Eclipse Films loses appeal – no tax relief for investors in film scheme

Eclipse Films loses appeal – no tax relief for investors in film scheme

Sun 05 Jan 2014

The Upper Tribunal have agreed with the earlier FTT decision that the activity of a limited liability partnership did not amount to trading. The 2012 FTT decision received considerable publicity as many well known individuals were members of Eclipse Film Partners No 35 LLP.

There are several varieties of film schemes. The essentials of Eclipse 35 were entering into complicated transactions with the Disney Corporation which broadly were to lease and then lease back film rights. The LLP had borrowings which were structured such that the individuals who were members of Eclipse 35 would not actually have to pay the interest but they made claims for immediate tax relief on many years’ interest expense on these borrowings. The amount claimed for tax relief was much greater than the amount they invested in the partnership. The success of the claims for tax relief depended, inter alia, on the LLP carrying on a trade with a view to a profit.

The Upper Tribunal has very limited scope to disturb a finding of fact (the existence or otherwise of a trade is a matter of fact). An appeal against a decision of the FTT “can succeed only if they have misdirected themselves in law or if the only true and reasonable conclusion from the facts found by them is contrary to their determination.”  Following a careful and exhaustive review of the FTT decision the UT concluded it failed to get over this hurdle.

The UT did reverse the FTT’s decision that the LLP was not carrying on a business. Had this stood the members of the LLP could have faced the doomsday scenario of no carry forward of the initial loss and full taxation of later profits of the LLP. Thus carry forward will be allowed for the initial business loss of the LLP.

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