Film industry finance guide 2013Document Transcript
Grant Thornton’s Media and Entertainment team
is delighted to bring you our latest Film industry
finance guide. This booklet provides an overview
of some of the key financial issues relevant to the
UK film industry and how our team can help you
achieve your strategic objectives.
As a leading advisor, we’re proud to work with
dynamic companies in the film production and
distribution sector, providing a full range of
integrated compliance and advisory services to
enable our clients to be prepared for the future and
unlock their potential for growth.
The Enterprise Investment Scheme
Putting you in the picture – UK film tax credits
It’s easier to make decisions when you know
what your values are
About Grant Thornton
We hope you find this guide useful. If you would like further
information on how we can assist you, please contact one of
our sector specialists:
T +44 (0)20 7728 3171
T +44 (0)20 7728 2343
T +44 (0)20 7728 2326
T +44 (0)20 7728 2644
T +44 (0)20 7728 2868
Senior Manager, Tax
T +44 (0)20 7728 2155
The Enterprise Investment Scheme (EIS)
can offer generous income tax and
capital gains tax reliefs to investors.
Over the past few years there has been an
increasing use of EIS, and as of last year,
Seed Enterprise Investment Scheme (SEIS),
to provide financing for film. This involves
raising equity finance from private
individuals; we have summarised the key
points and frequently asked questions in
What are the tax benefits of an EIS
30% income tax relief
For investments made after 5 April 2011, relief is
given at 30% of the sum invested subject to there
being sufficient tax liability to absorb the relief. In
previous years, relief was available at 20%. This
relief takes the form of a credit against an
individual’s personal tax liability.
No capital gains tax on disposal
If a qualifying individual holds eligible shares for
more than three years from the date of issue (or
from the date of commencement of trading, if
later), then any capital gain on the disposal of the
EIS shares after that period will be tax-free,
subject to any withdrawal of the relief as
The reliefs are available to ‘qualifying
individuals’ who subscribe for ‘eligible shares’ in
‘qualifying companies’ undertaking ‘a qualifying
Further, if a loss arises on the disposal of EIS
shares then, subject to adjustment for the income
tax relief previously claimed, that loss will be
available to the investor. This relief can either be
claimed as a capital loss or as a loss for income tax
Deferral of tax on other capital gains
CGT on a gain from the disposal of any asset can
be deferred against an EIS share subscription. The
tax on any gain rolled over in this way only
becomes due on disposal of the EIS shares or if
the individual ceases to be UK resident within
three years of issue of the shares. There is no
requirement to obtain income tax relief to qualify
for capital gains tax deferral and the amount of
the gain which can be deferred is unlimited. To
qualify for deferral relief the EIS investment must
be made during the period commencing one year
before the realisation of the gain and ending three
Where a deferred gain becomes chargeable on
the disposal of EIS shares, it will be subject to the
CGT rate in force at that time (and not at the
time the original disposal was made). Therefore,
any disposals made after 22 June 2010 will be
subject to the flat rate of CGT of 28% or 18%,
depending upon whether the gain falls within the
individual’s unused basic rate band.
What are the investment limits?
Individuals may invest any amount in EIS shares,
but only the first £1 million invested in any one tax
year will qualify for income tax relief and the
Capital Gains Tax (CGT) exemption. Thus the
maximum tax credit available to an individual in
2013/14 is £300,000 (£1 million x 30%). For these
purposes, a husband and wife are treated separately.
Subject to the overriding investment limit in
any one tax year, any share subscriptions in the
current year can be treated as being made in the
previous year for the purpose of EIS income tax
relief. For example, an EIS investment made on
1 May 2013 may be ‘carried back’ and income tax
relief claimed in the tax year 2012/2013.
Who are ‘qualifying individuals’?
This is any individual who has subscribed for
shares wholly in cash in the company. However,
an individual will not qualify if they are
connected with that company at any time within
the two years prior to the share issue and the
three years after the share issue date (or the date
on which trading commences, if later). This
‘connection’ can be by way of employment,
partnership, or by being an associate (eg a spouse
or child; but not a brother or sister) of another
connected person. An individual will also be
connected if they own or are entitled to acquire,
directly or indirectly, more than 30% of the
issued ordinary share capital, issued share capital
or voting power of the company or a subsidiary.
