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HMRC shuts the door on UK film funding

 

 

· EIS,film finance,film,Film Production,Tom Petch

This post follows up my post 31 Oct 2017 https://www.tompetch.com/blog/is-eis-for-uk-film-under-threat . Back then I was active in lobbying for a stay of execution for the EIS tax relief UK investors get for putting their hard earned cash into British film – some might argue the only reason an investor would put money in film.

The resulting Finance Bill 2017 (No 2) directed that EIS relief would remain provided the ‘capital was placed at risk’. Who would have thought it wasn’t if it was invested in a film? But, as the growing volume of miss-selling litigation from investors dating from before the 2017 change shows many film funds were not risky enough for the taxman.

On the film production side of the fence the finance bill was good news: no more scams and a new directive requiring proper film companies and in the film industry the ‘suspension of disbelief’ is more than a guiding principle for film it is a way of life for producers so UK producers set to developing new films, polishing scripts, attracting talent, and yes, setting up film companies that they believed would find approval under HMRCs new legislature.

But now, as the UK warms to another year of the yanks are coming; as UK studios, back lots, sound stages and locations fill with the latest Netflix, Amazon, Warners etc production, funded from the US but benefiting from 20% tax relief here in the UK so the ominous thump of letters from HRMC started to hit the doormats of independent UK producers. The letters bear remarkable similarities but say one thing; rejected.

Before we talk of what has gone wrong we briefly discuss does it matter? In these days of Brexit and impending doom why does it matter if a bunch of film people didn’t get tax relief? Well because without it there is no UK film industry; none, rien, nichts, niente, nic. We will join Morocco – a fantastic place to film – but producing no films ourselves, and a successful UK film industry could be so much more of an asset to the UK economy if the investment, and therefore the profit, stayed onshore; the unicorn of many a successive government film policy including supposedly this one.

So the job of raising money for UK films was hard, but HMRC just made it impossible. What is going on and can we blame HMRC? A closer look at the rejection letters which all start – “as you may be aware, the Finance Bill (No 2) 2017 – 19 included a number of changes…” then continue to the “…risk-to-capital” clause show the problem is how HMRC is assessing “risk to capital”. Under the old system first you went to British Council got your British film certificate then gave that to HMRC - so effectively the British Council assessed the validity of the project on the basis of whether it qualified as a British film which was a box ticking exercise. Now HMRC is required to make objective judgements on whether a film company is satisfying the ‘risk to capital’ clause. The problem is HMRC has not been asked to do this before, and the metrics they are using may not be applicable to film companies. HMRC may have shut the door on UK film funding but it may not be their intention, and it certainly isn’t government policy.

Here is my analysis of reasons HMRC has rejected various film company applications, not complete, but extensive enough to get a picture, and my summation of where the problem lies:

From HMRC;

Dear Producer, it appears there is no capital at risk because…:

1. You have an exit strategy. Ok, but surely any investor investing in anything from a tech start up making babysitting apps to widgets that stop supermarket trolley wheels spinning round wants to get their cash out and then some at some point? Yes, so what do I think HMRC is saying here? They think you will shut up shop after you give your investors back their cash, and the risk to capital will not exist as you have no long term interest in using the capital invested to grow your film company. This of course is a subjective not objective assessment and some thoughts on this later (or skip to my point 6.).

2. The company is not planning to grow. This is a theme with HMRC rejection letters. The problem with a film company is it might turn into Working Title 2026, or it might go bust next year, but it will never be Apple. Its revenues will be proportional to each film it makes; some will make money, some will lose money, the ROI can be good, better with EIS tax relief, and sometimes you strike oil but good producers are always going to put in realistic predictions rather than cite “The Kings Speech”.

3. The company is not increasing its customer base. The problem with this metric is it’s a film company; it can’t. There are X number of distributors worldwide, it can increase the size of individual projects, but not the market to which it sells. Admittedly this market is currently growing but presumably at some point even Netflix will stop buying product.

4. The company is not increasing its number of employees. No, because it’s a film company. Every film production company employs a minimum of staff – usually the CEO who is a well know producer or director (like Sam Mendes, Mathew Vaughn) and some other people to help them. They will employ hundreds of freelancers as you can see on the end credits on any film everywhere but Netflix but these people are all responsible for their own tax, not PAYE.

5. The company is not building a meaningful business because it is subcontracting work to third parties. This metric links back to 4: the film company employs minimum permanent staff to develop its films, then when they go into production employs hundreds of third parties to make said film. The value in a film company is its reputation and IP. That’s it. Its ability to make bigger and better product thereby increasing its value is purely creative, not one widget or app will ever leave its workshop because there isn’t one.

6. We don’t believe you are what you say you are (aka you’re a tax scam). Ok fair enough – but here’s my answer which also helps with the other metrics HMRC is using. Pick up the ‘deck’ aka business plan, flick through it and find the ‘about us’, ‘team’, ‘personnel’, ‘superstars’ section with the biographies with nice smiling faces next to them. Tell me who you’ve got? If you’ve only got an accountant, lawyer and former private equity manager (apologies to all those decent professions), if these people have set up a film company you may have a problem. If however on the same page you got a couple of producers and a writer with a track record (look them up on https://www.imdb.com ) then you have a film company. And then maybe give them the benefit of the doubt. Investors are scared of investing in film, some of them have very big tax bills as a result of aforementioned miss-selling. And even if the film company does raise investment it will still have to obtain EIS3s and if HMRC doesn’t like what is sees at any stage then they can act.

Tom Petch is a writer/director. His film 'The Patrol' (2013) was part funded by EIS and filmed in Morocco. He set up the production company Salt Film Ltd in 2000, which is still trading.

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