EIS Industry Report 2018/19

34 35 Alex Buckley, a member of the HMRC policy team, said at a HM Treasury Q&A session in May: “One of the biggest sticking points you have with project-based businesses is - is the money being raised for projects or is it being raised for the business itself? Is this company being set up for future growth and development? If it delivers that trade by a project, that’s ok, but what you’ve mostly been seeing is companies which are used effectively to deliver projects, there’s no growth attached to the company itself. “In terms of script development, what we’re looking at is the funding of the production company, so not the funding of the script itself. Is it a company that’s set up to produce these and go on producing these and create its own name, displace others in the market, and set itself up as a business going forward? Or is it a vehicle to deliver projects for which other established names are involved, but only in their own name rather than the underlying EIS company?” 32 Film projects are struggling to qualify Jonathan Lea, senior corporate solicitor and managing director at The Jonathan Lea Network, said: “Recent applications we have made to HMRC appear to confirm that since the risk-to-capital condition came into force, film and TV companies are finding it very hard to qualify for SEIS and EIS. “Particular care needs to be made when applying for Advance Assurance to show how the HMRC guidelines are complied with and the company is not operating on a ‘project basis’. This starts with the company’s business plan which should be written from the outset.” HMRC updated its guidance to show an example of how the risk-to-capital condition might apply to a film production company. 33 (See overleaf.) "We previously offered a number of EIS investments with a range of risk and return profiles, through to 100% risk. Following the Patient Capital Review, we will simply be focusing on our 100% risk strategies. " — MATT DICKENS, INGENIOUS Market Update / Under the Hood of EIS Tech Market Update / Under the Hood of EIS Tech The long road to exit Although EIS investments are eligible for 30% income tax relief and CGT exemption after holding the investment for three years, advisers and investors should consider how long it may take to exit an investment. With the shift to growth capital, and especially in tech investments, the time to exit can be considerably longer than the three-year minimum holding period. The most common target term to exit for tech offers is five years, and the longest target exit time is eight years. Longer time scales should be expected, especially when looking at early stage tech investments. Is EIS for film still possible? Although there is clearly a buzz around tech investments in the EIS space, we should not disregard the other sectors that are benefiting from this Venture Capital Scheme. Media and Entertainment is still a significant focus for EIS managers, with 13 open offers still focusing on this area. These investments focus on areas, such as animation, film, tv, music, and video games. However, while EIS relief for film has not been explicitly removed, the new rules have significantly reduced the flexibility for this industry. Companies which are founded in order to produce just one film may not qualify for SEIS and EIS. This is because they are set up with a short-term goal, and therefore are not perceived as providing a continuing stream of taxable income. Compare that to a technology company, that will use EIS investment to hire permanent staff or invest in R&D to provide a long-term benefit, and you can see where HMRC is coming from. 30 The aim of the SEIS and EIS schemes is to facilitate the long term development of businesses (i.e. patient capital). In order to qualify, a film production company will need to satisfy HMRC that it aims to create an established brand with ongoing revenue streams. 31 Film production companies that receive EIS funding tend to spread the monies raised over several films which are all in early development. Mode Median Min Max TARGET MINIMUM TERM TO EXIT (TECH EIS) Average 4.4 years 5 years 3 years 4 years 8 years