These connection conditions do not apply to the
CGT deferral mentioned below.
What are ‘eligible shares’?
Eligible shares are any new ordinary shares issued
in the EIS company for bona fide commercial
reasons, which, throughout the period of three
years beginning with the date on which they are
issued, carry no preferential rights to dividends
(other than a fixed dividend in some cases) or
assets on liquidation of the company. The shares
must be fully paid up at the time of issue and they
cannot be redeemable.
What are ‘qualifying companies’?
A qualifying company need not be UK resident.
However, from 6 April 2011, the company
issuing the shares must have a ‘permanent
establishment’ (PE) in the UK. Different rules
apply for investments made up to and including 5
April 2011. These rules were changed in order to
ensure compliance with EU state aid rules.
Qualifying companies must be unquoted and
the funds raised must be used by the issuing
company or by a qualifying 90% subsidiary in
carrying out qualifying business activities.
Companies listed on the Alternative Investment
Market are treated as unquoted for these
Where a parent company is raising funds, it
must only have 51% subsidiaries to be a
qualifying company, with the exception of
property management subsidiaries which must be
held 90%. However, the funds can only be used
by qualifying 90% subsidiaries.
A qualifying company must have fewer than
250 employees and cannot have raised more than
£5 million from the EIS or Venture Capital Trusts
(VCT) regimes in the last year. In addition, the
gross assets of a standalone company, or
aggregate gross assets of a group, must not exceed
£15 million prior to investment, nor £16 million
A new condition was introduced, with effect
from 6 April 2011, excluding companies from
qualifying where they are in difficulty. The
‘financial health requirement’ will disqualify a
company if it would generally be regarded as
being in difficulty as defined in the EC’s official
journal, ‘Community Guidelines on State Aid for
Rescuing and Restructuring Firms in Difficulty’.
From 6 April 2012 a ‘disqualifying
arrangements’ test will disqualify activities where
companies are set up for the purpose of accessing
the relief, with little or no commercial purpose
other than tax avoidance.
What is a UK ‘PE’?
As stated above, from 6 April 2011, a qualifying
EIS company must have a ‘permanent
establishment’ in the UK. Broadly, a UK PE is
defined as a fixed place of business, such as a
place of management, a branch, office, factory or
workshop, through which the business is wholly
or partly carried on. However, this requirement
will not be met if the business activities carried on
in the UK are merely preparatory or auxiliary to
a non-UK based trade.
Alternatively, the definition also extends to a
company for whom an acting agent exercises their
authority in the UK on a regular basis.
What is a ‘qualifying business activity’?
Broadly speaking, a qualifying business activity
means the carrying on of a qualifying trade
during the three years from the date the shares are
issued or, if later, three years from the date the
company commenced trading. Any research and
development undertaken with the intention of
starting a trade is also treated as a qualifying
Qualifying trades encompass all forms of
trading except for certain prohibited businesses
including dealing in land, financial activities,
legal/accountancy services, property backed
activities, shipbuilding, as well as coal and steel
What if I sell the shares early?
A disposal of EIS shares within three years of
issue could result in a restriction of the EIS
reliefs previously given and, if so, the relief will
be clawed back. In addition, the CGT
exemption may also be lost, however, any capital
loss arising as a result may be set against either
income or capital gains in the same or the
preceding tax year.
Can I oversee my investment?
Yes, to a certain extent. The EIS rules allow
investors to become directors of companies into
which they have invested, so long as they become
directors after the issue of the shares. Such a
position may be executive in nature and the
individual may be remunerated accordingly.
Can the tax relief be taken away?
