Richard Watts-Joyce, CFO of leading UK production company Hereford Films, talks us through the impact last week’s budget had on the British film industry.
Tax incentives for film investment thrown a lifeline
There was a great deal of speculation before the Budget that the government would attack the use of their own tax efficient Enterprise Investments Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) arrangements in the making of British films. These HMRC approved arrangements offer significant tax incentives for investment in start-up companies, allowing individual tax relief of 50% (SEIS) for investments of up to £100k a year and 30% (EIS) for investments of up to £1m a year.
An investment of £100k in an SEIS effectively cost an investor £50k, with the rest underwritten by HMRC. The problem, in the eyes of HMRC, was that the arrangements were so generous, that some had been manipulating these in a way that was never intended.
So what was the problem?
The idea of EIS and SEIS arrangements was to help new high risk companies obtain investment. The issue with some film projects is that the level of risk can be reduced significantly through pre-sale agreements, which effectively mean the film is sold before it is actually made. Even at break even, an investor using SEIS then makes 100% profit courtesy of HMRC.
What happened in the Budget?
HMRC received responses to a consultation document earlier in the year, including several from film industry specialists (including Hereford). The government was already aware that every £1 of tax relief offered in British film, brings around £12 additional revenue to HMRC, so attacking the film industry would not only be incredibly unpopular, but would actually ultimately cost them money.
It was good to see that in the Budget, the government issued statements specifically allowing the continued use of EIS and SEIS for British film, including the use of Special Purpose Vehicles (SPV) which are typically used in the industry to fund particular projects.
So there are no changes at all?
Not quite. The government statements have seen a tightening of the use of EIS and SEIS for British film projects. The key requirement is that the investor must remain at significant risk, which means that any amounts relating to pre-agreed sales will not be eligible for relief.
In addition, the SPV must be established for the purpose of making long term investment returns, for example through reinvestment of profit in subsequent films.
Will this affect British Film companies?
For some, yes, The days of using EIS/SEIS for a one off film project that has a pre-sale agreement attached may be coming to an end. However, for companies like Hereford it is very much business as usual. Our investment projects include a combination of film, television and books, so an SPV becomes a “brand” or “franchise” for long term, diverse projects for the benefit of the investor. If anything, it may be be a good wake up call for the industry and add a layer of protection to investors. Our setup is already a little different from most, with a team comprising Jonathan Sothcott and Adam Stephen Kelly on the creative side but also myself (a regulated Chartered Tax Adviser), an accountant and a lawyer, whose focus is on the investors and making sure they get the best deal. As such, we welcome any changes that protect the investor.
What plans do Hereford have for 2018?
We have some diverse projects ahead. We are already filming a slate of horror films and will also release the final film in the “We Still Kill” trilogy, “We Still Die The Old Way” next year. We also have a project for a Christmas film, “A Christmas Carole” which is a modern day interpretation of the Dicken’s classic. That is part of the new “Hereford Family” film slate, for which we are using the HMRC SEIS/EIS investment arrangements.
2018 will also see the expansion of Hereford into the US as we look to open an office in LA, with several US based film projects already in the pipeline. It is going to be a busy year!