HMRC's Enterprise Investment Scheme can help you realise your directorial ambitions and slash your tax bill, writes the award-winning producer, Stephen Evans.
Anybody thinking of investing in a British film for tax 'efficiency' reasons may not have been encouraged by the HMRC Tax Tribunal's opinion on the Ingenious film partnerships case.
This saw members of the Ingenious investment scheme invest money into one of three limited liability partnerships – Inside Track Productions, Ingenious Film Partners 2 and Ingenious Games – the first two of which produced movies while the third developed associated computer games.
The idea, in HMRC's mind, was that investors tried to write off the annual losses against their other income, using the sideways relief deliberately introduced by the then government to encourage investment in the UK film industry.
HMRC have since decided that certain parts of such film production partnership schemes constituted tax avoidance schemes - a ruling that continues to be contested and remains undecided. The papers have listed the names of many well known figures who have been caught up in the scheme.
Against this background, why would any HNW want to consider investing in a British film today? Well, because there are other much more genuinely tax-efficient ways of investing in films and TV dramas that are 100 per cent legal and really do work efficiently.
The truth is that so long as you get the right advice, and are aware of the risks, investing in film can be very financially rewarding. The creative arts vary between being costly and occasionally financially rewarding. Equally, involvement can be emotionally stimulating and creatively fascinating. As part of the creative arts, films inevitably carry a risk factor, and sadly, their success cannot be securely evaluated by financial modelling. Otherwise, we'd all be film producers.
Nevertheless, unlike the creative arts in general, UK film is highly tax efficient. After the many weird and varied tax schemes which have been subsequently invalidated, one remains which has the unequivocal support of HMRC: The Enterprise Investment Scheme.
As an independent filmmaker, who fortunately has not been involved in these schemes, I genuinely concur that EIS and its younger Sibling Seed EIS (SEIS) are the only ways for a British tax residents to securely invest in films, and enjoy a specific and significant tax break. Both these schemes have been cleared by HMRC – in fact, they were created by them.
Before any HNW considers investing in film, they should ask themselves a number of questions.
1. Do you like, or are you interested in the subject matter of the film you might invest in?
2. Are you a UK tax-payer that can take advantage of EIS / SEIS schemes?
3. Are there actors in the film which give you certain amount of confidence in making the film a financial success?
4. Have you ensured that the producers of the film you might invest in have at least some kind of track record, including at least a couple of successful hits?
5. Have you ensured that the lawyers and accountants representing the film are well respected within the British film industry?
6. If you are an investor you receive from HMRC 30 per cent of your investment as a refund of tax, this means there is the potential of making 43 per cent net if the film breaks even through worldwide revenues.
7. Have you assessed the worst-case scenario? If the film fails totally, your loss after tax credits is 38 per cent. This is your investment downside. N.B. Any investor with Capital Gains Liability can utilise these gains legitimately to further tax advantage (speak to your accountants on case-by-case basis).
8. Often financial projections can account for little. Better to recall the words of William Goldman, Hollywood’s most famous screenwriter, when he was talking about the film industry: 'nobody knows anything.'
Moving on to SEIS specifically which, as stated earlier, was set up by HMRC for development funding. The maximum can be invested in one project’s development is £150k. The maximum any one individual can invest is £45k. The tax relief is higher than EIS at 50 per cent. Should the investor have CGT, the maximum loss is 13.5 per cent. The tax offer here is more generous because film development is a high-risk area. Only invest in this, if the investor is prepared to be worse off to the tune of 13.5 per cent - which, in their mind, should be written-off in case the film doesn’t get made. If the film is made, though, the tax-free profits can be up to 300 per cent. See your accountant.
Stephen Evans is the producer of many films including Henry V, Love's Labour's Lost (with Kenneth Branagh), Peter's Friends and The Madness of King George.