Eclipse Film Partners No 35 LLP v HM Revenue and Customs

Whether an activity constitutes a trade requires a realistic evaluation of the taxpayer’s whole activity against the statutory meaning of trade. The tribunal must focus on what the taxpayer actually did. A counterparty is required, but identifying a person who can ordinarily be described as a customer is not a separate test.

Commercial risk may indicate trade, but it is not essential. Nor does acquiring and sub-licensing valuable rights for profit necessarily constitute trade. Where the substantial reality is a fixed-term investment, a remote possibility of an additional return and limited related activity need not give the business a trading character. An appellate court may disturb the fact-finding tribunal’s characterisation only for an error of principle or where the only reasonable conclusion is inconsistent with it.

Eclipse Film Partners No 35 LLP acquired licences relating to two Disney films and immediately sub-licensed the rights to a Disney distributor. Its members had contributed £840 million, substantially financed by borrowing, and sought relief for interest on those borrowings. The arrangements produced predetermined annual returns over 20 years, together with a possibility of additional contingent receipts dependent on the films’ performance.

The First-tier Tribunal found that Eclipse 35 conducted a film-exploitation business but did not carry on a trade. The Upper Tribunal upheld that finding, while allowing Eclipse 35’s appeal against the closure notice on the narrower ground that it carried on a business with a view to profit.

Eclipse 35 appealed against the trading determination. It argued that its activities relating to the selection, licensing, marketing and exploitation of the films necessarily constituted trade, or that acquiring and sub-licensing film rights for profit was inherently trading.

1. Appeal dismissed. The First-tier Tribunal was entitled to find, and correctly found, that Eclipse 35 did not carry on a trade. Its business had to be characterised by evaluating the totality of its activities and enterprise, viewed realistically and with particular attention to what it actually did.

2. The transactions had two essential aspects. First, Eclipse 35 paid £503 million in return for predetermined payments with interest over 20 years, producing a profit unrelated to the success of the films. That aspect had the character of an investment. Secondly, Eclipse 35 had a possible entitlement to contingent receipts and undertook some activity intended to increase them. The tribunal was entitled to regard that second aspect as insufficiently significant to give the business as a whole a trading character.

3. The contractual documents were genuine and the licensed rights had value. Nevertheless, Disney retained very wide control over whether and how the films would be marketed. The contracts preferred Disney’s interests, restricted Eclipse 35’s powers and permitted Disney companies to act without regard to Eclipse 35’s interests. In practical terms, Disney produced and marketed the films, implemented the plans and reported its activities to Eclipse 35. The contingent receipts were therefore no more than a potential additional return on a fixed-term investment.

4. Trading requires a counterparty, but it was unhelpful to impose a separate requirement that the counterparty be characterised as a customer in ordinary speech. The tribunal’s terminology did not invalidate its substantive inquiry into whether Eclipse 35 supplied anything commercially meaningful by way of business.

5. Risk is not an essential ingredient of trade, although speculation or commercial risk may legitimately indicate trading. The tribunal had treated the absence of meaningful risk as an indicator rather than an indispensable condition.

6. The acquisition and sub-licensing of rights for consideration and profit does not inherently constitute trade. The precise facts must be evaluated against the statute. Ensign Tankers was distinguishable because the partnership there funded film production and held a substantial interest in commercial exploitation, whereas Eclipse 35 did neither in any significant sense.

7. The court declined to endorse the reasoning below concerning section 609 of the Income Tax (Trading and Other Income) Act 2005, because it had discouraged submissions and received no full argument on that provision.

1. Court of Appeal (Civil Division): By [2015] EWCA Civ 95, dismissed Eclipse 35’s appeal and upheld the determination that it was not carrying on a trade.

2. Upper Tribunal (Tax and Chancery Chamber): Sales J dismissed the appeal on the trading issue. He allowed the appeal against the closure notice on the narrower ground that Eclipse 35 carried on a business with a view to profit. No citation is stated in the judgment.

3. First-tier Tribunal: Found that Eclipse 35 was not carrying on a trade, but conducted a non-trade film-exploitation business. It dismissed the appeal against the closure notice. No citation is stated in the judgment.