Why overly cautious HMRC needs to embrace film investing

The film industry is important to UK Plc but the taxman isn’t making it easy for this sector to contribute to the economy

The changes to EIS brought about by the Patient Capital Review should have a beneficial impact on film investing but HM Revenue & Customs (HMRC) still needs to do more to boost this important tenet of the UK economy.

The film industry is vitally important to the UK economy. Figures from the Office of National Statistics (ONS) released last year singled out ‘motion picture activities’ as playing a large role in the growth in UK GDP. This included production activity and income from blockbusters such as Wonder Woman and Guardians of the Galaxy.

The ONS figures revealed that since 2014, the economic value of film, TV and music industries in the UK has grown a staggering 72.4%, compared to just 8.5% in the wider European Union, as Hollywood studios – attracted by generous government tax breaks – decide to shoot films and make use of world class studio facilities in the UK.

The generous tax breaks are not just for the film industry, they are also for investors who are willing to fund, what they hope will be, a box office success. Investing in film via EIS and SEIS offers income tax relief of 30% and 50% respectively. Films made in the UK also qualify for film tax credits totalling 20% of budget spend that will hopefully boost the returns to investors.

However, the government believed the tax reliefs were being taken advantage of with EIS and SEIS used as capital preservation vehicles rather than to invest in high-risk burgeoning businesses and adding to the UK economy. The government’s Patient Capital Review tackled this problem, rejigging the criteria for EIS and SEIS qualifying investments.

Within the film industry it is hoped that instead of EIS being used to fund middle-of-the-road films that ensure capital preservation, the alternative investment vehicle will be used to fund higher risk and potentially higher returning films that pack more of a punch.

Speaking at an IFA Magazine roundtable in Belfast, Ben White, Co-Founder of Ober Private Clients, which specialises in sourcing EIS investments, says he hopes the Patient Capital Review will result in a stronger crop of films being produced in the UK, although “it is far too early to say” at the moment.

“Still, I think that will be the case and it will help the British film industry because of it,” he says.

“The EIS, for some years now has been allowed to fund films anywhere in the world but still the highest percentage of the funds have gone into British films and whilst there has been a handful of good productions, the majority have been mediocre.”

The demands that the review brings should ensure “there is going to be a lot more focus on quality and I think that will be good for all parties; for the investors, and for the sector, and for the EIS too”.

“It will start to lift the reputation not only of the film EIS sector but the global reputation of the British film industry,” says White.

Independent financial adviser Brian Hamilton, says the new criteria placed on EIS through the Patient Capital Review should benefit the industry but there are some people still only interested in the net return.

“Most are right to say the new HMRC criteria should lead to better investment but there are people in the industry who are only interested in the net return,” he says.

“Those involved in the process may be passionate about their industry but basically the interest is on return and maybe a bit of publicity.”

He adds that it is only when people have a “wider interest” in the film industry will they “take the trouble to learn a bit more about the business and realise the things that are important like scripts and directors, and certain dangers within the industry”.

Qualifying for investment

With the change in criteria on what qualifies for EIS and SEIS, there are fears that it will be tougher for funds to acquire advance assurance from HMRC, which provide investors with the confidence that the taxman has rubber-stamped the scheme.

This confidence is especially needed when dealing with SEIS and White says HMRC understands that a film maker “will never go on to make a second film within an SEIS unless the first film was sufficiently successful to generate the capital needed fund the next”.

He adds that there may not be “enough capital raised within an SEIS to make multiple films but HMRC is comfortable providing there are bona fide plans to reinvest returns into a slate or an ongoing business”.

If the wider plan is in place then a film would qualify for SEIS, he says, although the current rules can never be taken for granted.

“HMRC do seem to be more understanding of the challenges involved but may change their attitudes again in the future and there is the draft legislation from the Patient Capital Review to contend with at the moment. It will all depend on whether there are other changes in the future,” says White.

Film investing wish list

Raimund Berens, Producer at Iron Box Films, says if film producers could get HMRC to do one thing to help the film industry and the use of EIS and SEIS within it, it would be to “speed up advance assurance by having a direct communication line”.

White agrees that EIS and SEIS advance assurance in film is particularly difficult to get from HMRC at present.

“Bearing in mind that film is only about a third of what we do, we are finding that other EIS advance assurance we are getting back far quicker than film advance assurance,” he says. “And with EIS certificates, we are getting approvals but they are taking much longer with film and HMRC is asking many more questions on film, as opposed to non-film.”

With filming having a tainted history from the days of film partnerships and tax avoidance schemes, White adds that he can understand HMRC’s caution but believes it has tipped too far the other way.

“I can understand the increased scrutiny to some degree but there needs to be a balance,” he says. “I would ask HMRC to look at that, especially where the film EIS is straight forward, is growth focused and the company has an ongoing business plan.”

“There is clearly some nervousness within HMRC that is bringing this about so hopefully that can be addressed in coming months.”

David Lovell, Operations Director at EIS and SEIS platform GrowthInvest, says pre-Patient Capital Review HMRC was “still debating where it was going to draw a line in the sand” when it came to EIS and SEIS investing.

“We have more certainty now but whether that impacts on the flow of the advance assurance and EIS certificates relating to film matters or not is too early to say,” he says. “There is not much evidence yet but it is early days.”

He added that there is “no reason” why advance assurance for film investments should be taking longer than for non-film investments as “it is not more complicated”.

Berens adds that “two or three years ago you could go into an EIS and start investing in financing” quickly.

“Now we have to wait for the advance assurance as we want to be absolutely sure we have that in order to trade accordingly,” he says.

Overly cautious attitude

The cautious attitude of HMRC when issuing advance assurance and EIS certificates is because it wants to avoid the bad press suffered by film investing in recent memory where investors lost money, but ironically it may be doing more harm than good by delaying films that then struggle to make money.

White says it was undeniable that there had been issues around films EIS in the lead up to the Budget and he “can understand HMRC being cautious”. However, he adds that “where there are good quality films within compliant EIS structure, I would have hoped HMRC would be more pragmatic”.

“The HMRC view, on the issuance of EIS3 Certificates, is that commencement of trade for the film is when the principal photography commences for that particular film, but the film maker wants funding from a much earlier date,” he says.

“So the current HMRC stance is one where they will not issue an EIS certificate until four months after commencement of trade, but producers would be looking for investment many months, or even a year, before that.”

He says this cautious approach could be because “they know that some films run out of money”.

“We need an independent film world where you raise money and go through the whole process but, viewed in a different light.” says White.

“They are trying to meet the need by expanding the objectives behind these schemes but not answering this problem that the film industry has; that films need funding ahead of principle photography.”

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