EIS backing for films in UK could be hampered by new Treasury consultation

Leading representatives of the creative industries have been lobbying hard for the changes to encourage investment in their sector (reckoned to represent 7% of British GDP) in a post-credit-crunch world.

The UK film sector is now gearing up to take advantage of the EIS changes, which many have been predicting might lead to another mini-boom in British film financing. However, some industry experts are warning that film risks falling foul of the Treasury consultation on “Tax Advantaged Venture Capital Schemes.”

The consultation was launched by the Treasury to improve the focus of EIS and VCT (Venture Capital Trust Schemes) to ensure that the relief was targeted at smaller high-risk companies that might otherwise struggle to raise the finances to sustain their businesses.

Eligibility rules appear to be the sticking point.

One of the key problems is that so many companies operating in the creative industries are micro-businesses employing small numbers of staff. The Treasury has been trying to target relief at what the consultation paper calls “genuine high risk capital investments.”

The Government has made clear its concerns “about investment in companies which exist for a relatively short period of time during which they employ no staff, sub-contract all activities to other – often much larger – entities, and then cease activities.”

One potential solution floated in the consultation document is that companies using the reliefs will need  “to employ 4 or more full time working employees or equivalent, including directors.”

Film industry insiders point out that such a solution would be bound to hamper film-related EIS and VCT funds.

“Although we are not opposed in principle to the sharper targeting of fiscal relief, we are greatly concerned that the commercial reasoning deployed in the Treasury’s consultation document is generally inapplicable to creative businesses, more than 90% of which employ only four people or less,” commented Dr Martin Smith, Special Adviser at Ingenious media. Smith stated that further work was needed from the Treasury “to ensure that the process of introducing new tests on business models in fiscal eligibility rules does not lead to the large majority of creative businesses, including film companies, being effectively freezed out of the frame in any future venture capital tax regime.”

The belief among film financiers is that the Treasury consultation document was not intended as an attack on the creative industries but was written by economists who didn’t fully understand the sector.

The initial consultation period ended earlier this autumn. The Government is expected to introduce draft clauses addressing these issues and concerns in early December.