Insights

Using the availability of EIS tax relief to finance the production of new films is becoming more widespread. For legitimate ventures, this opportunity is making a significant contribution to the UK film industry and it continues to be popular amongst media entrepreneurs and investors alike.

However, not all film production investments are what they seem and some are being investigated by HMRC for suspected aggressive tax avoidance. Such schemes include those designed to automatically create a loss, for which tax relief can be claimed. Eclipse Film Partners LLP is an example of a scheme which has fallen foul of HMRC’s tax relief eligibility criteria. This limited liability partnership has just lost a court case against HMRC, who successfully claimed that Eclipse was not entitled to the £293m tax relief it had claimed. 

The case hinged on HMRC’s argument that Eclipse was not conducting a legitimate trade and was not therefore entitled to tax relief, even though its business interests included the acquisition and licensing back of rights associated with the Disney films Enchanted and Underdog. HMRC successfully argued that Eclipse was actually an investment vehicle as opposed to a genuine trading business. Its argument was based on two primary points: 1) a multimillion pound payment made by Eclipse would be repaid with interest over a fixed term and would produce a profit regardless of the success of Eclipse’s business activities; and 2) Eclipse would be entitled to a share of the Contingent Receipts associated with its activities.

The government’s increasingly aggressive stance against tax avoidance, as implemented by HMRC, means there is more and more danger in becoming involved with tax planning initiatives that could be considered aggressive or artificial by HMRC; whereas in the past HMRC would seek to disallow some of the reliefs, now they are generally attacking all of the reliefs claimed.

It is now mandatory to declare any involvement with such initiatives on your personal tax return and it is also fair to assume that if you have been involved with such schemes, you are likely to be targeted with an enquiry. Over the past few months we have highlighted numerous instances where taxpayers involved with such schemes have been issued with Accelerated Payment Notices (APNs) and have been required to repay tax relief and outstanding taxes, sometimes to the tune of thousands of pounds.

If you think you may have underpaid tax and need to make a voluntary disclosure, or may be involved with a tax planning initiative that could be regarded as aggressive and need independent advice, please contact Lesley Stalker by emailing las@rjp.co.uk.