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European law firm Fieldfisher has secured a settlement offer for the entire membership of the Eclipse film finance scheme, drawing a line under a long-running and highly contentious dispute with HMRC.
HMRC has today published details of the settlement offer that (if accepted by each taxpayer) will eliminate the exposure to upwards of £1.6 billion of "Dry Tax" that HMRC had previously said was due from around 700 Eclipse members as a result of their participation in the Eclipse scheme.
"Dry Tax" is tax payable without any corresponding income or profit and represents an absolute cost for the taxpayer.
This is the result of eight years of dedicated work by the specialist tax team at Fieldfisher. Following detailed fact-finding and analysis, Fieldfisher concluded that both losses and profits said to arise to the Eclipse LLPs and Eclipse members were illusory, so that no tax reliefs were available and no income tax was due.
In response to submissions made by Fieldfisher, HMRC has offered a settlement in which HMRC agrees to accept that no Dry Tax is due on illusory profits, provided taxpayers accept that no relief was available for illusory costs.
The large majority of Eclipse members either did not receive any tax reliefs or have already paid back tax reliefs that were received.
As part of the settlement offer, Eclipse members must repay any remaining tax reliefs together with late-payment interest, which compensates HMRC for any period in which reliefs were wrongly held by taxpayers.
If the Eclipse members had also been required to pay the Dry Tax, they would have faced huge tax bills on income that they never received and could never have received. The tax bills were so enormous that they exceeded the net wealth of many Eclipse members, meaning HMRC's claims would have resulted in financial ruin for many.
The settlement secured through Fieldfisher’s work and engagement with HMRC provides the right and fair result for the Exchequer and for Eclipse members.
The Fieldfisher team advising the Eclipse membership was led by tax partners Derek Hill and George Gillham, supported by a wider team including consultant Shauna Johal-Jaggi.
James Collins at Dante Partners was a vital part of the team and instrumental in seeing through the complex legal documents to the facts of the Eclipse structure.
Fieldfisher was appointed by Eclipse members and, through the novel Alternative Resolution Consultancy (ARC) structure devised by Fieldfisher and Dante Partners (see below), was fully accountable for its work and costs to steering committees appointed by contributing Eclipse members.
Commenting on HMRC's announcement, Derek Hill, Head of Tax and Structuring at Fieldfisher said:
"This is how large, complicated and difficult tax disputes should be resolved. HMRC's lead team were willing to build a relationship based on honesty and trust, which enabled us to show HMRC our whole analysis outside a court process.
"Once HMRC fully understood the hopelessly flawed Eclipse structure, HMRC personnel at the highest level reviewed HMRC's position on Eclipse and were willing to change it, without requiring the Eclipse membership to follow through with expensive, time-consuming and stressful litigation.
"The settlement offer is a huge relief for all Eclipse members. Over the years we have worked with the Eclipse community, I have seen the damage that the persistent threat of financial ruin caused to the health and well-being of the individuals caught up in this mess.
"HMRC's settlement offer marks the culmination of eight years of tireless work, including launching protective judicial reviews and restitution claims and protective appeals in the tax tribunal. It is no longer necessary to pursue those court proceedings and they will be withdrawn as part of the settlement process.
"Fieldfisher's technical analysis is ground breaking, and essentially disproves an entire tax avoidance industry. We demonstrated that the Eclipse structure lacked any legal or economic substance.
"HMRC has been clear that this settlement only applies to Eclipse. However, Fieldfisher's view is that our analysis could be applied to most tax structured film finance schemes that remain the subject of dispute with HMRC, affecting potentially thousands of other individuals.
"We couldn't have achieved this outcome without the vital input and support of James Collins at Dante Partners.
"All our work was funded by the Eclipse members and overseen by steering committees appointed by them. We are delighted for all the Eclipse members. We are grateful for their trust and patience and for the tireless work of the steering committee members in ensuring that Eclipse members joined ARC and supported our work."
Paul Mullins, an Eclipse member and chair of the main steering committee, said:
“This is an outcome made all the more welcome by years of anxiety. We are all really grateful to Derek and his team. Fieldfisher pursued its analysis doggedly, imaginatively and professionally.
"HMRC understood the significance of Fieldfisher’s analysis and determinedly pursued its logic to the conclusion announced today, without the expense and distraction of a court case. This cannot have been straightforward and has given us renewed confidence in public administration."
George Gillham, Co-Head of Tax Disputes at Fieldfisher, added:
"It is deeply satisfying to have brought this matter to a fair and just conclusion.
"As we have shown, the villain of the piece was the Eclipse film finance model itself. The structure did not work, and could never have worked, as implemented.
"I echo Derek's congratulations – and gratitude – to those Eclipse members who supported us in our work, and would like to add my thanks to everyone who has worked with us throughout this process."
