EIS Industry Report 2019/20

26 27 Film and media in the new EIS world HMRC has been concerned for some considerable time about EIS investment going into companies where it considered artificial arrangements had been put in place regarding the relevant trading activities and/or it deemed there was no real economic risk to the EIS investors. Such investment offerings, which were prevalent in the market, were viewed by HMRC as “tax-structured capital preservation products” and were marketed principally to the IFA community for their clients to invest in large quantities. It was considered that this was not within the spirit of EIS and that significant tax benefits were being enjoyed by those investing in artificial companies where there was no real economic risk. HMRC’s initial focus in this respect was the media and entertainment industry where it perceived there to be particular abuse. Unfortunately, ‘film’ and ‘television’ have become ‘dirty’ words when it comes to EIS investment ever since, saddled with enhanced scrutiny from HMRC. HMRC first tried to address this in 2012 with the introduction of the ‘disqualifying arrangements’ legislation and followed up with the risk to capital condition. So what does this mean today? The risk to capital condition means the necessary legislation is already in place to ensure there is evidence of genuine economic risk for the investor but it goes a stage further in that a company must also demonstrate that it has objectives to grow and develop its trade in the long term. The upshot of this is that HMRC is now typically not allowing EIS investment for what it deems ‘project finance’ where Special Purpose Vehicles (SPVs) are used for each project, and this is particularly relevant to the media and entertainment industry. HMRC will no longer grant EIS advance assurance where, for example, a film or television production company wishes to produce a single film or programme, or even an existing film or television production company wishing to produce and distribute a slate of new films/programmes. For such companies, HMRC now wants to see evidence (primarily by submitting cash flow forecasts) that any EIS monies will be used for the long-term growth and development of the business, e.g., hiring more staff, increased rent on bigger premises, increased marketing and promotional spend, etc, and not just to fund projects. Unfortunately, from what we have seen recently, the default position for HMRC is typically to refuse to grant EIS advance assurance for such companies unless there is strong evidence that the growth and development condition would be satisfied. We believe this is a worrying development and particularly punitive to existing media companies whose core activity is the production of new distributable material on defined projects, e.g., in film and television. Such activities inherently carry a significant amount of commercial risk and it seems unfair that such companies, conducting bona fide commercial activities on an arm’s length basis, should be excluded from raising EIS investment merely because they are active in the film or television sector. Effectively, they are deemed guilty by association in respect of the past misdemeanours of others. Adrian Walton Partner, Business Tax, Smith & Williamson CONSIDERATIONS FOR INVESTMENT Note: This article applies equally to SEIS and VCT investments where the same legislation is in place and HMRC typically adopts a similar approach. Disclaimer: By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. The tax treatment depends on the individual circumstances of each client and may be subject to change in future. Clients should always seek appropriate tax advice from their financial adviser before committing funds for investment. Details correct at time of writing. Smith & Williamson LLP: Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.