The Enterprise Investment Scheme, an HMRC programme which offers qualifying investors a 30% rebate against their income tax (as well as other benefits) has been a staple of UK film finance for twenty years. In light of Screen International’s recent report that EIS tax relief on UK film production has been effectively scrapped, we spoke to Hereford Films CEO Jonathan Sothcott, an independent producer with 40 films to his name, who has raised over $20 million of film finance over the last decade.
Jonathan what is your take on the changes to EIS funding, their causes and the repercussions this will have on the British film industry?
Last year HMRC changed the criteria to make film companies qualify for EIS tax relief for investors. In the past the money raised could be used to fund film production, so long as there were no pre-sales in place. Unfortunately, certain producers were exploiting this by effectively agreeing pre-sales of 50% of the film’s budget on the quiet, then offering this, the 20% UK Film Producers’ Tax Credit and and the 30% tax break to investors as a tax free fait accompli. So HMRC introduced a new ‘Risk to Capital’ condition, where you have to prove definitively that the investor capital is actively at risk. I think this is fair enough. However, the bigger change is that they will no longer allow EIS funding to be used on film production at all – the money can only be used to grown the production business in the long term through investment in technology and human resources. This is a nice idea but it is neither sexy for investors or particularly practical in a perpetually changeable business. In order to attract EIS investment one has to submit a business plan and various supporting documents to HMRC’s Advance Assurance department. This is in order to get a letter from them saying that your company will qualify for EIS relief. No shrewd investor will put money into an EIS of any kind without the Advance Assurance. I know of producers who are still waiting to hear back after 10 months and are effectively stuck in a holding pattern of being unable to raise finance because of an effectively broken system. As to the repercussions I think it will be pretty disastrous and lower budget independent films which are not funded with soft money will have a 60-70% drop off in production. I think it could significantly cripple a large sector of the industry.
What did you think of the Screen International article?
It was great – finally someone is talking about this dreadful problem at the heart of the film industry – I’m just amazed it took so long to be the focus of a significant news piece. I think it was deliberately non-alarmist but I expect there to be a lot more articles about this and they will be less optimistic as more and more people can’t get their films together.
So who will this effect?
I think it will affect the whole industry – Ingenious have already cancelled all of their media EIS which is a significant statement. It will affect everyone from the big companies like them through to the first time producers who painstakingly raise £1 million to make a film with theatrical ambitions.
Will it benefit anyone?
I would imagine it would help people in the animation and perhaps virtual reality sectors but I really can’t see any bona fide positive in this for film production companies.
Will it affect you?
No, we have actually never done EIS funding, just some Seed EIS in the past, but that’s capped at £150,000 per company.
What would you like to see happen next?
HMRC need to provide an alternative mechanism to incentivise investment in production finance. They cannot pass the buck to soft money eg the BFI as they only fund a certain type of movie and we need to be a broad church industry, not just make the films that public bodies think we should be making. If they wanted to truly help Britain become the most attractive place in Europe to make films they could up the tax credit to 30%, but that in itself is very different from encouraging inward investment into our domestic industry. Hopefully the Government (whoever it is by then!) will address this in the budget later in the year.