EIS Industry Report 2019/20

24 25 This is not simply an issue for the film and media sector, but it is one that weighs particularly heavily in this area because of the way these companies are often structured - for example, with companies established to deliver one single production or film, with an intention to be wound up on completion of that production. It is worth noting that HMRC has long had a close eye on investments in the film sector - even outside of EIS. In July 2019, the upper tax tribunal ruled against Ingenious Media, backing a 2016 decision that Ingenious Film Partnership was a “tax avoidance scheme”. HMRC had been investigating this partnership since 2010 and this shows that it is not simply EIS, or even the new risk to capital requirements, that are necessarily at issue in the suitability of film and media for tax efficient investments. However, the risk to capital changes do present the media and entertainment industry with an opportunity to change. Anecdotally, some in the sector are glad they no longer need to focus on ‘project finance’ but can instead look at how to grow long-term businesses. In a July 2019 FT Adviser article, BFI deputy chief executive, Ben Roberts, said: “This is the first time we’ve seen a possibility to really support the brilliant emerging production companies we meet, as well as more seasoned film executives who might be looking to recalibrate their business and start something new at a point where film and television in the UK is just exploding.” 9 It is also important to remember that the risk to capital factors that are listed by HMRC aren’t exhaustive, and each one may exist in an EIS scheme in isolation without raising any questions over its appropriateness under the scheme. Where the problem lies is when more than a few of these factors exist. The difficulty for the industry at the moment is that it remains a matter of discretion on HMRC’s part where the line is drawn here. There is also some sympathy for HMRC’s stance, as some point out that the film and media sector has done exceptionally well through EIS over the years and there was a clear need to realign the scheme with its original intention of focusing on higher risk activities. Furthermore, the sector already has Film Tax Relief, which is available at 25% of qualifying film production expenditure, regardless of budget. “During the Patient Capital Review, we spoke to HMRC, which said it liked the film and media sector, just not the structure of those companies,” explained Brownridge. “So HMRC and the industry have spent a lot of time trying to get comfortable with how it works. If the investee company is structured properly, HMRC will be happy.” Brownridge is referring here to short termism associated with individual special purpose vehicles for one production only, designed to limit risk and without growth ambitions. Interestingly, companies receiving investment through the BFI-backed UK Creative Content EIS Fund will still be able to access Film Tax Relief alongside their EIS funding, suggesting that in the right circumstances there is still scope for the film and media sector to prosper from EIS, while still using some of its traditional risk mitigation. “I think the sector will come back in a new guise,” said Brownridge, “although it probably won’t be as big as it once was.” It seems likely that the UK Creative Content EIS Fund will be at the heart of that new market, thanks to the support it receives from the BFI. Adrian Walton, a partner at Smith & Williamson, will be advising fund manager Calculus Capital on the EIS tax structuring of each fund investment, including obtaining EIS advance clearance from HMRC. He told us that the message from HMRC now is clear that any company looking for advance assurance in this area must demonstrate something different from project finance, with almost a presumption against advance assurance for any media EIS application. “When it comes to investments, the fund is going to need to get EIS clearance for each investee company,” he explained. “We do know we are going to have to be robust and demonstrate that the investment monies are not going to be used for project finance, but for the long-term growth and development of the business. Once the fund starts looking at companies to invest in, this will create a lot more information about what are suitable investments.” THE NEXT BIG BING Anyone with pre-school children has probably heard of Bing, one of the top-rated shows on the BBC’s CBeebies channel. What many may be less aware of is that the production company behind the show, Acamar Films, raised over £3 million in 2018 through an EIS offer. In 2019, the company launched a second round of EIS funding, seeking up to £2.5 million to support Acamar’s three main business developments: (i) complete production of new episodes of Bing; (ii) invest in the digital and content division to become a global broadcaster; and (iii) invest in its commercial team to support Bing’s global expansion 11 According to the Investment Memorandum, Acamar Films has obtained advance assurance from HMRC. On first sight, this might appear slightly surprising, given that the investment still appears project-specific (the development of one brand that already has contracts in place: Bing). However, as there is also a focus on Acamar becoming “a global broadcaster”, it may be that HMRC felt there was sufficient risk in this endeavour to grant the assurance. The underlying message from HMRC appears to have been that it wants to support companies that are building a brand. It may be looking for companies following a model similar to that of Hat Trick Productions, for example (which produces a wide range of shows and is perhaps best known for long-running BBC series such as Have I Got News for You and Outnumbered), instead of backing a series of projects. It may be that HMRC sees some similarities in Acamar potentially building a brand, first around Bing but eventually in other areas. Acamar was approved as a knowledge- intensive company by HMRC in February 2019, which enabled it to carry out the EIS fundraising under the older company age limit allowance for knowledge-intensive companies. This also shows that companies can benefit from and qualify for knowledge-intensive status even if they are not a pure technology firm. Market Update / Media & Entertainment Focus Market Update / Media & Entertainment Focus Back in the game An EIS manager that has been prominent in the media and entertainment sector for some time showed there remains life in the market in 2019 with EIS investments in three companies: a media start-up; a data analytics and digital asset management platform for film and TV; and an online screening portal. The investments have received advance assurance from HMRC. The manager’s director of investments told Wealth Manager in April 2019 that it has seen many media companies obtain advance assurance, insisting that “a great many” businesses meet the new risk to capital condition in the media sector. 10