Sir Alex Ferguson, Sven-Goran Eriksson and others hit by tribunal decision

Eclipse 35, a film partnership made up of 289 wealthy individuals has lost its case at the first tier tax tribunal that the partners were entitled to claim tax relief on interest paid on loans from Barclays bank that were used to provide capital to the Eclipse 35 partnership. The Tribunal judges did not deny that the loans taken out by the partners were used to provide capital to the partnership. However, they determined that the partnership itself was not trading, trading being one of the criteria to be satisfied in order to claim the tax relief.

According to the promoters, Future Capital Partners, the trade was the exploitation of the rights to two Disney films, “Enchanted” and “Underdog”. Furthermore, the partnership was expected to make a profit over a 20 year period. The partnership acquired rights to the two films from Disney and sub-licensed those rights to the (Disney) distribution company. So why did the Tribunal find that Eclipse 35 was not trading?

The acquisition and sub-licensing took place almost simultaneously. Therefore, the Tribunal decided that “On any commercially meaningful basis, Eclipse had no ‘customer’ and did not offer to provide any goods or services by way of business.”

It may seem improbable to some that the buying of rights for £503 million and the sale of those rights for income expected to reach £1.022 billion does not constitute trading. However, this case shows that the Tribunals are willing to look critically at the activities being carried out in order to determine whether or not a trade is being carried on. This appears to be a shift from decisions in past cases where one off transactions in silver bullion and toilet rolls were found to be trading activities.

Tim Levy, the founder of Future Capital Partners, has said he will appeal the decision. Meanwhile, it is important to note that the underlying activities of a trade may be examined if loss relief, or any other relief that is trade dependent (e.g. Demerger Relief,) is being claimed.

It is expected that other film partnerships will come under increased HMRC scrutiny following this decision. Please contact Paul Hughes on 020 988 6133 if you wish to discuss this.

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