Richard Watts-Joyce, Chartered Tax Adviser and CFO of leading UK production company Hereford Films, assesses the current HMRC position on film investment.

British film producers have traditionally relied on HMRC tax breaks to attract investors and effectively “prop up” the industry. Investors could receive a 30% tax relief on every £1 they put in under the Enterprise Investment Scheme (EIS) and an extremely generous 50% tax relief under the Seed Enterprise Investment Scheme (SEIS), both with tax-free gains on profits made. It seemed to be a win-win for everyone until HMRC decided to tighten up on the rules in Finance Act 2018.

So why did HMRC change things? The problem in the eyes of HMRC is that EIS was intended to help fund start-up companies with a long-term plan of making profits with a “significant risk” to investors. In many cases, film production companies would apply for EIS relief on a single film on a short-term project basis. The film was pre-sold to a distributor or the fund was asset backed, so there was minimal risk to the investor. Even if the film made a slight loss, the investor could still make a profit courtesy of the HMRC tax relief. In certain cases, the investor profits were effectively funded by HMRC.

From 15th March 2018, when Finance Act 2018 received Royal Assent, new rules came into play. On a positive note, HMRC specifically announced that film production would continue to be a “qualifying activity” for EIS, albeit with some changes. However, these changes would have a significant impact on certain production companies that used asset backed media funds under EIS to gain investors for films that may have already had distribution deals in place. Under the new rules, many EIS media funds no longer fully qualified and vast numbers disappeared or closed down overnight.

So does that mean tax efficient investment in British Film is now over? On the contrary. For independent production companies like Hereford Films, that seek private investors for their own film slates, EIS is very much alive and flourishing. We are pleased to confirm that HMRC has already provided SEIS approval for a number of Hereford film projects following the FA 2018 changes (with some investor’s having already received their tax relief) and has been supportive. The only requirement is to stick to HMRC rules and build that into each slate. In line with the Hereford model, provided there are long-term growth prospects and a genuine plan to make and reinvest profit, EIS applications for film production will continue to gain approval.

What is clear, however, is that an investor will need to be much more careful when choosing which film company to invest in and only seek those with a proven track record of obtaining distribution deals once the film has been completed. For this reason, it may well become more difficult for “new” film production companies to obtain investor funding.

Hereford is a good example of how tax-qualifying investment in British Film is very much business as usual. At a time when HMRC tax relief is at an all-time low, with pension relief even limited to a maximum of £10k of contribution per year for some, it is encouraging to see that EIS continues to allow a very generous HMRC approved tax benefit for investors, regardless of their income levels.

From a tax planning perspective, it continues to be possible to roll capital gains (including those made under Entrepreneurs Relief) into an EIS and defer for a further three years whilst also receiving income tax relief. Tax on investment property gains can also be reduced by 8% and deferred for three years, making EIS a very attractive part of an investment portfolio.

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In summary, there is still no better tax approved planning option under current HMRC rules and investors in British Film can continue to take full advantage alongside the traditional benefits of set visits, attending premieres and obtaining executive produce credits. Further information on a selection of EIS (and SEIS) qualifying film and television projects at Hereford can be found at the following link: www.hereford.film or prospective investors can contact Richard@Hereford.Film for more information on the tax benefits of film investment.