The Court of Appeal has released its judgement in the important case of Eclipse Film Partners No 35 LLP v HMRC. This was a high-profile case which HMRC was very keen to win both for its precedent effect and because of the amounts involved: tax relief on £293m was at stake. The decision matters because the weapon with which HMRC succeeded in felling the scheme (the argument that the LLP simply was not carrying on a trade) has been deployed in a number of other cases currently in dispute. It’s a good day for HMRC; a bad one for scheme promoters.
The key question was whether the LLP’s activities (the acquisition and licensing back of the rights in the Disney films “Enchanted” and “Underdog”) amounted to the carrying on a trade. In the end, the decision, though long and closely-argued, was straightforward. “Trade” is a term which is not defined by the Act. Whether a particular set of circumstances amounts to trading is a question of fact to be determined by the First Tier Tribunal applying the right legal tests at to what factors are relevant and what are not. And in making that determination, the principle of the “Ramsay” case applies: “the essence of the new approach was to give the statutory provision a purposive interpretation in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description.” In other words (and recognising that paraphrasing a court’s carefully-chosen words is hazardous) – does the FTT think that what they are considering looks like what the Act was thinking of when it used the word “trade”?
The FTT thought not (though without specifically invoking the Ramsay principle): the Upper Tribunal agreed: so, now, has the Court of Appeal. Why? As the Court put it:
“The proper characterisation of the business of Eclipse 35 depends upon the totality of its activity and enterprise. Stripping the business down to its essential elements, the transactions on which Eclipse 35 was engaged had two aspects. One aspect was that a payment by Eclipse 35 of £503 million would be repaid with interest over a 20 year term and would produce a profit unrelated to the success or otherwise of the exploitation of the Rights sub-licensed. That aspect had the character of an investment. Mr Aaronson [Eclipse’s Counsel] did not argue to the contrary. The second aspect was the possibility of Eclipse 35 obtaining a share of Contingent Receipts and the activity on the part of Eclipse 35 to secure such a share. The FTT considered that this second aspect was in real and practical terms insufficiently significant in the context of Eclipse 35’s business as a whole to lead to a proper characterisation of Eclipse 35’s business as one of trade within the meaning of the tax legislation. In our judgment, that was a conclusion which the FTT were entitled to reach and, indeed, with which we agree.
Is it final? That depends on whether leave to appeal to the House of Lords is granted: which we think is unlikely.
Is it fatal for other schemes? That depends on the extent to whether “an unblinkered approach to the analysis of the facts” and “a realistic approach to the transaction” lead to the conclusion that the arrangement looks like what the Act means by a trade. If so, the fact that the arrangement might have been undertaken with half an eye (or indeed both eyes) to the tax benefits does not prevent the activities from constituting a trade.
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