litigation.

This decision upholds the earlier Court of Appeal decision, concluding that there is no merit in this case being heard any further. As a result the findings of the Court of Appeal remain in place. Investors were not eligible for interest relief and profits from the partnerships remain taxable. This puts the investors in a significantly worse position than if they had never invested in the scheme.

£800m Government investment

The Government has introduced tough new powers and game-changing measures to tackle offshore and onshore tax evasion, and the summer Budget 2015 gave HMRC an additional £800 million to invest in compliance and tax evasion work.

This is expected to recover £7.2 billion in tax over the next five years and includes tripling the number of criminal investigations that HMRC can undertake into serious and complex tax crime, focusing particularly on wealthy individuals and corporates, with the aim of achieving 100 prosecutions a year by the end of the Parliament.

The new measures include:

  • higher financial penalties for those hiding assets offshore, such as, for the first time, taking part of the evaded asset as a penalty. These are in addition to existing measures, which already allow for fines of up to 300% of any tax found to have been hidden offshore
  • new civil penalties on those who enable tax evasion, so they will face a penalty as well as the tax evader
  • public naming both of tax evaders and those who enable tax evasion
  • a new criminal offence for corporations that fail to prevent the facilitation of tax evasion. The new power will ensure that corporations exercise due diligence over the service they provide, and ensure that HMRC can prosecute those who don’t
  • a new strict liability criminal offence for offshore evasion, so in the worst cases it is no longer possible to plead ignorance in an attempt to avoid criminal prosecution.