Samarkand Film Partnership No. 3 & Ors v Revenue and Customs, [2017] EWCA Civ 77

Arden LJ followed Eclipse in finding that a film tax shelter partnership was not carrying on a trade given that the film it acquired was immediately leased out for a stream of licensing payments which matched its debt servicing commitments - so that in essence its business was “the payment of a lump sum in return for a series of fixed payments over 15 years.” As a “non-trading partnerships,” the targeted trade loss relief was not achieved.

Respecting an argument that “the FTT erred in law in concluding that there were no partnerships in existence before the adherence of the taxpayer partners,” she stated (at para. 67-68):

Section 1 of the Partnership Act 1890 defines partnership as "the relation which subsists between persons carrying on a business in common with a view of profit". The question which arises is whether that test is satisfied where two or more persons carry on a business in common with a view of profit, not for themselves, but for future new partners who will for all practical purposes replace them.

…[I]n view of its potential wider significance I would be reluctant to express a view upon [this issue] unless it were necessary to do so.

At issue was whether two partnerships which acquired interests in films and immediately leased their acquired interest for fixed, increasing, secured and guaranteed rental payments for a 15 year period, and were acknowledged to have a business, were carrying on a trade.

The following is a simplified description of the sale and leaseback structure and associated cash flows. The partners borrowed 8 from the Bank of Ireland and used that 8 together with 2 of their own funds to contributed 10 to the partnership. The partnership bought the film from the seller for 9 and leased the film to Haiku for a period of 15 years in return for fixed but escalating rentals. Haiku licensed the film directly or indirectly back to the seller; the seller paid or procured the payment of 8 to Haiku (retaining a "producer's net benefit" of 1) and Haiku placed 8 on deposit to secure the guarantee of its rental obligations The partners' loans and interest were discharged from the rental payments made out of Haiku's deposit and the partnership paid a fee of 1 to the promoter.

"Trade" was defined to include “every trade, manufacture, adventure or concern in the nature of trade."

In affirming the finding below (initially made by the First-Tier Tribunal) that the partnerships were not carrying on a trade, Arden LJ stated (at paras 59, 61, 66):

… [I]t is now clear from Eclipse… that the question whether what the taxpayer actually did constitutes a trade has to be answered by standing back and looking at the whole picture… .

… The [FTT’s] overall assessment of the commercial nature of the agreements as the payment of a lump sum in return for a series of fixed payments over 15 years…was not a crude conclusion based on an impermissible transformation of the taxpayers' activities into an economic equivalent, but rather a way of expressing the ultimate inference of fact which they drew from the totality of the primary facts which they had found.

…[T]he FTT correctly focused on the position after the investors joined the partnerships, and treated the previous activities of the founding partners as preparatory steps which in themselves threw no light on the question whether the partnerships were trading when the deals were eventually closed.

In rejecting an argument that the determination of whether a partnership carried on a trade should take into account financing activities at the partner level, Arden LJ stated (at para. 72):

[T]he distinction between partnership activities and the affairs of individual partners is clearly recognised both in the authorities and in the legislation. ...[I]n Heastie v Veitch [1934] 1 KB 535...the issue was whether, in computing the profits of a partnership, a deduction was available in relation to the payment of rent to one of the partners who owned the premises from which the firm operated. ...This court held...that this test was satisfied, even though the rent was paid to one of the partners, because the payment was made to him in his capacity of landlord of the premises, not in his capacity of partner... .