Hike in U.K. tax incentive targets film finance
LONDON — Films are about to get a boost in Britain — and perhaps Hollywood as well — as the U.K. considers changes in the tax structure that would double the amount individual backers can write off, and increase the coin that companies can invest in tax-free projects by 150%.
The modifications will be part of the revisions to the Enterprise Investment Scheme, which provides tax breaks to boost economic activity for smaller businesses in the U.K., with qualifying investors receiving an upfront tax break.
“The interesting thing about EIS is that you no longer have to be carrying on your activity in the U.K.,” says Olswang tax lawyer Cliona Kirby. “Now, you can trade internationally. So you can actually fund an American film with British money and make your movie in the U.S. or wherever you like, and still access the incentive.”
Pending approval from the European Union, the annual amount companies will be eligible to invest in an EIS scheme is set to increase from £2 million ($3.2 million) to £5 million ($7.9 million), while the amount an individual will be able to invest will double from $792,977 to $1.59 million.
“For non-U.K. producers looking to come and shoot in the country, this raise means that they may be able to access more private equity in the U.K.,” says Anthony Pins, corporate ventures partner at media specialist accountant Nyman Libson Paul.
Addtionally, qualifying companies can now be much bigger than before: the number of employees a qualifying company can have has been upped from 50 to 250 workers and assets before investment have risen from $11.1 million to $23.8 million, or $25.4 million post investment (previously $12.7 million).
Last year, income tax relief an individual could claim on EIS investments rose from 20% to 30%, a move welcomed by the industry.
On the surface, being able to mitigate tax against larger sums of money looks like an attractive option for a private investor, but since EIS investment is not limited to the film sector, it’s hard to assess the full weight of the changes (which was expected to pass April 6 but now sources suggest EU approval won’t take place until late summer.)
“It’s quite attractive for investors, but in this tough economic climate, it’s difficult to predict what kind of impact it will have on the business,” says Formosa Films’ Neil Thompson, whose company has a history in producing EIS-funded pics, such as recent thriller “Twenty8K,” for which it raised $2.5 million.
“A lot of big financing companies that used to be around could start to enter the fray again, and we’ll see a lot of EIS funds and slates set up,” Thompson says. “It could be good for the industry in that there might be a lot more places to go for your money.”
The film biz appears to be a clear target of the changes. In order to qualify for an exemption from capital gains when an investment is sold, EIS players must hold onto their stake for at least three years, which many say works well in the biz, where pics tend to have a long gestation period.
“This is a clear endorsement from the U.K. government that the film industry is important and is punching above its weight,” says Prescience’s Paul Brett, whose outfit put money into pics such as “The King’s Speech” and “The Guard.” “I think we’ll see a lot of change in the future, as EIS is a very effective vehicle for raising money for film.”
Brett cites the recent boom of mid-budgeted pics such as “King’s Speech” and “The Best Exotic Marigold Hotel” as being reflective of a period of sustained growth in the U.K. film biz, and adds that raising the cap for EIS investment recognizes the potential of quality films as an important place to invest in the current climate.
“There have been far too many micro-budget films,” Brett says. “But with the success of bigger, smarter budgeted films, the government has realized that these things are not a flash in the pan anymore.”
Pins calls the increase in tax breaks a game-changer.
“A different sort of film could be made through EIS,” says Pins. “Films with higher budgets will now have the opportunity to raise more through EIS.”
Pins notes that while the predicted $15.9 million cap was extinguished at the 2012 budget announcement, it still means that bigger budget pics that are looking to fund part of their budget via EIS, will still be able to do so.
Kirby adds: “I think there will be a number of U.S. investors looking to raise money via EIS schemes and there will still be a number of people who want to use EIS to mitigate tax liability.”
Eligibility criteria seem to be quite straightforward for investors, with sources saying the government is trying to make it as easy as possible to enter the arena.
An investor simply has to be a U.K. taxpayer, and can’t own more than 30% voting control of the company in which he or she is investing. However, U.K. pics aren’t necessarily the scheme’s sole benefactors — a Hollywood film can tap the funds, too.
Olswang’s Libby Savill points out that there are still big issues when it comes to structuring and raising finance via EIS.
“It’s all very well to increase raise the cap from £2 million, but you still have to find investors willing to take a risk on the film being exploited,” she says. “And there is not necessarily a wall of money out there (for) film production.”
Pins questions what will happen if a raft of shingles seek investments of $7.9 million rather than $3.2 million — will there be enough cash to go around?
“I don’t think anyone knows the answer to what (the tax changes will mean),” he says. “And I don’t think we’ll know for another two or three years.”
What: The U.K. is set to increase its investment tax writeoff.
The takeaway: Producers looking to shoot in Britain may be able to access more private equity.