– . – Finance and Funding
Finance and Funding
What’s In It For Me Then?
Part 3 The Enterprise Investment Scheme: Dave Morrison continues his look at UK film funding.
In previous issues we looked at the history of film investment through tax incentives, and how the UK government reached the conclusion that the way ahead was through the UK film tax credit, which saw the producer—rather than the investor—getting the direct benefit. In Part 3 we look at the tax incentives available for investors in lower budget movies.
To Boldly Go…
The Enterprise Investment Scheme (EIS) is not specific to the film industry; indeed, it is a general scheme to help smaller businesses find outside investors. Tax incentives are aimed at rewarding the risk taking of investors, and so are designed to entice the investor to join the adventure. In the case of filmmaking, the mission of the EIS is to issue shares to investors putting in between £500 and £500,000 per tax year.
In Search Of Aliens
EIS is not available to shareholders who control over 30 percent of the company, or generally directors, employees and other connected persons. In other words it is designed to attract outsiders—we are in search of alien investors.
The final frontier is set at £2m. In other words, only £2m can be raised by the company in any 12-month period under the EIS scheme. It is possible to raise more than that, however, but the excess shares issued do not qualify for EIS reliefs. Remember that foreign (i.e. non-UK) investors are unlikely to be able to use EIS reliefs, and so it should not upset them too much if their shares do not qualify. One other suggestion is phasing, where £2m is raised at the outset and another £2m after 12 months and one day.
The EIS is all about tax incentives and these should leave your film investors beaming:
• 20 percent of the amount invested off their current or previous year’s tax bill
• No capital gains tax on the future sale of the shares if held for three years
• The shares are free of inheritance tax if held for two years
So, your investor is guaranteed to get 20 percent back on their investment at the start and, if the film is profitable, could end up paying absolutely no tax at the end.
Tax Warp Factor
OK, we know that some films lose money but if, for example, the investor loses all of their money there is another twist to come. Just suppose it all went badly wrong; having already had a 20 percent tax break (see above), the remaining 80 percent loss can be set against income tax. So a 50 percent taxpayer would get a further 40 percent tax break (50 percent x 80 percent). Simply put, a 50 percent tax rate investor could effectively only lose 40 percent of their investment even if it all goes horribly wrong. This should certainly calm a few nervous potential investors.
There is also another potential opportunity to shoot at the tax bill via capital gains deferral. This broadly allows an investor in your EIS film to defer another capital gains tax liability that has arisen within the last three years or up to one year later. If that gain was taxable at the pre-5 April 2008 rate of 40 percent, the deferred gain which arises on the disposal of the EIS shares will only be taxable at 18 percent (the current rate)—potentially, a further 22 percent tax saving.
So, a 50 percent taxpayer investing now might risk as little as 18 percent of the amount invested if the movie logs a loss. Such little risk for the opportunity to make a tax-free gain on an investment in three years time! Mr Spock would surely find that a very logical investment…
In addition to all of the financial incentives, many EIS projects offer investors the chance to visit the set, meet the stars, attend the premiere and maybe even be an extra. It’s all part of the seduction.
There is a parallel scheme known as the Corporate Venturing Scheme (CVS) for corporate investors.
Beware of ‘Clingons’
EIS is certainly an attractive way of raising finance for films budgeted at the lower end. There are many tricky little rules that ‘cling on’ to the broader legislation, however, that could trip the producer up. Additionally, there are also rules under the Financial Services and Markets Act that dictate how you are able to promote your share issue. It is therefore always advisable to seek professional advice.