Will investors join EIS club?

It was supposed to be the new gold rush in British film financing. When the UK government raised the cap on the Enterprise Investment Scheme (EIS) from $3.2m (£2m) to $8m (£5m) earlier this year, many in the UK film industry were anticipating a boom akin to that experienced during the sale and leaseback heyday.

First introduced by the UK government in 1994 — to help smaller UK companies raise money for new business by offering tax relief to investors — use of EIS by the film industry had become widespread after the introduction of the UK Film Tax Relief in 2006 and the end of section 42 and 48 tax relief.

But as 2012 ends, it is apparent the EIS gold rush hasn’t happened. Several schemes that launched amid much fanfare in the spring have conspicuously failed to raise the cash they needed.

“There is very little interest in film EIS from advisers and investors at present,” says Martin Churchill, editor of Tax Efficient Review. As he points out, film as an investment class “has been sullied by the past schemes; investors and advisers are starting to realise that film EIS offerings offer different risk and reward profiles, and the past track record of producers is opaque”.

“Overall, my message to potential investors is to be very cautious about investing in this area,” he declares.

Vexed about tax

“Just because you’re allowed to raise $8m (£5m) doesn’t mean you will,” adds Trademark Films’ Ivan Mactaggart. “Sometimes there is a confusion between what you are permitted to do and what you will actually achieve.”

Another vexed issue is uncertainty about what is and isn’t permitted. Companies planning to launch EIS funds are able to go to HMRC and apply for ‘advance assurance’. If the Revenue is satisfied the scheme falls within the rules, it will give that assurance. The new fund can then be marketed to investors as having received HMRC blessing. However, if HMRC doesn’t receive the full information or the actual scheme ends up diverging from that originally proposed, that approval can be withdrawn. As Christine Corner, a partner in Grant Thornton’s Media and Entertainment group, puts it: “There are a lot of people out there trying to get EIS away but because of the changes in the rules, people are waiting until that consultation is finished.”

In draft legislation introduced a year ago, there was a loosely phrased clause on “disqualifying arrangements”. The industry asked HMRC for further clarification. This autumn’s version of HMRC’s guidelines still left some uncertainty. Some believe the Revenue has been deliberately vague to give itself more flexibility in clamping down on schemes it disapproves of.

“One of the problems with EIS is that we’ve been waiting for these changes of rules and not known what the government is going to be saying. That has meant that people have been paralysed in terms of what they are looking to do,” agrees Future Films CEO Stephen Margolis. Still, others say that guidelines around disqualifying arrangements are now far clearer.

Then there is the Jimmy Carr effect. As the British economy continues to stutter, the government has clamped down hard on tax avoidance. This summer, comedian Carr and some investors in tax-efficient film schemes were named in the media as avoiding tax (The Times kicked off the investigation). Prime Minister David Cameron weighed into the debate, calling tax avoidance “morally wrong” even if it didn’t break the law.

Against such a backdrop, it is little surprise that, as Corner puts it: “People are scared to go into EIS even if it is approved.”

Making a difference

EIS specialist Formosa Films’ co-founder, Neil Thompson, who has used the financial model for films such as Clubbed [pictured] and Twenty8k, agrees. “The EIS market everyone thought would come and take over a big chunk of UK film financing and fill that 35% to 40% gap that people are always looking for hasn’t happened… It’s a lot tougher than we thought it was going to be. The increase to $8m hasn’t made a big difference.”

Thompson argues that the market has become more and more polarised. With the weakening of the DVD market, many lower-budget films are no longer viable in the marketplace. Formosa is therefore ramping up with slightly bigger films, looking to make films in the $6m-$7m bracket. “That’s what we’ve learned from the market. That’s what people are telling us they want,” Thompson says. “What sales agents and distributors want now is films with bigger names that can work theatrically.”

Some argue that EIS is “still growing” as a tool for film financing. Some very respected names are active in the market, among them companies such as Ruby and See Saw (which launched their joint EIS earlier in the year), Matador, The Ingenious Pathé EIS Film Fund and Motion Picture Capital.

Seed EIS (SEIS), launched in April with the extra incentive of a one-year exemption on capital gains tax, has been taken up with an enthusiasm that EIS schemes haven’t always generated. This can be used for film development, but the amounts of money are small. SEIS is subject to a maximum investment of £100,000 per annum for investors and £150,000 in total per company.

EIS expert Dave Morrison, from entertainment accountants Nyman Libson Paul, argues that the EIS market is continuing to mature. After a busy summer, Morrison has seen a real boom in SEIS in particular. “There has been plenty of activity,” he says. SEIS, he points out, is now being used widely not just for development but for the actual production of micro-budget movies.

“You’ve got to give EIS another year,” Morrison says. “There is so much uncertainty about disqualifying arrangements, people spending time putting brochures together — I think the jury is still out a little bit.”

“You will see more activity going forward,” predicts Margolis, who now aims to use EIS “more in the TV space”.

Mactaggart adds: “The change to the EIS rules is great. EIS is fantastic and it’s great for the film and entertainment industries in general. In coming years, providing that the regime stays much as it is, it will continue to be enormously beneficial.”

Bob Benton, president of Bob & Co, argues that the way to win investors over is to be as transparent as possible, to alert them to the possible risk but also to court them assiduously. They must be reassured that EIS and SEIS are government-sanctioned. It also helps if producers can tap into the enthusiasm that investors often have for being part of a movie. “There is no getting away from the fact that you are taking a risk — but make it an enjoyable risk,” he says.

A spread bet

Benton, who is raising EIS funding for an animated adaptation of The Canterville Ghost featuring Stephen Fry, and Bruce Robinson’s adaptation of his own book The Peculiar Memories of Thomas Penman, advises investors to spread their risk. “Go for something that you like and want to be associated with,” he says. “If you’re going to do it in a more serious way, do several. If you want to do it in an investment way, take a basket of ones that interest you individually.”

Benton is also hatching plans for an EIS film festival that will showcase movies made using EIS. The idea is to underline to audiences, investors and regulators alike that decent films are being made — and will continue to be made — through EIS investment. He wants to emphasise that EIS is “good for the British film industry and good for Britain”.