Eclipse Film Partners No 35 LLP v Her Majesty's Revenue & Customs, SPC 00736

Spc00736

Closure notice – application for direction to close enquiry into tax return – limited liability partnership – s 28B Taxes Management Act 1970 – direction for closure within three months

ECLIPSE FILM PARTNERS No 35 LLP Applicant

- and -

Special Commissioner: EDWARD SADLER

Sitting in public in London on 27 January 2009

Jolyon Maugham, counsel, instructed by DLA Piper UK LLP, for the Applicant

Victoria Wakefield, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1. Eclipse Film Partners No 35 LLP (“the Applicant”) is a limited liability partnership which has entered into certain transactions in relation to the licensing and distribution of film rights, and is subject to an enquiry by The Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) into its tax return for the tax year ended 5 April 2007. The Applicant has applied to the Special Commissioners under section 28B Taxes Management Act 1970 (“TMA 1970”) for a direction that the Commissioners issue a closure notice in relation to that enquiry within a specified period. The Applicant considers that the Commissioners now have sufficient information to enable them to issue such closure notice. The Commissioners consider that they require more time to gather and then to consider further information before they are in a position to complete their enquiries and to inform the Applicant of the conclusions they have reached, with any amendments they propose to make to the Applicant’s tax return.

2. Section 28B TMA 1970 requires that I should give the direction applied for unless I am satisfied that there are reasonable grounds for not issuing a closure notice within a specified period. Having heard the evidence and the arguments of the parties in a lengthy hearing, I am not satisfied that there are reasonable grounds for not issuing a closure notice, and it is my decision to direct that the relevant officer of the Commissioners issue a closure notice not later than three months from the date on which this decision is released.

3. I heard evidence from Mr Nicholas John Hagan, an officer of the Commissioners working in the office of the Specialist Investigations team and responsible for the enquiry which is the subject of this application. Mr Hagan’s evidence was set out in his witness statement which had exhibited to it 35 documents, for the most part correspondence and notes of meetings between the Commissioners and the Applicant’s agent correspondence and documents relating to notices served on third parties in the UK by the Commissioners under section 20(3) TMA 1970 in relation to the enquiry; and documents relating to an exchange of information request made to the United States Internal Revenue Service. Mr Hagan gave further evidence-in-chief in reply to questions put to him by Miss Wakefield, who appeared for the Commissioners, and Mr Hagan was cross-examined by Mr Maugham, who appeared for the Applicant. Some considerable part of the evidence related to the transactions which the Applicant has entered into in relation to film distribution arrangements and the financing arrangements entered into by the members, or partners, of the Applicant to fund their investment in the Applicant. It is not necessary for the purposes of this application to make detailed findings of fact on such matters, nor is it appropriate to do so since it is possible that at some point and in some guise the substance of such arrangements will be the subject of an appeal to this tribunal.

4. The following are the outline facts relevant to reaching a decision on the application for a direction as to a closure notice made by the Applicant:

   1. The Applicant is a limited liability partnership with approximately 240 members all, or most, of whom are individuals liable to UK income tax.

   2. Shortly before 5 April 2007 the Applicant entered into a complex series of transactions whereby it obtained a licence from a United States corporation, Walt Disney Company, for a period of 20 years of the rights to distribute two films, and sub-licensed the distribution rights in those films to another Walt Disney entity in the United States, WDPT Film Distribution VIII LLC (“WDPT”). The Applicant paid Walt Disney Company approximately £500 million as consideration for the licence to distribute the films, and under the sub-licence the Applicant is entitled to receive from WDPT annual fixed royalties and further royalties contingent upon the earnings from the films. The production costs of the two films are, in aggregate, approximately £79 million.

   3. The Applicant was financed for these purposes by its members, who contributed capital to the partnership. Each member financed his capital contributions in part from his own resources but substantially (as to approximately 94 per cent) by undertaking borrowings for that purpose, borrowing under a 20 year facility made available to him by Eagle Financial and Leasing Services (UK) Limited (“Eagle Financial”). Eagle Financial is a subsidiary company in the Barclays Bank group of companies. In aggregate the members borrowed approximately £790 million from Eagle Financial.

   4. Prior to 5 April 2007 the Applicant made a payment (expressed to be by way of loan on account of anticipated profits) to the members of an aggregate amount of approximately £292 million. The facility with Eagle Financial includes a term requiring the members to make a payment expressed as a pre-payment in respect of interest accruing over the first ten years of the borrowing, and the members made such payment (of an aggregate amount of approximately £292 million) to Eagle Financial, again, prior to 5 April 2007.

   5. Complex arrangements were put in place to secure the obligations of the various parties. Barclays Bank plc (“Barclays”) issued a letter of credit supporting the payment by WDPT to the Applicant of the fixed royalties due under the sub-licence, with Walt Disney Company depositing with Barclays approximately £495 million as security for that letter of credit. The Applicant assigned that letter of credit to Eagle Financial as security for the members’ borrowing.

   6. The Applicant contracted with a number of other parties for advisory and other services, and in particular with a UK company in the Walt Disney group, WDMSP Limited, which agreed, for a fee, to act as the Applicant’s agent in developing marketing and release plans for the two films in question.

   7. On 11 September 2007 the Applicant filed its tax return for the tax year ended 5 April 2007. That return shows no profit and no loss.

   8. Also on 11 September 2007 the Applicant wrote to the Commissioners with copies of the principal transaction documents relating to the film licensing and distribution arrangements, the marketing and sales documentation whereby the arrangements were proposed to prospective members, the Applicant’s partnership documents, the documents entered into by the members in relation to their membership of the Applicant (including their capital and current accounts with the Applicant) and their borrowings from Eagle Financial, bank statements and other records and documents.

   9. ...