…when it’s done by a leasing
partnership, says HMRC – which could have industry-wide
ramifications, write
James Murphy
and Judy Harrison

In the second recent case of its kind (see
No trading loss relief for
), HM Revenue & Customs has successfully
argued in Eclipse Film Partners No 35 LLP that a film “leasing”
partnership is not trading. This is likely to encourage it to raise
the question of trading more often.

Eclipse 35 contained some useful
comments on whether finance leasing companies are trading,
particularly where a lessor is part of a financial group. Leasing
companies that are trading are able to surrender and receive losses
from other group companies.

In Eclipse 35, individual partners
borrowed from a bank to invest in a limited liability partnership
(the LLP). The LLP paid an upfront fee to license rights in two
films from Disney then immediately on-licensed the film rights to a
second Disney company which agreed to pay the LLP fixed amounts and
amounts contingent on the films performing well. Fixed amounts were
secured by a letter of credit. No contingent amounts were paid. The
LLP made a loan to the partners which they used to make a
prepayment of interest on the loan they took out to invest in the
LLP. The partners argued this prepayment of interest was
deductible; individuals borrowing to invest in a partnership may
claim a deduction for interest costs if the partnership is carrying
on a trade with a view to profit.


The first-tier tribunal held that the
partnership was not carrying on a trade as the fixed receipts
payable to the LLP were calculated without reference to the success
of the films and thus were not the profits of a trade as they
lacked an element of speculation. Further, the likelihood of the
LLP receiving the contingent profits was too remote to justify the
existence of a trade. The LLP was deemed not to be a provider of
services as its role was restricted to on-licensing. Helpfully, how
the partners financed their contributions to the LLP was seen as
irrelevant to the question of what the LLP did. 

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The LLP argued that it should be
regarded as trading by analogy to the position of a lessor under a
sale and finance leaseback.  Whilst this argument failed on
the basis the LLP did not provide finance and retained no residual
interest in the films, the tribunal accepted that a finance leasing
company will normally be trading. Some commentators considered the
effect of the decision as casting doubt whether a special purpose
leasing company is trading. Eclipse 35 soothes those concerns where
a lessor is a member of a financial group which provides finance
and retains a residual interest in the asset – this is often
achieved by the lessor retaining a portion of the price at which
the asset is sold.

James Murphy
is an associate and Judy
is a senoir associate with legal firm Norton

Further analysis of this case can be found in an extended
article here