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EIS: A Future for British Film? – movieScope

EIS: A Future for British Film?

Third Star, produced by Matador Pictures with EIS assistance

Dave Morrison from Entertainment Industry accountants Nyman Libson Paul looks at why EIS is topical for film makers right now.

Whatever Lord Smith might think of the above adaptation of the title of his recent policy review, it’s the Enterprise Investment Scheme (EIS) that may well prove to become an integral part of getting many British films off the ground. Indeed, you might argue that it already is…

What’s Hot?
So, why is EIS so topical just now? Keen followers of the subject will recall that it was announced in the 2011 budget that, from 6 April 2012, the amount a company could raise under EIS in a 12-month period would rise from £2m to £10m, and that the amount an individual could invest in any tax year would rise from £500,000 to £1m. Surely this would open up EIS as a tool for financing a wider range of film budgets than is currently the case, wouldn’t it?

What’s Not?
Well, it could, but there may be a hitch because, at the time of writing, the European Union has not given its blessing for the rises, and these are required as EIS can be seen as state aid to industry. It appears that negotiations over this have been dragging on for some time. Nevertheless, the UK government appears confident, having published the necessary draft legislation for inclusion in this year’s Finance Bill. We may know more by the time you read this…

The Plot
For those unfamiliar with EIS, it offers individuals investing in a qualifying limited company 30 per cent tax relief on the amount they invest in company shares. Furthermore, there are other tax advantages too, both for successful and unsuccessful projects. If the project is successful and the investor is ‘in’ for three years—a suitable lifespan for a film production company—then any disposal of those shares may be tax-free. On the other hand, if the project flops the investor can claim a tax loss against income of the remaining 70 per cent of their investment (i.e., the amount they invested less the 30 per cent tax relief at the start). This latter feature means that a 50 per cent taxpayer may only be at risk for as little as 35 per cent of the amount invested, whereas if things go well they could profit tax-free plus the 30 per cent initial tax relief.

This makes EIS shares quite attractive and there are other benefits too, like inheritance tax exemption and capital gains tax deferral, which can be factored in. (For more information on this, see movieScope March/April 2010).

The Rot
So, assuming that the proposed improvements to EIS go ahead, could we see a blossoming of the UK film industry? We certainly hope so, but let’s also hope that some aspects of the pre-2007 so-called Section 48 and Sale and Leaseback era don’t come back to haunt the industry. During this time, limited liability partnerships were used to fund films in tax-deferral schemes, which has left a few scars and given film investment something of a bad name amongst some investors. The money that poured into these schemes funded a lot of films and some argue that too many poor films were funded as a result—you can make your own mind up regarding that point!

Furthermore, the government were hostile towards selected tax schemes and some investors have consequently experienced long, drawn-out tax investigations which may have undone the benefit of the tax deferral. Take care when talking to investors that you distinguish your film from arrangements of that era!

Do Not…
There have been some interesting structures used for EIS recently which, while ticking the right boxes to qualify, have sometimes fallen a bit short of the spirit of EIS when it comes to the substance of the business. Essentially, EIS is there to help small businesses emerge and create jobs, so setting up a film distribution company and then subcontracting the distribution to an established distributor without taking on any extra staff hardly stands up as a job-creating, economy-expanding model. Setting up a company which is a small player in a larger production may or may not be acceptable, depending on whether there is any real contribution and activity taking place.

After a few months of consultation, HM Revenue & Customs dropped their original proposals to counter these sorts of structures, particularly as the film industry protested that they did not suit its modus operandi. Controversy reigns, however, with the proposed replacement, known as ‘disqualifying arrangements’, broadly aimed at structures where an EIS vehicle is interposed in a project that would have gone ahead without it anyway. The government’s approach is probably acceptable but the draft legislation is likely to be amended because there have been howls of protest about how vague and uncertain it is.

Whatever you do, do not get caught out by this new anti-avoidance legislation, however it ends up, and seek advance EIS assurance from HM Revenue & Customs wherever possible.

So, how do you market your EIS to investors? Be very aware of the Financial Services and Markets Act 2000 which dictates what you can and can’t do. For smaller companies, approaches to individuals and companies on a one-to-one basis is acceptable. If you need to produce a share offer document (aka an information memorandum) then it may need authorisation by someone deemed suitably qualified by the Financial Services Authority, unless you use one of the exemptions, such as only issuing it to certified high net worth individuals or sophisticated investors. If your offer seeks to raise over €5m, you will almost certainly need to get your document authorised.

The Tiny Tot
The new kid on the block is SEIS (Seed Enterprise Investment Scheme), set to run from 6 April 2012. Offering investors 50 per cent tax relief, as opposed to 30 per cent under conventional EIS, this is for small new companies and allows them to raise up to £150,000. It is not designed to be done simultaneously with EIS but may be attractive to people seeking film development money.

That’s Your Lot…
Well, for now, anyway. At the time of writing there is uncertainty over the size of EIS and details of proposed anti-avoidance legislation to take effect from 6 April 2012. The chancellor’s budget speech is scheduled for 21 March, so by the time you read this we may know more. If the goalposts move significantly, be sure that movieScope will bring you an update.

You can also find out more about the EIS by visiting www.hmrc.gov.uk/eis

Taken from movieScope magazine, Issue 27 (March/April 2012)

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