Eclipse claimed to trade in film rights but was in reality a tax avoidance scheme. Financial Secretary to the Treasury David Gauke said:
“The Government is committed to tackling tax avoidance schemes like Eclipse. “These schemes, which were all too common in the mid-2000s, are an affront to the vast majority of businesses and people who pay what they owe. “The Government has invested £1 billion into HMRC to track down and challenge tax dodgers and they will continue to pursue the minority who do not play by the rules.”
There were 31 Eclipse partnerships that ran for between 11 and 20 years from 2005/06. Eclipse 35 is the first of the partnerships to be taken to litigation. The scheme sought to create substantial interest relief claims for investors.
People borrowed significant sums of money, at interest, to invest in Eclipse. As the capital was supposed to be used by the partnership for trade, the individuals could make interest relief claims against their other income.
The scheme operated by acquiring the rights to certain Disney films and then sub-leasing them back to a different Disney entity for a guaranteed income stream. In reality, the borrowed money simply earned interest, which was then filtered through the partnerships to investors to cover the interest on their loans.
This was dressed up as a trading transaction in order to enable the partners to claim tax reliefs. The Court of Appeal upheld earlier tribunal decisions that Eclipse 35 was not trading. As a result investors were not eligible for interest relief and profits from the partnerships remain taxable.
This puts the investors in a significantly worse position than if they had never invested in the scheme.