Failed film partnership – causes tax avoidance grief – but not for the promoters!

Film Partnership schemes have been around for years, they are normally entered into with the hope of obtaining corporation tax relief or relief against income tax.

In recent years they have come under increasing scrutiny, the Eclipse Film partnership 35 was set up to secure income tax relief for its investors. It entered into a complex set of transactions with the Disney Group of Companies to license film rights and sub-license rights to distributor.

Under the financing arrangements, members of the LLP relied on loans from Barclays and were able to claim £117 million in loan interest – almost three times the amount that they invested. The structure of the scheme relied upon risk centred on Barclays’ solvency.

The failed tax avoidance scheme – Eclipse Film Partners 35 – was set up by Future Capital Partners Group Holdings; parent company of Eclipse and other film tax avoidance schemes. It was sold to the rich and famous including Manchester United boss, Sir Alex Ferguson, and Sven-Goran Eriksson, former England manager.

Account documents at the tax tribunal show that Future Capital Partners received £44m in 2007, £11.5m of  which was paid to directors, Stephen Margolis and Timothy Levy, in the year to the end of April 2007; the pair is  also alleged to have earned £10m in the previous year. The highest paid director, whose name is not on the tax tribunal accounts, is said to have received £6.6m in the same year.

Recently a First Tier Tax Tribunal ruled that investors in the film tax avoidance scheme – Eclipse Film Partners 35 – were not entitled to tax reliefs on their investments. The tribunal ruled that Eclipse was not classed as ‘trading’ as the film distribution rights they bought were leased straight back to Disney. The First Tier Tribunal denied tax relief on the basis that the LLP was not carrying activities that amounted to a trade.

The film schemes investors’ wanted to claim £117 in tax relief from complex payments, including £790m in bank loans. However; from the £50m of cash that was put into the film investment scheme only £6m went to Disney when Eclipse bought the rights to the films Underdog and Enchanted.

Future films have said they intend to appeal against the tax tribunal judgement: “We maintain that this investment is very much a commercial opportunity. We are disappointed with the decision and intend to vigorously appeal it,” a spokesman said.

When considering financial or tax planning or making tax savings you should take advice before entering into any “tax strategy” it is essential that due diligence is carried out on the structure of the scheme. You may be able to achieve the same results by adopting less complex business tax or corporate planning strategies. It is natural to want to save tax but there may be more than one way to skin the tax cat.

Ray Best can help you protect your financial future. To find out more, simply click here!

About Ray L Best

Ray Best has had over 30 years experience of advising on complex financial matters. A published author of a number of books including “Partnership and Shareholder Protection”, Inheritance Tax Simplified”. We provide an initial meeting at no cost and only engage with clients when we can add significant value.

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