HMRC draft guidance raises doubts over EIS schemes

Weeks after the new UK Enterprise Investment Scheme rules were finally given EU State Aid approval, major doubts have again been raised over whether EIS is going to work as a source of funding for British film.

The problem is the latest Draft Guidance issued by HM Revenue and Customs. Experts are attacking this guidance as “opaque at best” and are complaining that they’ve been given just one week to comment after a previous set of notes were withdrawn.

If the guidelines are implemented in their current form, these experts warn, they could be interpreted in such a way as to disqualify the majority of creative businesses from accessing the relief.

In a strongly worded briefing note prepared in the course of industry discussions, leading UK film financier Ingenious suggests that “HMRC does not seem to understand the film and TV sectors in all their funding complexity and appears to entertain certain prejudices about the nature of abusive behaviour within them which, if not challenged, could severely limit the inflow of funds through the EIS.”

Ingenious suggests bluntly that if If HMRC relies on the draft guidance notes, “the likelihood is that as a result of the uncertainty created, combined with the absolute discretion which HMRC is seeking to give itself, the flow of investment funds into film and TV industry production, not to mention the jobs and tax revenues that flow from it, could be significantly reduced in the next twelve months.”

The British Screen Advisory Council - the independent sector body representing the audiovisual industry - has this week written a letter to HMRC detailing its fears 

“BSAC is concerned that the way in which the guidelines are drafted concerning where ‘disqualifying arrangements’ apply so that advance assurance will not be given (section VCM21035) is far too broad, and is therefore likely to give rise to uncertainty,” the letter reads. “It is crucial that companies seeking to use EIS are able to gain advance assurance in order to be able to provide potential investors with a level of comfort that they will be eligible for tax relief. Creating uncertainty concerning advance assurance will lead to a stymieing of investment activity.”

In the letter, BSAC Chief-Executive Fiona Clarke-Hackston calls for clearer and “more specific guidance” as well as an indication of how “HMRC plans to interpret the guidelines in practice, with detailed examples.”

Commenting on “disqualifying arrangements,” the BSAC boss points out that film producers depend on expert intermediaries to raise capital on their behalf. BSAC also notes that “it is a common practice that the majority of shareholders will not be involved in the day to day management of the business.”

“It is imperative that creative businesses not be excluded from the relief as EIS has been invaluable in providing equity finance to these risk-intensive high growth businesses,” Clarke-Hackston writes. “Lord Smith recommended in his 2011 independent report on film policy, commissioned by DCMS, that Government should ensure that any changes to the EIS rules should not adversely affect the opportunity for independent film production companies to apply’. We would add that it is also essential that film companies are able to claim both the Film Tax Credit and EIS relief, a view expressed by HM Treasury when developing the Tax Credit.” 

Contacted by Screen, HMRC responded with the following statement: “The anti abuse provision in the EIS and VCT legislation is aimed at arrangements which seek to use the schemes for purposes other than intended by government. HMRC has sought and obtained input from key stakeholders including the British Screen Advisory Council. We are currently drafting guidance on this legislation to provide as much clarity as we can, to ensure all customers know how this legislation is likely to apply in practice, before publication.”

HMRC also pointed to recent remarks by Exchequer Secretary David Gauke when introducing the legislation to Parliament.

“The legislation is intended to prevent two types of abuse. First, it will prevent arrangements where the aim is to deliver to investors a tax mitigation product with no other commercial purpose. Secondly, it targets arrangements that aim to provide the benefit of tax advantage investment to entities or projects that do not themselves qualify under the schemes, or whose owners want the benefit of cheap financing without relinquishing equity. These amendments will ensure that the legislation targets the abuses effectively without inadvertently preventing legitimate use of the venture capital schemes,” Gauke commented.

The BSAC letter is available in full on /www.bsac.uk.com