Film investors face ‘life-changing’ bills for tax avoidance
Sports stars, financiers and celebrities caught out by Eclipse 35 investment scheme
Hundreds of sports stars, financiers and celebrities are braced for bills running into millions of pounds as Revenue & Customs prepares to send out tax demands linked to a failed avoidance scheme.
Investors — including Sir Alex Ferguson, the former Manchester United manager, and former England manager Sven-Göran Eriksson — are expected to be issued shortly with demands for tax payments that will far exceed their original investment in Eclipse 35, a film investment scheme.
The move follows April’s decision by the Supreme Court in favour of HMRC. While the Eclipse partnership argued it was trading film rights, HMRC said it was in reality a tax avoidance scheme. It said its victory protected an estimated £635m in tax.
Nick Wood, an adviser for hundreds of investors in the Eclipse 35 partnership, told The Times that it was ‘highly likely’ that up to 600-700 of the 780 people in the scheme would go bankrupt. Despite the claims, there was no evidence that any named investors were in financial difficulties, the paper said.
HMRC said it recognised that some people would face “life-changing bills”. It said it took its duty of care very seriously and it had briefed its teams on the support available to people who were worried or anxious.
It said: “HMRC has made clear that, if people consider they will have problems in meeting their tax bills, they should talk to us as soon as possible. We will discuss with people, in light of their individual circumstances, whether payment arrangements may be appropriate.
“HMRC works closely with individuals caught up in avoidance schemes to help them resolve their tax affairs. Where people face genuine hardship we will always discuss payment arrangements to make the settling process more manageable.”
The members of Eclipse 35 claimed tax relief on interest on loans they took out to buy distribution rights to two Disney films, Enchanted and Underdog. The company swiftly leased the film rights back to the film producer for a payment spread over a 20-year period.
HMRC argued that Eclipse 35 never carried on a trade — a pre-requisite for investors to qualify for tax reliefs — and “merely organised a sophisticated financial model involving licensing and distribution rights” in relation to the films.
It said that 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.
HMRC said: “Avoidance schemes are often highly contrived and almost invariably fall flat when trying to deliver a tax advantage never intended by Parliament. The fact is the majority of schemes simply don’t work and can put avoidance users in a significantly worse financial position than if they had never used the scheme in the first place.”
For the last two years, HMRC has had the power to make people pay disputed tax up front. Over that period it has collected more than £3bn from users of avoidance schemes. It had agreed to over 95 per cent of request for payment arrangements when people could not immediately pay the amount due.