Another tax scheme for British films

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In recent years, tax-saving schemes involving films have got their promoters into hot water and roasted unfortunate users in the newspapers. So why is the British Film Institute tempting investors with tax relief to invest in British films?

Some might argue that, while there have been some cynical planners attempting to take advantage of loosely-drafted legislation, the finger of blame for this taxing issue might reasonably be pointed at the government of the time.

That is because a political desire to support the industry that brought us Chariots of Fire, and is often seen as a shining and very glamorous beacon for this country, was encouraged with tax breaks that seemed too good to be true – and sometimes actually were.

Stars of stage, screen, politics and especially sport seemed to be prone to the bad publicity, getting themselves embroiled in film-related tax schemes that were ultimately ruled to be outside the law by HMRC.

However, this licence to print money only went so far, and last year a quartet of promoters (thankfully not including anyone practising as an accountant) was jailed, in one case given a suspended sentence, for helping clients to claim tax relief on a non-existent movie about Formula One motor racing.

First rushes

There have been a number of consequences of the high-profile attacks on what were originally worthy attempts to bolster the movie and entertainment industries.

  • It became apparent to all that HMRC would show a great deal of interest in any schemes purportedly or actually attached to films.
  • A number of cases were investigated by HMRC, frequently successfully. When combined with the possibility of ending up vilified in the media, this has persuaded many potential investors that this kind of tax avoidance should be avoided.
  • Various pieces of tax legislation were tightened up in an effort to prevent future abuse.
  • Although this may not be entirely connected, the government introduced and promoted a raft of new provisions designed to offer preferential corporation tax treatment to those that made or created films, high-quality TV series, animations, video games and the like with a significant British element.

This is helpfully been summarised by the British Film Institute (BFI) as follows:

  • Film tax relief (at 25% of qualifying film production expenditure) is available for British qualifying films. Films must either pass the Cultural Test or qualify as an official co-production;
  • Films must be intended for theatrical release;
  • Films, including those made under official co-production treaties, must have a minimum UK core spend requirement of 10%;
  • Tax relief is available on qualifying UK production expenditure on the lower of either: 80% of total core expenditure; or the actual UK core expenditure incurred.
  • There is no cap on the amount which can be claimed.
  • The film production company (FPC) responsible for the film needs to be within the UK corporation tax net.

Sequel

In a further effort to help its members, the BFI has just announced plans to set up an independent commercial fund that is intended to qualify under the Enterprise Investment Scheme (EIS) legislation.

One can only speculate as to the reason for using EIS. Perhaps the BFI has decided that this is bombproof legislation that will not get its members or investors into trouble years down the line.

The basic idea is that smaller British producers will be able to tap into much-needed funding in order to compete with the likes of Amazon and Netflix.

Those investing in films through the fund will be given a chance to hit the jackpot, should they happen upon the next Mary Poppins or The Favourite, while receiving a 30% tax break on up to £1m per annum. At the other end of the scale, the fund will provide something of a cushion if, as seems far more likely, the investment yields little or no return, with the choice between full income tax relief and capital gains tax relief in either case on net losses.

The critical point is that the BFI will ensure its fund does not breach tough new legislation introduced in 2017 to protect against scams. In particular, the key differentiator will be that the fund’s cash will only be given to companies who wish to develop intellectual property, a purpose that is specifically permitted under the current legislation.

Credits

At £20m in Year 1 to support half a dozen ventures, there is no question that the money will prove useful to smaller, start-up companies looking to make their way in the film industry. However, it is a drop in the ocean when one realises that Netflix or Disney will happily spend far more than that on a single movie.

As readers will know, the EIS legislation is fraught with potential dangers, particularly when there are changes in plans or connections between investors and investees. However, in principle, it could be ideal for those wishing to have a flutter in the movie market.

About Philip Fisher

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07th Jun 2019 20:54

sadly the supreme court in my opinion got this wrong , they clearly put ' the public interest' first by making a political decision. If you make a continual loss you may not be able to claim but if you make a guaranteed profit it must be illegal. its nonsense that careful planning should be treated in this way.
i do accept that some of the schemes were close to the bone but not all. And while we are on about it we need to push for more transparency in the judiciary who are resisting attempts to declare interests

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By VIOLA55
10th Jun 2019 10:34

What might be permissible now in terns of tax reliefs for investing in British films may not be later when an investor / entrepreneur tries to claim it. The Government has form on this. Famous Russian proverb: Fool me once, shame on you, fool me twice, shame on me.

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11th Jun 2019 09:30

The attacks on the majority were pure revisionism possibly driven by a Treasury trying to plug holes in it's income.

At it's most basic level a sale and lease back under either Section 42 or 48 were never anything more than a tax deferral, a lumpt sum refund up fron based on the loss and an increasing level of tax as the income stream matures. From day one HMRC was guarnteed to get more than its money back (save inflation) and with the increase in tax rate was truly in the money.

To disallow the relief but continue to apply the tax on income is pernicious.

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