TT266: Film and Television Production
What do the new “Risk-to-Capital” provisions added to the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) mean for film and television production?
In the recent Finance (No2) bill 2017-19 the Government introduced their heralded “risk-to-capital” condition into SEIS, EIS and VCT legislation (in this note we are looking at the implications for SEIS and EIS investment). This was followed by the publication by HMRC on 4 December of a guidance document to the new provisions.
It is important to note that although the guidance is only in draft form, from 4 December 2017 HMRC will only provide advance assurance if, having taken all factors into consideration, it is reasonable to assume the investment will pass the risk-to-capital condition.
Also, the new condition will apply to shares issued after royal assent to the Finance (No2) bill.
This is an important change that will impact the film and television industry. The aim of the new condition is to target SEIS/ EIS investment to companies that have long term growth potential and are higher risk such that they cannot obtain finance from other sources.
To pass the risk-to-capital test there are two conditions that must be satisfied:-
- The company in which the investment is made must have objectives to grow and develop over the long term; and
- The investment must carry a significant risk that the investor will lose more capital than they gain as a return (including any income tax relief).
Many independent film and television companies produce their films/programmes in special purpose vehicles (SPV’s) which ring fence the commercial risks from other productions. The SPV’s often raise production monies by issuing shares under the SEIS/ EIS schemes. The guidelines make it clear that shares in stand-alone SPV’s will no longer qualify for SEIS/ EIS reliefs as they will not pass the test in “a” above.
The second part of the condition is that the SEIS/ EIS investments must pose a significant risk of loss of capital of an amount greater than the net return. The risk is assessed by considering:-
- The risk of losing the money invested; and
- The net investment return for the SEIS/ EIS investor.
The net investment return includes the amount of upfront income tax relief the investors may be eligible to claim.
Film and television companies sometimes enter into presale agreements or have other methods of ensuring income is received provided the production is completed. They can also be eligible for creative industry tax credits. This means that a film or television company can have a significant amount of assured income which HMRC see as making it a lower risk investment. Whether a film that does not have a completion bond is a lower risk investment is a matter of opinion, but HMRC appear not to distinguish between bonded and unbonded films.
Many film and television companies will have to restructure their business if they wish to carry on raising monies via SEIS and/or EIS. As stated above, from 4 December 2017 the risk-to-capital condition will have to be passed if advance assurance is to be obtained. Great care will have to be taken in drafting applications for advance assurance as there is now no appeal procedure if an application for advance assurance is rejected.
If you would like further general information regarding this new condition then please see Topical Tip TT265 on our website.
If you are raising monies under SEIS or EIS or plan to do so and would like to discuss the impact of these new regulations on your fundraising then please contact your usual Barnes Roffe partner or Paul Hughes on 01322 620 203, email firstname.lastname@example.orgTalk to Barnes Roffe today