Yes. The main conditions for retaining relief are:
• The money raised by the issue of EIS shares
must be wholly applied in qualifying business
activities and must be applied in that business
within two years of the share issue, or where it
is a new trade, within two years of
commencing the trade
• The company must not cease to be a
qualifying company during the three year
period from the date of issue of the shares or
the start of trading, if later
• There must be no arrangements at the start of
the relevant period for the company to
become quoted during the three year period
• Shares must be fully paid up when issued
• The company must not be controlled by
another company or companies, although for
shares issued on or after 21 March 2000 this
should not prevent financial institutions
having a stake in the form of preference shares
as the test is based on the number of shares or
voting power. This restriction applies to any
arrangements for another company to acquire
control at some time in the future (such as
• If the individual investor becomes connected
with the company during the relevant period,
relief is withdrawn
• Problems may arise and cause a restriction or
withdrawal of the EIS relief if companies
redeem or repurchase non-EIS shares during
the period commencing two years before and
ending three years after an EIS issue
• Investors who receive any value from the
company within a period commencing two
years prior to the issue of the EIS shares and
three years after may find their relief being
adjusted or withdrawn. This restriction does
not apply to normal salaries for new directors,
nor does it apply to interest given at a
commercial rate on monies lent by the
investor, dividends representing a normal
return on investment or other normal
commercial arrangements between the
investor and the company
Seed Enterprise Investment Scheme (SEIS)
A new relief, SEIS, was introduced from 6 April
2012. It is similar to EIS, but providing for 50%
initial income tax relief on share investment, as
well as reduced capital gains tax on reinvested
gains, and ultimately an exemption from capital
gains tax on a disposal of the SEIS shares after
The investment limits are considerably lower
than for EIS;
• the investor limits is £100,000 per annum
• the company cannot raise more than £150,000
• at the time of the share issue the company’s
asset’s must be less than £200,000 and have
fewer than 25 employees.
Who should I contact?
This information is intended only as a broad
outline of the schemes. Investment in EIS or SEIS
is high risk and both investors and issuers should
seek professional advice before undertaking such
investments. If you need guidance on this subject
or other matters please contact:
T +44 (0)20 7728 2326
T +44 (0)20 7728 2155
Putting you in the picture –
UK film tax credits
What is a film tax credit?
For many years, UK governments have sought to
encourage the film industry with tax incentives. In
2007 an entirely new tax regime was introduced for
film production companies (FPCs). This was to
replace the previous tax reliefs for film costs, which
had been seen as placing too much emphasis on tax
breaks for individuals at the cost of real investment
in UK films.
The tax rules allow FPCs to claim an enhanced
tax relief on qualifying film production costs,
depending on the size of the film. This additional
relief can then be ‘surrendered’ in exchange for a
payment, the amount again depending on the size of
the film, for up to 25% of the amount surrendered.
The relief will continue until at least the end of
Who qualifies for the film tax credit?
Only FPCs qualify (and not, for example,
partnerships). FPCs are companies that are
responsible for pre-production, principal
photography, post-production and delivery of the
completed film. A FPC must be actively engaged in
production planning and decision making during
these periods, as well as directly negotiating,
contracting and paying for rights, goods and services
in relation to the film. It does not have to have been
involved in development of the film before
Note there can only be one FPC in respect of
each film; if more than one company could qualify,
the company that is most directly engaged in the
activities above is the FPC. In the case of qualifying
co-productions (see below) a company that makes
an effective creative, technical and artistic
contribution to the film is the FPC.
What films qualify for the film tax credit?
To qualify for film tax credits, the film must be
intended for theatrical release at a paying public
commercial cinema with a significant proportion
(HM Revenue & Customs will accept at least 5%
as meeting this test) of the intended earnings from
the film to be obtained from the exhibition. It is
the intention that is important; the film does not
subsequently need to have a theatrical release. This
condition must be met at the end of each
accounting period of film making activities by the
FPC. Once the condition is failed, it cannot be
qualifying in that or any later period. The film
must also be certified by the Secretary of State for
Culture, Media and Sport as a British film.
Certification of films is currently administered by
the British Film Institute.
In addition, at least 25% of the core expenditure
(see below) must be incurred in the UK. In the case
of qualifying co-productions this condition must be
met by the co-producers.
the film. Income for this purpose is any receipts
from the making or exploitation of the film treated
as earned at the end of the period.
