HMRC updated its Venture Capital Schemes Manual VCM8560 on 15 March 2021.
The update is regarding Example 3 of VCM8560 which presents an example of a qualifying film company.
The new guidance provides further clarity on how the risk-to-capital condition applies to Film and TV production companies that are seeking SEIS/EIS advance assurance approval.
The risk-to-capital condition
The risk-to-capital condition needs to be met for a company to qualify for SEIS/EIS and is defined as having two required components (VCM850+):
(1) The company must have the objective to grow and develop in the long term; and
(2) The investment must carry significant risk that the investor will lose more capital than they gain in return (including tax relief and dividends/distributions).
This condition raised complexity and constrictions on the Film and TV sector companies in the past as the old Example 3 provided assumptions that were not typically applicable to film production companies.
For example, the previous guidance seemed to not allow the investment monies to be largely used for the development of films, but rather the investment should have been used on hiring permanent staff (such as accountants, admin assistants etc.) and for the growth of the company in its own right, unrelated to any specific films. This often resulted in Film and TV companies being rejected for SEIS/EIS advance assurance.
The new guidance is much broader in its approach and it appears that HMRC recognises the restrictions with which it has previously placed on the film industry.
We set out below the two main changes made by HMRC to its guidance, alongside the new and updated guidance, and what this means for Film and TV companies.
Use of investment monies
The majority of the Film and TV productions start-up companies would need investment in order to produce their first films and upon the distribution of these first films, a film production company will start generating revenues and establishing itself within the industry.
The previous HMRC guidance seemed to imply that these Film and TV productions start-up companies will not probably qualify for SEIS and EIS if the investment monies were largely spent for the production of a film or a slate of films. Under the old guidance, a film production company would potentially qualify if the investment was used not on film projects, but on creating a permanent support team that will grow in size over the years and which would not be attached to any specific movie projects.
“The company intends to use some of the investment to move to a larger office and recruit a new team to improve its licensing and IP exploitation activity. The remainder of the investment will be used to set up a wholly-owned subsidiary company, a special purpose vehicle (SPV) through which it will produce the new film, in line with usual industry practice.”
The narrow approach of the previous guidance allowed HMRC the discretion to reject applications that looked to spend a large amount of the SEIS/EIS monies on film production activities. This in turn prevented Film and TV companies from being able to apply for EIS/SEIS successfully, as well as prevented many investors from investing in these start-up film production companies.
The new guidance is broader in its approach and provides that:
“The company intends to use the investment to further develop its slate of films which are at various stages of development, for production costs on its first film and the remainder of the investment will be used on expanding the company.”
This update recognises the need of the Film and TV companies to utilise some of their investment monies on production costs of their first film(s), while they are also working on expanding their retained team. By using some of the investment monies on film development, a film production start-up company will hopefully begin generating revenues and be better placed to create new employment opportunities and continue growing its internal infrastructure.
Short-term contract employees
Due to the fast-paced environment of the performing arts sector, films tend to be made on a project-by-project basis, and revenue, employees and clients fluctuate depending on the project being focussed on.
HMRC produced an example of how the risk-to-capital condition might apply to a film production company. They noted that:
“The investments will be marketed and raised as long-term investments in the company, not in the latest film. The company has made some films and built up a core team of employees who source scripts, develop projects and undertake marketing and promotion from a small office space.”
This old guidance meant applications for advance assurance were often coming back rejected due to the monies raised being used for the development of film projects, rather than the investment to hire permanent staff and grow the company in its own right. HMRC failed to recognise that the majority of the Film and TV companies require short term contracts of employment, especially for actors, visual effects and construction due to the specific nature of each project.
The new update provides that:
“The company will recruit some staff on short term contracts to oversee aspects such as the casting and marketing of certain projects, the company will build on its core team of employees by taking on a head of production and a creative director in the second year of its activity when it will move to a new and larger office”.
This is a clear recognition by HMRC that the Film and TV industry cannot operate on one set of core employees, and in fact, require the ability to subcontract some elements of the film production activities from the beginning of their investment in order to produce any such work that will go on to grow and develop.
How can we help?
Following HMRC’s guidance update, Film and TV companies look to now have much more opportunity to successfully obtain SEIS and EIS advance assurance approval.
Here at The Jonathan Lea Network have breadth and depth of experience with SEIS and EIS matters, including advising on applications made on behalf of Film and TV production companies, and therefore know how to resolve the most common and uncommon issues that may arise during the process.
Having advised many clients on numerous EIS and SEIS applications, we are proud to announce that in 2020 we were successful in receiving approvals from HMRC on 100% of our applications.
If you would like to discuss submitting an EIS/SEIS advance assurance application, or if you would like to know more about the process and our fees, we offer a 20-minute no-cost, no-obligation call as a starting point.
If this is of interest, please get in touch via the firstname.lastname@example.org email address to schedule a call with one of our fee earners.