HMRC has won a three-year battle with a film scheme used by celebrities and sports stars to avoid tax, after the highest court in the land threw out its case.
The Supreme Court has dismissed a ‘last throw of the dice’ appeal from Eclipse 35 brought by its creator Future Capital Partners and 287 investors, who reportedly include former football managers Sir Alex Ferguson and Sven-Goran Eriksson.
Those who used the scheme now face paying around Â£117m in unpaid tax and penalties, according to figures from HMRC in December 2013.
For financial advisers the ruling could mean a fresh wave of claims at the Financial Services Compensation Scheme, after the body agreed to deal with similar investment-based tax cases in September 2014.
Michael Avient, private client services partner at UHY Hacker Young, who has been following the case said that the ruling was a â€œwatershed momentâ€ with â€œsignificance much wider than Eclipseâ€.
â€œThe decision not to hear the appeal will have significant implications for those who participated in the Eclipse 35 LLP and its similar incarnations,â€ he said. â€œAs a consequence participantâ€™s will have substantially larger tax liabilities than if they never participated in the scheme.â€
It is likely to be seen as a watershed moment for tax avoidance litigation. It may with retrospect be the time when the Supreme Court called a halt to the massive backlog of cases seeking to appeal decisions in respect of tax avoidance.
â€œThe decision puts the matter of â€˜factâ€™ clearly back with the tribunal and participants in tax avoidance should be under no illusion regarding the Tax Tribunalâ€™s view regarding the use of tax avoidance schemes.â€
Tax avoidance has dominated the news agenda in recent weeks, in the wake of the Panama Papers revelations of high-profile figures including prime minister David Cameron having links to offshore avoidance.
The Supreme Court ruling in London yesterday (13 April) marks the end of a three-year pursuit of the Eclipse scheme – and the tax its investors have so far avoided – by HMRC.
Last February the Court of Appeal dismissed Future Capital Partnerâ€™s appeal against an earlier ruling in favour of HM Revenue & Customs.
The Court of Appeal found Eclipse was never likely to generate â€˜contingent receiptsâ€™ and as a result it held that Eclipse 35 was â€œnot commercially trading with a view to make any profitâ€.
Due to this, it was not a trading business within the meaning of tax legislation, the court found.
But in a last throw of the dice, Future Capital managing director Tim Levy wrote to investors in December asking them to contribute towards a Supreme Court Appeal.
The Supreme Courtâ€™s decision follows a ruling in December 2013 by the Upper Tax Tribunal which said the Eclipse 35 scheme did not deliver the tax relief it claimed, despite being marketed as a tax efficient way to invest in the film industry and it being recommended to many as a way to mitigate higher rate income tax.
However Mr Avient said the Supreme Court ruling may not be the end of the saga.
â€œAttempts are being made to re-characterise the arrangements of other LLPâ€™s in the Eclipse series of LLPs but with such a strong precedent from the courts it is difficult to see why HMRC would allow such attempts,â€ he said.
â€œIt is therefore likely that HMRC will start the process of seeking collection and issuing follower notices. Participants in other Eclipse partnerships will therefore need to decide whether they seek to pursue other basis of challenge, and suffer potential penalties or seek settlement.
â€œFor those in other structures where the question of trading is raised, the issue is now clear. If they are unable to win the trading argument at the tribunal stage not only will a successful appeal be unlikely, they may not even receive permission to appeal.â€
Victor Sacks, adviser at Cambridgeshire-absed Ringrose Grimsley, said: â€œMy perspective is any scheme trying to circumvent standard rules is clearly up for scrutiny. Weâ€™ve seen it time & time again.
â€œOne would hope those clients who were encouraged to invest were made fully aware of the type of scheme being recommended and the possibility of it being scrutinised by HMRC.
â€œIn my mind, the company recommending such action, should be liable for the penalty and not the FSCS which could force another raise on an already expensive levy.â€