Sir Alex Ferguson (pictured), Sven Göran Eriksson and Glenn Hoddle are among a number of stars facing hefty ‘dry tax’ bills from a failed film investment scheme.
According to reports, the trio of former football managers are among hundreds of sports stars and celebrities facing multi-million tax bills after the Eclipse scheme lost its legal dispute with HM Revenue and Customs.
The Eclipse partnerships were part of a government initiative to allow tax breaks to investors in the film industry. Investors in the schemes were allowed to defer tax payments until the life-span of the partnership expired, usually 15 years.
Amid growing pressure to crack down on tax dodgers, HMRC became concerned the schemes were being used to avoid tax. This led to a test case against the Eclipse 35 Film Partners LLP scheme, which reached the Supreme Court in 2016.
After the court ruled in favour of HMRC, accelerated payment notices (APNs) were issued to investors the following year, reversing the tax benefits they had previously enjoyed. On top of returning the tax, investors also had to pay interest on those sums.
However, on 8 March HMRC then went further, saying it would make a ‘dry tax’ charge against Eclipse members, meaning they would face income tax liabilities on money they never received. The decision has been upheld in a final tribunal hearing.
Law firm FS Legal, described this as a ‘double blow’ for the partners in scheme, highlighting that investors would typically take out multi-million pound loans to invest in the partnership, buying the rights to a film, or a portfolio of four to five films.
The film would then be leased to a production company which would make the film and promote it, all the while paying ‘rent’ to the partnership that owned the rights.
This ‘rent’ was used to pay off the multi-million-pound loans and interest, so in theory it was never actually received by the individual partners.
This left HMRC with a problem, FS pointed out. ‘On the one hand investors had been “punished” already. They had paid back any tax due under the APNs, together with interest and were already considerably worse off [and] HMRC understood they had never had the “rent” income and that to charge tax on that sum (dry tax) would be manifestly unfair.’
FS said that while HMRC would have been aware of the ‘horrific’ and ‘clearly unfair’ consequence such action would have on investors, leading to possible bankruptcies, it highlighted the tax office was under mounting political and economic pressure to clamp down on tax avoidance.
FS partner Julia Norris was not surprised by the outcome and said that this could have significant implications for investors in other film partnerships.
‘This leaves the other Eclipse partners facing the prospect of many years of litigation to try to argue that their partnership was not the same as Eclipse 35 and so should not suffer the same treatment. That, regardless of the outcome, will be a long and drawn out process taking many years and many millions of pounds in legal costs. Alternatively, if they can afford it, they can pay HMRC tax on income they have never had, Norris said.
‘Clearly when individuals are being asked to pay more in tax than they ever received in income, they are highly unlikely to have the money to pay those claims and may well end up being made bankrupt by the Revenue. Our experience is that HMRC are adopting a “take no prisoners” approach to making individuals bankrupt, although we have been able to negotiate agreements on behalf of some of our clients.’
She added: ‘It is possible that not even bankruptcy will bring an end to this liability for investors. Those who do take this course of action may find that liabilities crystallising in later years, long after their bankruptcy, could simply make them bankrupt again and again. Our firm will be discussing this prospect with leading accountancy firms and insolvency practitioners in the coming weeks.’
FS Legal said it has successfully recovered millions of pounds for participants in the schemes who were not told of these risks and consequences by their financial and tax advisers. It is also representing a number of clients in court action against their advisers.