The Eclipse 35 Court of Appeal decision leaves no doubt that where a tax avoidance scheme is found not to be trading by the Lower Courts, on appeal this will only be overturned in exceptional circumstances.
In seeking to alter behaviour, HMRC have found the perfect case, as participants in Eclipse not only failed to reduce their tax bill but now face catastrophically larger tax liabilities than if they had never participated in the scheme.
The Court of Appeal yesterday ruled that the Eclipse Film Partners No.35 LLP was not trading. No doubt HMRC will quickly publicise their success and the dire consequences of pursuing such litigation.
For those involved in other Eclipse LLPs the future looks bleak. The Court reaffirmed the decision that whether or not a trade exists is a question and decision for the tribunal of fact, namely the First Tier Tax Tribunal. The Court, in a carefully considered judgement, saw no reason to overturn this finding. In doing so it directed a strong message to cases currently under appeal regarding the availability and chances of success of any final appeal to the Supreme Court.
Participants in the other Eclipse LLPs, therefore, now face the realisation that, unless they can differentiate the activities and contracts entered into by their specific LLPs from those of Eclipse 35, they are likely to face a similar fate. Suddenly, HMRC's original settlement opportunity of receiving income tax relief on the cash contribution seems like an offer that should have been taken.
However, the decision has far wider implications. One of the main challenges facing many of the marketed tax schemes either awaiting litigation or appeal is whether or not they are carrying out a trade, and as such, rely on obtaining income tax relief from losses generated from such a trade.
Many of those awaiting appeal have lost at the First Tier Tax Tribunal because they were found to be not trading. Therefore, for those cases awaiting their first hearing, where little or no productive trading activity was undertaken by the LLP, the decision of whether litigation rather than settlement should be pursued ought to be objectively re-evaluated.
A common thread in many of the 'trading' tax avoidance structures identified by HMRC is that the partnership, LLP, individual or company undertook minimal activity other than a supervisory role with little or no actual control. As identified by the courts in the case of Eclipse 35, if this is linked by only a remote prospect...