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Eclipse film partnerships settlement opportunity announced by HMRC

08 September 2021. Published by Adam Craggs, Partner and Constantine Christofi, Senior Associate

HMRC announced on 6 September 2021 a settlement opportunity for current and former members of the Eclipse Film Partners (numbers 1 to 40) limited liability partnerships (the Eclipse LLPs), under which HMRC will agree not to seek to impose a 'dry tax' charge in exchange for members settling historic tax liabilities (with interest) and abandoning litigation against HMRC in relation to the Eclipse LLPs. If accepted by each taxpayer, approximately £1.6 billion of 'dry tax' will not be pursued by HMRC.

Background

Members of the Eclipse LLPs claimed relief for substantial interest payments incurred on bank borrowings used to purchase film rights (for the production, distribution, financing and exploitation of films, some of which enjoyed great box office success) by the Eclipse LLPs.  The licensing arrangements gave the Eclipse LLPs the exclusive right to distribute and exploit the films. At the same time as they entered into the licensing agreements with the studio, they entered into distribution agreements with a distributor owned by the film studio.  Under these distribution agreements, the distributor agreed to perform all the Eclipse LLPs' obligations under the licensing agreements, save for the payment of the licence fee to the studio, in exchange for which the distributor agreed to pay the Eclipse LLPs variable royalties and fixed annual amounts.  

A substantial proportion of members' capital contributions to the Eclipse LLPs (94% in the case of Eclipse Film Partners No. 35 LLP (Eclipse 35)) was funded by bank debt.  The loans matched the term of the licensing agreements, at a fixed rate of interest, and members were required to make a prepayment of interest (10 years in the case of Eclipse 35), in respect of which they claimed interest relief against their tax liabilities for the year in question.

HMRC disputed the effectiveness of this planning, and the transaction involving Eclipse 35 was litigated up to the Court of Appeal1.   The Court of Appeal held that Eclipse 35 had not been trading. The result of this was that HMRC denied the members of Eclipse 35 (and other Eclipse LLPs) interest relief with respect to the borrowing used to finance members' capital contributions.  

As a consequence of this decision, not only was interest relief denied on the prepayment of interest (which was designed to provide the initial tax advantage sought) members also faced a potential 'dry tax' charge in respect of the Eclipse LLPs' income under the distribution agreements, which was never received by individual members.  Members were therefore faced with potential tax liabilities that dwarfed the initial tax advantage that they sought by participating in the arrangements. 

Settlement Opportunity

The settlement opportunity which has been announced by HMRC is open for six months from the date on which members/former members of the Eclipse LLPs are contacted by HMRC.  It involves those members who wish to take advantage of the settlement opportunity:

  • giving up interest relief claims related to the Eclipse LLPs and paying the tax liability that they sought to mitigate by means of those interest relief claims
  • paying interest on the tax liability
  • giving up any claims that are part of other Eclipse-related litigation involving HMRC (which would include contesting Accelerated Payment Notices and Follower Notices and other claims brought in a public law forum).

In exchange for this, HMRC "will not pursue individuals for tax on income treated as paying back borrowings, including for periods after individuals had exited the LLPs".

This settlement opportunity will doubtless come as a welcome relief for those who have faced many years of uncertainty (and potential financial ruin) relating to their participation in the Eclipse transactions.

If you would like advice in relation to this settlement opportunity (or generally in relation to the Eclipse LLPs), we would be happy to advise.

[1] The Supreme Court heard a further appeal on a point relating to the power of the First-tier Tribunal to award costs in respect of bundle preparation, but refused the taxpayer permission to appeal the Court of Appeal's substantive judgment.