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Eclipse casts a shadow

Tax avoidance may be morally repugnant in the eyes of George Osborne but it is legal.

Yet last month’s landmark victory for HMRC in the Eclipse 35 film finance case has left tax professionals’ confidence in recommending aggressive schemes shattered.

The introduction of an over-arching cap on taxable reliefs set to come in next April, when the maximum claimable will be restricted to £50,000 or 25 per cent of taxable earnings, would normally have created a buy-now-while-stocks-last opportunity. But the Eclipse 35 decision, other Revenue moves to tighten tax loopholes and increasingly vociferous attacks by politicians means recommending anything left field is riddled with risk.

The accountancy profession is, when it comes to aggressive tax planning, currently in a state of soul-searching.

On the one hand, it is hoping the Eclipse 35 case is a one-off decision of a maverick judge, on the other, it fears this crusade against tax avoidance may ultimately lead to the outlawing of strategies considered main-stream a couple of years ago, with clients coming a cropper along the way.

The Eclipse 35 case is clearly at one end of the spectrum of what constitutes aggressive tax planning. The scheme’s strategy of compressing 20 years’ interest payments into a transaction that held rights to a couple of Disney films for a single day led the court to conclude the scheme was not genuinely engaged in a trade. Even though the scheme borrowed £790m to fund the scheme, the court found that the risk of Barclays defaulting on its letter of credit that returned the fixed distributions was too slight to make the profits returned speculative.

The fear for many advisers is where this will all ultimately lead. Just how far will the Revenue succeed in pushing back the frontier of what is acceptable? The Eclipse 35 case seems to say schemes have got to have risk if they are to attract tax relief. But how much risk is enough for tax relief, whether for loss relief or for recognised tax-relieved investments? The Government has already said EIS and VCT schemes that rely on feed-in tariff income are not acceptable because they are not risky enough.

Look up the description of an EIS on HMRC’s website, for example, and it is defined as a scheme designed to help smaller, higher-risk trading companies raise finance.

Yet many of the capital preservation schemes that have been marketed in recent years could arguably fail to meet the Revenue’s description of “higher-risk trading companies”. The reality is in the current climate of hostility towards tax evasion, it has become incredibly difficult to predict with any certainty precisely where the line will be drawn.

The Eclipse 35 case will also embolden HMRC in relation to all the other film schemes already under investigation.

Given the genuine hardship faced by many members of the public on account of the scarcity of public money, it is no surprise that sympathy for the very wealthy is at an all-time low.

It is manifested in public outrage over the tax affairs of public figures, from Ken Livingstone to Lord Ashcroft via senior NHS staff.
As a nation, we could get over the way secrecy breeds suspicion by following Sweden, Norway and Finland and publishing everyone’s tax returns but that would not solve the adviser’s problem in second-guessing what the Revenue will or will not be able to enforce as unacceptable.

John Greenwood is editor of Corporate Adviser

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