Film Partnerships

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We have clients who went into Film Partnership over the last ten or twelve years. Some are still in litigation and are asking us whether they should accept the terms of the HMRC settlement offer. We have never advised clients to go into such schemes – but the possible impact of the decision in Eclipse 35 could be very costly.

It is difficult to give advice on the film partnerships and the settlement opportunity. The key difficulty is that HMRC clearly object to the gearing which was introduced to boost the tax relief obtained – so the settlement they have offered is to give you tax relief on what you actually invested. However when they are challenging in the Courts (at least in Eclipse 35) they don’t argue that the statute prevents the gearing – but they are arguing (and have been successful in Eclipse 35) by saying that the partnership was not carrying on a trade. So they are looking at the minutia of the commercial arrangements and saying that they do not amount to a “proper” trade – largely because there was no . Hence Ingenius respond by arguing that the minutia of their arrangements is sufficiently different so that the Courts will hold that they were carrying on a trade.

We need to be clear that we cannot cost effectively give a serious opinion on how well Ingenius did their set up. It is also possible that a change in the political climate may have an impact on the Courts – so that they are more likely now to find against tax planning which is highly imaginative.

Finally there appears to be a risk that the tax which could now be charged is more than the tax which would have been saved – because HMRC are looking to both disallow the original loss claim and the interest arising on the loan for the gearing. It is not clear that HMRC will actually go for both – it would be very costly for some people if they did.

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