The new settlement opportunity for members of Eclipse Film LLP was reported in Taxation, 16 September 2021. The first part of this article briefly reviews the nature of the opportunity. The second part suggests that the decision to offer this opportunity raises wider questions about how HMRC interact with different taxpayers and, in particular, how their Litigation and Settlement Strategy (LSS) is being operated.
The new settlement opportunity is available to present and past members of Eclipse Film Partners (Nos 1 – 40) LLPs. The opportunity is open to members within a six month window of being contacted by HMRC. In brief, members purchased various film rights including a right to income on distribution. The purchase was largely (sometimes over 90%) financed by bank borrowings. Members made a prepayment of interest of several years. The number of years varied but in Eclipse 35 it was ten years. A claim was then made for the whole of the interest relief in the tax year in question.
HMRC challenged Eclipse 35. The case worked its way to the Court of Appeal which found that Eclipse 35 had not been trading and so the claim failed. HMRC then denied claims to interest relief for all Eclipse members of the various partnerships. Many of these members have outstanding appeals.
However, there was a substantial sting in the tail of the HMRC challenge. Apart from denying interest relief on the prepayment of interest, HMRC looked at the right which individual members had to income under the distribution agreements. While there was no suggestion that such income was received, nonetheless HMRC argued that the right triggered a charge to tax. The consequent tax liabilities are huge.
The settlement opportunity terms are that:
- the taxpayer gives up interest relief claims and pays tax and interest; AND
- gives up on any other Eclipse related litigation which includes contesting Accelerated Payment Notices or Follower Notices. IN EXCHANGE
- HMRC will not pursue the argument that tax was due on the right to income.
There is scope for differing views on how robust the taxpayer claims were in the various Eclipse LLPs. While HMRC won in Eclipse 35, in another film scheme case, Ingenious Games, the First Tier Tribunal (FTT) considered whether three partnerships were trading with a view to profit. The conclusion was that two were and one was not. This was appealed to the Upper Tribunal who said the FTT had made errors of fact in reaching their conclusion. The case then went to the Court of Appeal who found that the FTT had not misunderstood or misdirected itself and therefore the decision of the FTT stood. Against this background, it is a brave commentator who believes the outcome of film scheme appeals can be predicted with any certainty. It may follow that it is a brave investor who proceeds down this route when aware of the uncertainty.
In Eclipse, apart from the question of whether the claim to interest relief should stand, there is the additional complication of the HMRC claim that the structure triggers a “dry tax” on the right to income which has not been received. In fact, for those seeking a further layer of complexity, there is the related Eclipse claims dealing with whether HMRC have the right to issue Accelerated Payment Notices and Follower Notices in order to receive the disputed tax up front while the litigation is wending its way through the courts. On this point, the earlier Supreme Court decision in Haworth has led some commentators to suggest that HMRC should exercise more discretion in issuing Follower Notices.
Given the complexity of the position and given the hugely disproportionate costs of the “dry tax” on income, the Taxation view that the Eclipse deal is a victory for common sense must be correct. However, yoking together “common sense” and ‘tax” can lead us into interesting places.
Apart from Eclipse, there are other tax schemes where there is scope for debate as to whether there is more than one challenge available to HMRC. If HMRC can offer an opportunity for settlement in Eclipse where the taxpayer concedes on one point in return for HMRC agreeing not to pursue the other then, given the principle that all taxpayers should be treated equally, is there a similar opportunity to move to settlement in these tax schemes?
Even more broadly, and moving away from tax schemes, unless we are informed otherwise it would appear that HMRC have convinced themselves that the Eclipse settlement opportunity is in line with HMRC’s LSS. The LSS states that the outcome of an enquiry must be in line with the HMRC view of the law and most certainly should not involve any “deals”. In Eclipse, presumably HMRC believe that the law does not support the taxpayer claim to interest relief but does support the charge to tax on the right to income. To offer a settlement opportunity whereby the taxpayer concedes the former and HMRC walk away from the latter looks a bit like a deal to the unsophisticated eye.
If it is a “deal”, then as indicated above, many will agree that it is a victory for common sense. It avoids years of litigation with the consequent time and costs for all parties. A further justification for the deal is presumably that to follow the law would impose a disproportionately harsh financial consequence on the taxpayers involved. That being so, we seem to be in a world where opportunities (aka deals) can sometimes be available where taxpayers invest in tax schemes which have unforeseen and unfortunate consequences. By contrast, for those taxpayers who do not invest in schemes but who find themselves facing unexpected and substantial costs by virtue of a complex and litigious tax system which can throw up unexpected results, no such opportunity for reaching a negotiated settlement based on what might be appropriate to the particular case occurs. The principle of LSS overrides any argument on proportionality or common sense.
That of course was not always the case. Before the introduction of LSS there was scope to negotiate towards settlement where common sense as well as a view of the law was involved. As in commercial litigation, it accepted there could uncertainty as to outcome in litigation and therefore the certainty of a negotiated settlement could be to the advantage of all parties. One factor which HMRC took into account when considering whether such a course could be justified was whether there was an element of egregious avoidance in play. If there was, a negotiated settlement became less likely.
This is not an argument that where tax planning does not work out the taxpayer should not face the consequences. Balancing that, if HMRC accept that sometimes applying the LSS can have disproportionate consequences then that is a positive move. However, given that the initial move to the LSS was to discourage avoidance, it seems perverse to limit that approach to those who have invested in tax schemes.
This article was first posted in Taxation 21 October 2020
