Members of the Eclipse film finance scheme can heave a sigh of relief as HM Revenue & Customs (HMRC) will not be demanding an astronomical “dry tax” sum from them anymore.
The UK taxman has reached a settlement with law firm Fieldfisher, acting on behalf of the investors, and dropped its claims of £1.6bn ($2.2bn, €1.8bn) in “dry tax” owed by around 700 investors.
A ‘dry’ tax is payable without any corresponding income or profit and is an absolute cost for the taxpayer, the law firm explained.
If the settlement is accepted by the members, they will be required to:
- Give up their Eclipse interest relief claims and pay the tax avoided;
- Pay interest on the tax paid late; and,
- Give up any legal actions which are part of other Eclipse related litigation involving HMRC, the taxman said.
Investors will have six months to inform HMRC about whether they agree to the settlement.
The decision stems from the fact that, as Eclipse Film Partners was not trading, its members were not eligible for interest relief, the tax tribunal ruled; but also because any profits made were “illusory”.
‘Fair and legally correct outcome’
Fieldfisher said: “Most Eclipse members either did not receive any tax reliefs or have already paid back tax reliefs that were received.
“If the Eclipse members had also been required to pay the dry tax, they would have faced tax bills amounting to millions of pounds each on average, on income that they did not and could never have received, resulting in financial ruin for many.
“[The settlement] announcement, therefore represents a fair and legally correct outcome for all those involved, and is believed to be one of the largest such settlements in UK tax history.”
‘Hopelessly flawed’ model was the ‘villain’
Derek Hill, head of tax and structuring at Fieldfisher, added: “This is how large, complicated tax disputes should be resolved. HMRC’s lead team were willing to proceed on a basis of mutual honesty and trust, which enabled us to show HMRC our whole analysis outside the court process.
“Once the hopelessly flawed Eclipse structure had been clearly demonstrated, HMRC personnel at the highest level reviewed HMRC’s position on Eclipse and were willing to change it, without requiring the Eclipse membership to go through expensive, time-consuming and stressful litigation.
“The settlement offer is a huge relief for all Eclipse members. Over the years, we have worked with the Eclipse community, I have personally seen the damage that the persistent threat of financial ruin caused to the health and wellbeing of the individuals caught up in this mess. Sadly, not every Eclipse member has survived the experience.
“HMRC’s settlement offer marks the culmination of eight years of tireless work, including launching protective judicial reviews and restitution claims and protective appeals in the tax tribunal. It is no longer necessary to pursue those court proceedings and they will be withdrawn as part of the settlement process.
“Fieldfisher’s technical analysis is groundbreaking, and essentially disproves an entire tax avoidance industry. We demonstrated that the Eclipse structure lacked any legal or economic substance.
“HMRC has been clear that this settlement only applies to Eclipse. However, Fieldfisher’s view is that our analysis could be applied to many, if not all, tax structured film finance schemes that remain the subject of disputes with HMRC, affecting potentially thousands of other individuals.”
Background
Eclipse was one of several tax structures that were promoted by Future Capital Partners. The firm went into liquidation in 2018.
The scheme was open to investors between 2006 and 2008 and was marketed by its promoter as a tax-efficient investment in the film industry.
Individual investors were invited to take part to the scheme using a combination of their own money and large sums provided by banks. The money was then paid to the promoter – who handed it to IFAs and the designers of the structure – film producers and banks.
The sums provided by the institutions were held by the different firms to make inter-bank payments.
But the promoter’s marketing material claimed that Eclipse generated tax relief on income for its members, even though this was not the case, as the tax tribunal ruling found.
Fieldfisher was then contacted by investors in 2013 to demonstrate to HMRC that there were no grounds for its claims for £1.6bn of dry tax.
The law firm added: “The income and payments said by the promoter to create income and relief were illusory; the Eclipse members could not properly claim tax relief, but equally HMRC could not properly claim any dry tax.”
One of the banks involved in the scheme was HSBC, which was hit with a £1.3m lawsuit in June 2020 by over 370 investors who alleged that its private banking arm failed to trade or exploit Disney movie rights.
Several celebrities were also caught in the net of the film finance scheme, including football managers Sven-Goran Eriksson and Sir Alex Ferguson.
