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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Eclipse Film Partners No 35 LLP v HM Revenue and Customs [2015] EWCA Civ 95 (17 February 2015) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2015/95.html Cite as: [2015] EWCA Civ 95, [2015] BTC 10, [2015] STC 1429, [2015] STI 522, [2015] WLR(D) 71 |
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ON APPEAL FROM
THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
B e f o r e :
LORD JUSTICE CHRISTOPHER CLARKE
AND
LORD JUSTICE VOS
____________________
![]() ![]() |
Appellant | |
- and - | ||
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS | Respondents |
____________________
(Transcript of the Handed Down Judgment of
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Malcolm Gammie QC, Rajesh Pillai and Rebecca Murray (instructed by General Counsel and Solicitor to Her Majesty's Revenue and Customs) for the Respondents
Hearing dates: 13-15 January 2015
____________________
Crown Copyright ©
The Chancellor of the High Court (Sir Terence Etherton):
Introduction
The issue
"Subject to sections 363 to 365, interest is eligible for relief under section 353 if it is interest on a loan to an individual to defray money applied –
…
(b) in contributing money to a partnership by way of capital or premium, or in advancing money to a partnership, where the money contributed or advanced is used wholly for the purposes of the trade, profession or vocation carried on by the partnership …"
The relevant transactions
Barclays Bank plc ("Barclays") | The issuer of a letter of credit securing the payment by the Distributor of certain sums due to ![]() ![]() |
Eagle Financial and Leasing Services (UK) Limited ("Eagle") |
A wholly-owned subsidiary of Barclays, which made loans to the members and received, as security for such loans, the benefit of the letter of credit issued by Barclays. |
Walt Disney Pictures ("Disney") |
A US corporation and a member of the Disney group of companies which on 3 April 2007 as grantor entered into a licensing agreement with ![]() ![]() |
WDPT Distribution VIII LLC ("the Distributor") |
A US corporation and a member of the Disney group of companies which on 3 April 2007 as licensee entered into a distribution agreement with ![]() ![]() ![]() ![]() |
WDMSP Limited ("WDMSP") |
A UK company which is a member of the Disney group of companies and which entered into an agreement with ![]() ![]() |
Future Films Limited ("Future") |
A UK company which arranged the financing of films and also the production and distribution of films, which for a consultancy fee promoted ![]() ![]() ![]() ![]() |
(1) Barclays paid Eagle £790 million by way of loan.(2) Eagle paid the members in aggregate £790 million by way of loan.
(3) The members paid
Eclipse
35 in aggregate £840 million by way of capital contributed to
Eclipse
35, using the borrowings from Eagle of £790 million and £50 million from their own cash resources;
(4)
Eclipse
35 paid:
(a) £503 million to Disney on account of the licence fees due under the Licensing Agreement;(b) £44 million to Future as its fee due; and(c) £293 million in aggregate to the members as loans against future income profits, pursuant to the partnership agreement.(5) The members paid Eagle in aggregate £293 million by way of a prepayment of interest under their respective loan facility letters.
(6) Eagle paid Barclays £293 million by way of a prepayment of interest.
(7) The Distributor paid Barclays £497 million by way of deposit to induce Barclays to issue the Letter of Credit, and out of which Barclays was to be reimbursed for the payments it makes to
Eclipse
35 under the Letter of Credit in place of the Annual Ordinary Distributions.
(8) Barclays paid the Distributor £293 million on account of the interest accruing on the deposit made in the deposit account which the Distributor holds with Barclays.
The proceedings before the FTT and its material findings
"also represents the likely value of the Rights licensed by Disney toEclipse
35 or, at least, the value which the parties agreed to place on those Rights in the context of the overall deal which they struck after having regard to expert advice on the estimated financial performance of the Films."
"Drawing all these matters together, therefore, we conclude thatEclipse
35 acquired the Rights by licence pursuant to the Licensing Agreement which it then subsequently proceeded to sub-licence to the Distributor pursuant to the Distribution Agreement. Neither the substance of the Rights nor their value was materially affected or depreciated by reason of the licence being granted subject to the Prior Agreements. The consideration which
Eclipse
35 gave for the Rights reflected the likely value of the Rights. The Rights gave
Eclipse
35, by reason of the Distribution Agreement, the entitlement to Contingent Receipts, and at the time the transaction was entered into a payment of Contingent Receipts, although speculative, was reasonably anticipated to be possible in the course of the twenty year term of the licence."
"356. …. we do not consider that Mr Salter's activities establish thatEclipse
35 was, even on a collaborative basis, engaged in directing and supervising the marketing and release of the Films.
Eclipse
35 cannot be said to be directing and supervising matters in circumstances where the Distributor had already come to a conclusion as to what it should do.
357. Finally, although there was undoubtedly a well-planned and well-executed regular flow of high quality and relevant information gathered by SCI and Mr Salter from the relevant Disney companies to WDMSP Ltd andEclipse
35, with pertinent comment by Mr Salter, and although that information was considered at board meetings of WDMSP Ltd and by the Designated Members (that is, in effect, the executive Members) of
Eclipse
35, that does not in itself establish the case which
Eclipse
35 is asking us to accept.
358. Whilst we can conclude that, through WDMSP Ltd,Eclipse
35 monitored the activities of the Distributor with regard to the marketing and release of the Films, and was kept fully aware of the activities in that regard which the Distributor undertook and of the financial performance of the Films, we are unable to conclude that
Eclipse
35 had a part, or at least a meaningful part, in directing and supervising the marketing and release of the Films by the Distributor."
"an element of speculation is a characteristic of the concept of trade – if a taxpayer is trading, what he does must, normally at any rate, be speculative in the sense that he takes a risk that the transaction(s) may not be as profitable as expected (or may indeed give rise to a loss)".
The appeal to the UT
The appeal to the Court of Appeal
"90. Matters which were the subject of particularly intensive negotiation included the following:
(1) The value to be attributed to the film rights licensed and the amount of the fixed royalties paid by the Distributor;
(2) The identity of the films, and the extent of the rights in such films, to be licensed;
(3) The protection of Disney's rights in the films in the eventuality of the insolvency of theEclipse
partnership;
(4) The marketing arrangements carried out through WDMSP Ltd, including the extent of WDMSP Ltd's role and its accountability to, respectively, theEclipse
partnership which engaged its services and Disney;
(5) The amount of the Studio Benefit in the case of each tranche (which was reduced from 2.5 per cent envisaged in the Term Sheet to … 1.15 per cent in the case ofEclipse
35);
(6) The terms on which the Contingent Receipts were to be ascertained, and the proportion of the Contingent Receipts to which theEclipse
partnerships were entitled; and
(7) The extent of the rights which theEclipse
partnership had to audit the gross income receipts earned by the films in order to monitor any entitlement of the
Eclipse
partnership to Contingent Receipts."
Legal principles
"the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."
"A man cannot be trading or engaged in an adventure in the nature of trade unless there is someone with whom he is trading – someone to whom he supplies something such as goods or services for some return. Here there was no one with whom Mr Higgs can fairly be said to have "traded" … Mr Higgs … simply told the parties concerned to carry out the transaction which the scheme which he had adopted required them to carry out."
Discussion
"acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual rights and obligations (if any) which the parties intend to create."
"The production of a film, or the completion of an uncompleted film or, I might add, the purchase of a completed film, in each case with a view to its distribution and exploitation for profit, are all typical, though highly speculative, commercial transactions in the nature of trade."
Conclusion