Over the past 10 years or so HMRC has made concerted efforts to address what it sees as unacceptable tax avoidance. A strategy of litigation, settlement opportunities, changes in legislation and targeting tax scheme promoters was introduced and has been very successful, collecting billions in historic tax liabilities and protecting much more for the Exchequer as a result of reduced participation in tax avoidance.
One of the challenges HMRC faced was convincing participants in a tax avoidance scheme that had been successfully litigated to accept the Court’s decision and settle their tax liabilities. Various measures have been introduced to address this including dedicated settlement opportunities, the introduction of Follower and Accelerated Payment Notices and the Disguised Remuneration Loan Charge.
The latest dedicated settlement opportunity relates to the Eclipse Film Partnerships (“Eclipse”) promoted by Future Capital Partners. Eclipse was promoted in the mid / late 2000s and took the typical form of an investor contributing a small percentage of the total investment from their own cash resources and borrowing the rest. The intention of the structure was to create a tax deduction for the interest paid on the loan which could be set against income from other sources – often taxable income from previous tax planning in film schemes. An unusual feature of the Eclipse structure was that in the last year of the partnership there was income generated which would be used to repay the loans. That income was taxable but no actual monies would be paid for the investors to pay the tax that would fall due. The tax due has colloquially been called “dry tax” because of the lack of real money coming in from the structure.
HMRC formed the view the Eclipse partnerships were unacceptable tax avoidance and Eclipse 35 LLP was the test case that went through the Courts. The litigation was complex but HMRC won at the Court of Appeal which concluded the partnership was not trading with the consequence that the tax deduction for the interest paid was not an allowable deduction.
The Court of Appeal didn’t consider the dry tax position so there remains a considerable risk of, in some instances, very substantial dry tax liabilities falling due to partnership members. Consequently this issue received considerable attention in the media and various action groups were set up to try and find a solution with HMRC and / or litigate HMRC on this point.
On 6 September 2021, HMRC announced a settlement opportunity for members of the Eclipse Film Partners LLPs (numbers 1 to 40).
The settlement follows the Court of Appeal ruling in Eclipse 35 LLP and whilst we are awaiting further details from HMRC as to the intricacies of the settlement opportunity, the headline points are:-
- The taxpayer will have to give up any interest relief claimed against their income;
- But there will be no “dry tax”; however
- The taxpayer must withdraw from any Eclipse related litigation against HMRC.
It is reported that the dry tax charge is c.1.6bn to all members of the Eclipse Film Partners LLPs and so is a welcome concession under the settlement opportunity.
HMRC will invite individual members of the partnerships to take part in a time limited settlement opportunity to bring closure to all highly contentious and long running Eclipse enquiries. Taxpayers will also be required to pay any late payment interest on the additional tax due, but will not incur any penalties. It is important to note that individuals under criminal investigation with HMRC are not eligible to settle with HMRC using this settlement opportunity.
The offer deadline is likely to be 6 months from the date the settlement letter is issued. If members do not want to wait for such notification, they can contact HMRC directly to settle.
There are various tax and non-tax issues to consider for Eclipse members before agreeing to settle with HMRC and it is recommended specialist advice is sought. We would be delighted to have an initial no cost discussion to any member wishing to consider their position – get in touch with us today.