TAX RELIEF FOR FILM INVESTMENT

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TAX RELIEF FOR FILM INVESTMENT

I was reading an article on Accounting Web the other day.  It started:

“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”.

Or perhaps it should be pointed at greedy investors.

1.      In 1992, as a result of lobbying by Harold Wilson introduced tax relief for investment in British Films.  When we joined the EEC, we had to extend this to EEC films as well.

2.      This worked well.

3.      Then promoters turned the relief into avoidance.  They arranged non-recourse borrowing (i.e. repayable only out of proceeds of sale of the film rights) for, normally, three times the investment so that the investor got back in tax relief most of the investment he had made in the film.  HMRC were not amused – but tolerated the gearing provided that the investment was limited to a period of 15 years.  The scheme worked by purchasing a film and leasing it to a distributor.  It deferred tax.  In return for the up-front tax relief, the investor obtained taxable rental receipts over the next 15 years (but he did not actually receive the cash as it was used to repay the loan; he only paid tax on it).

4.      Then some promoters amended their schemes to terminate the contract early so the taxpayer ceased to be entitled to the rentals (and the tax bill).  HMRC became very unhappy.

5.      In 2006, the government retargeted the relief.  Instead of giving tax relief to the investor, it gave it to the film production company.  That should have been RIP film schemes.  Films are very risky investments.  Investors are generally risk averse.  Accordingly if the new style film relief was to compensate the production company for taking the risk, there was no room for passive investors.

6.      But that would have put a lot of promoters out of business.  So they sought to find a way to enable investors to benefit from the new relief in defiance of the government’s intent to move it from the investor to the coalface.  The result was the film production partnership.  The partners were the investor (but as the partnership was a limited liability partnership they were insulated from risk beyond the amount of their investment).  The partnership bought a virtually completed film and leased it to a distributor.  This largely eliminated the risk on the investment itself.  Old style gearing with non-recourse borrowing also continued to cover any residual risk.

7.      HMRC took the view that the essence of a trade is risk, and as the partnership was insulated against risk activities, it did not qualify as film production.  To date, the Courts and Tribunals have agreed with HMRC.

8.      The result is that the investor is left with no tax relief but the continuing right to income over the next 15 years (or whatever) on which he will be taxable, but will not see the money as it is used to repay the loan.

9.      Investors are suing the scheme promoters.  Some high-profile investors claim to have thought that they were doing a public good by investing in the British film industry.  As far as I am aware, no-one has asked them, “What investment”?  It is not readily apparent how putting £100,000 into a tax scheme to generate £100,000 of tax relief is an investment, let alone an investment that benefits the British film industry.

10.  Ever since EIS was introduced in 1994, some people have set up film production companies and raised EIS finance.  As the film tax relief is obtained by the production company, not by the investor, such companies comply with the government’s policy to aim to assist the film industry.

11.  Sadly, most such companies have gone bust!

12.  The BFI seems to be wanting to attract EIS investment which it will co-invest into film productions via a new company.  This seems a very sensible move.  It is a world away from the aggressive tax avoidance devices described at 6 to 9 above.

The answer to the question posed by the author of the Accounting Web article is accordingly that the BFI is tempting investors not with film tax relief, but with the general small business EIS relief in order to help make British Films.  It has no interest in insulating rich investors from tax.

ROBERT MAAS