by Liz Brion, partner, and David Adams, senior manager, Grant Thornton
It’s been no secret that the recent changes to the EIS and VCT legislation have had a huge impact on the ability of companies in the film and media sector to access EIS and VCT financing, leading to several high profile EIS media fund closures. Coupled with the ongoing HMRC disputes into film production companies, it’s been tough for the sector, particularly for small independent film production companies seeking to raise external finance.
So why have the recent EIS changes made life so difficult for film and media companies compared with other sectors? Historically, companies would raise money under EIS using special purpose vehicles (SPVs), which would then be used to finance specific film or other sector-focused projects. The SPVs would have a minimal organisational structure, and most of the costs of production would be incurred via contractors and third parties as is the norm for the sector. Once the project was completed, the SPV would be wound up and any profits would be distributed to financiers and investors.
It’s obvious therefore to see how this model struggles to satisfy a key element of the risk-to-capital condition: the need to evidence objectives to grow and develop a trade for the long term.
EIS funds and film and media companies have had to adjust their investment strategy to focus on investing in an underlying business rather than specific projects in order to operate within the new rules. Some of the key areas where they’ve had to adjust include:
- Investment in companies responsible for multiple projects which are seeking to build an IP library which they have produced and own, with profits and capital reinvested back in the company for the future. A pipeline of future projects which support a long-term growth proposition is key.
- EIS money being employed for the growth and development of the business, such as the recruitment of new staff, building a sales team or infrastructure to support future growth. That does not preclude the use of contractors, particularly where this is an industry norm, however HMRC wants evidence of real organisational growth through increased head count, revenues and customers.
- Projects may still be undertaken in SPVs but these must be wholly owned subsidiaries of the EIS investee company which itself retains creative and operational control of both the company and project. While HMRC’s guidance indicates that EIS funds can be used to fund ‘project activity’, in practice we see HMRC taking a different stance and refusing to accept that project costs can be funded with EIS investment.
As a result of the sector adapting, we have seen an increase in the number of advance assurances provided by HMRC. Furthermore, a new BFIbacked EIS fund has been created specifically for investing in the creative industries and is hoping to raise £20 million in the first year alone. All in all, funding prospects for EIS-backed media businesses look much rosier now.
This piece has been published as part of the first Adviser’s Guide to the Enterprise Investment Scheme, to access the full report click here