​HMRC wins £635 million for the public in landmark case against Eclipse 35 avoidance scheme

Following a lengthy legal battle, the highest court in the land, The Supreme Court, today ruled in favour of HM Revenue and Customs, 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.

David Gauke, Financial Secretary to the Treasury, said:

“This is another important victory for HMRC and shows that its compliance teams are effective in tracking down tax avoiders and retrieving money owed to the Exchequer.

“Tax avoidance doesn’t pay, and as this case proves those who try to avoid paying tax will be brought to justice.

“The Government has invested a further £800 million into HMRC to strengthen its ability to pursue tax dodgers and we will continue to pursue the minority who do not play by the rules.”

Jennie Granger, Director General of Enforcement and Compliance, HM Revenue and Customs, said:

“I’m delighted that the Supreme Court has confirmed the decision of the Court of Appeal in dismissing this case going any further. This is a fantastic victory for HMRC. It has significant ramifications for the 31 other Eclipse schemes and beyond.

“It just proves that tax avoidance doesn’t pay and highlights the danger that people face in getting involved in these schemes, which can see investors in a worse position than if they had not entered the avoidance scheme in the first place.”

Recent legislation, aimed at clamping down on avoidance, ensures that any tax in dispute is paid up front. These include the Follower Notice and Accelerated Payment Notices regimes, which has brought in more than £2.5 billion to date, and ensures the profits are taken out of avoidance

The public rightly expect HMRC to collect the right amount of tax at the right time, and we will pursue all cases which may contain features of avoidance to determine whether the arrangements need to be challenged.

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.

Notes to Editors

1. Eclipse Film Partners (No 35) LLP, with £117 million tax at risk, is the first of the partnerships to be taken to litigation.

2.The First Tier Tribunal, Upper Tier Tribunal and Court of Appeal all ruled in favour of HMRC. Eclipse 35 appealed to the Court of Appeal hearing was heard from 13 to 15 January 2015. The appeal was unanimously dismissed.

3.HMRC has collected £26.6 billion from compliance activities in 2014-15 alone, including from tax evasion, avoidance, fraud and organised crime – a 43% increase from £18.6 billion in 2011-12

4.Follow HMRC Press Office on Twitter @HMRCpressoffice

5.HMRC's Flickr channel www.flickr.com/hmrc.gov.uk