James Collins, a partner at Dante Partners, said:
"Over the years I have got to know the Eclipse membership very well, and spent hours reassuring them that they should try to live their lives on the basis that the dry tax was not real or collectible.
"We were able to tell the Eclipse members about the settlement offer in August, prompting a genuinely moving outpouring of relief and gratitude. We knew some of the Eclipse members were strained to the point of being at risk. The settlement offer could not come soon enough.
"While getting to this point has not been easy, it is reassuring to see HMRC acting with integrity and sympathy in response to Fieldfisher's submissions."
In 2016, Fieldfisher created ARC (the Alternative Resolution Consultancy) with James Collins of regulated firm Dante Partners. ARC is a non-commercial entity that allows groups of individuals to pool funds and exercise collective control how those funds are used.
Unlike commercial intermediaries who have their own interests, ARC has no commercial interests of its own so that it can act entirely in the interests of its contributors. ARC is a response to a market problem, providing groups of individuals caught up in tax avoidance structures with a trusted intermediary to enable them to work together and a safe place to pool their funds. ARC accounts for all funds received and every penny spent, and returns surplus funds to its contributors at the end of any work stream.
Eclipse is one of several tax structured film finance structures successfully resolved by ARC and Fieldfisher.
Background to the Eclipse settlement
Eclipse was one of several tax structures promoted by Future Capital Partners, which went into liquidation in 2018.
Eclipse was open to investors between 2006 and 2008. It was marketed by its promoter as a tax-efficient investment in films.
Individual investors were invited to invest in the Eclipse scheme, using a combination of their own money and very large sums provided by banks. The own funds were in practice paid to the promoter (and via the promoter to independent financial advisers (IFAs) and the designers of the structure), film producer and banks.
All the bank-financed funds were held at all times within the relevant banking group and used to make inter-bank payments. Nevertheless, the promoter's marketing materials claimed that the Eclipse structure generated tax reliefs and income for Eclipse members.
Fieldfisher was first contacted by an Eclipse member in summer 2013 and began acting for the Eclipse LLPs in 2016, ultimately taking on the role of demonstrating to HMRC that there were no grounds for its claims to £1.6 billion of Dry Tax.
After a thorough investigation of the Eclipse scheme, Fieldfisher filed its submission to HMRC in February 2020.
The highly detailed Fieldfisher submission (some 124 pages) set out in full the analysis on which Fieldfisher intended to rely if the Eclipse case were litigated. Fieldfisher's analysis demonstrates that the inter-bank payments never reached the Eclipse LLP or the Eclipse members. The complex web of contracts resolved, essentially, to nothing. As a result, the income and payments said by the promoter to create income and reliefs were illusory – the Eclipse members could not properly claim tax reliefs, but equally HMRC could not properly claim any Dry Tax.
Eclipse members had to pay to access the Eclipse scheme and the cost of this entry is an absolute loss. The very significant costs incurred dealing with the Eclipse structure are also absolute losses. The structure itself was otherwise a zero sum game for its members, with no change at all to the wealth or benefits attributable to any of its members. The settlement offer reflects the legal and economic reality of the Eclipse structure for the Eclipse LLPs and Eclipse members – "nothing happened here."
HMRC never condoned the Eclipse structure. The structure had previously been litigated (under the effective lead of the promoter) over a number of years through the tax tribunals and courts, and ultimately before the Court of Appeal in 2015 (see: Eclipse Film Partners No 35 LLP v HM Revenue and Customs [2015] EWCA Civ 95 (17 February 2015) – the "Eclipse 35" case).
In that case, the Court of Appeal found Eclipse had not been trading in the tax year ending April 2007. HMRC relied on the Eclipse 35 case to deny all tax reliefs.
Unfortunately, the Eclipse 35 litigation left many important questions unanswered, in particular whether the Eclipse structure could generate taxable income. The settlement offer effectively restores HMRC and the Eclipse members to the correct tax answer based on the real facts and their legal effects.
About Fieldfisher
Fieldfisher is a European law firm with market-leading practices in many of the world’s most dynamic sectors. We are an exciting, forward-thinking organisation with a particular focus on technology, financial services, energy & natural resources and life sciences.
Our tax disputes and investigations practice is a leading team of tax specialists advising in respect of all taxes and duties, and the market leaders in media finance disputes.
We operate across our offices in Amsterdam, Barcelona, Beijing, Belfast, Birmingham, Bologna, Brussels, Dublin, Düsseldorf, Frankfurt, Guangzhou, Hamburg, London, Luxembourg, Madrid, Manchester, Milan, Munich, Paris, Rome, Shanghai, Turin, Venice and Silicon Valley.