Costs are those in respect of film making
activities in connection with the film, or with a view
to exploiting the film. No deduction is available in
respect of expenditure that would not be allowed for
tax purposes (eg entertaining), but expenditure is
not regarded as being of a capital nature because it is
creating an asset (the film).
How are FPCs taxed?
The FPC’s activities in respect of a film are treated
separately from any other activity for tax purposes,
commencing at pre-production or, if earlier, when
income from the film is received. The notes below
look at the position of one film only.
For each period of account, the FPC brings in as
income a proportion of the estimated total income
from the film, less the costs of the film incurred (and
represented in work done) to date. The proportion
of income brought in is the costs of the film incurred
to date as a proportion of the estimated total costs of
When is expenditure incurred?
To be a cost of an accounting period, it must have
been incurred in the period. Generally this will be
when it is reflected in work in progress. However the
following should be noted:
• Advance payments are only recognised when the
work is carried out
• Deferred payments are recognised when the
work is recognised in the state of completion of
• There must have been an unconditional
obligation to pay
• If payment is linked to income from the film, the
cost is only recognised when the income is earned
• Pre-trading expenditure is recognised when the
and distribution costs, or financing costs. Where
costs relate to both core and non-core expenditure,
an apportionment on an appropriate basis will be
necessary, an example being writer’s fees.
The additional deduction is calculated as the
applicable rate multiplied by the lower of:
• UK expenditure within the core expenditure, and
• 80% of core expenditure.
For limited budget films (see below), the applicable
rate is 100%. For other films, the applicable rate is
80%. As the calculation is cumulative for each
accounting period, additional deductions given in
previous periods are deducted.
What counts as UK expenditure?
No claim can be made in respect of any amount
which has not been paid within four months of the
end of the accounting period.
This is expenditure on goods or services which are
used or consumed in the UK. For example a US
director, paid in dollars by the FPC for the time he is
filming in the UK, is regarded as UK expenditure.
What costs qualify for an additional
Film production company’s
Some of the FPC’s expenditure will qualify for an
additional tax deduction. The amount depends on
the FPC’s ‘core expenditure’. Core expenditure is
film making expenditure on pre-production,
principal photography and post-production. It does
not include development expenditure, marketing
From the film income and costs calculated as above,
the FPC can set off the additional deduction. If this
produces a loss for the accounting period, this can be
surrendered for a film tax credit. However the
surrendered amount cannot exceed the available core
expenditure for the period (effectively capping the
surrender to the additional deduction for the period
for limited budget films).
How much tax credit is payable?
For limited budget films, the payable credit rate is
25% of the amount surrendered, for other films it is
20%. A limited budget film is a film whose total core
expenditure is £20 million or less.
Claims for film tax credits
The FPC makes the claim as part of its corporation
tax return and computation. Interim claims can be
made during the film production period, but claims
must be accompanied by a certified copy of the
certification as a British film (either interim or final
as appropriate). Claims must also state the planned
UK core expenditure and confirm that the 25%
condition regarding this will be met. The tax return
for the film completion period must state the final
amount of core expenditure that is UK
For film tax purposes a qualifying co-production is a
film that falls to be treated as a national film in the
UK as a result of the UK’s official co-production
agreements or the European Convention on
The choice of the FPC’s accounting period is
important as it will determine the period of
expenditure which will form the FPC’s claim for film
tax credits. Terminating accounting periods early will
speed up claims, but has to be balanced against how
much expenditure will then fall into the next
accounting period. The tax rules regarding the timing
of expenditure referred to above will also be
important to consider. The Companies Act rules
regarding changing accounting dates should be borne
in mind.Particular care should be taken with
co-productions. For international films, other
countries have their own film tax incentives and
where expenditure is incurred and by whom will be
important. Note that if the co-production is not a
qualifying co-production, there could be issues about
whether the UK co-producer is a qualifying FPC.
The FPC should ensure that its PAYE/NIC
obligations and payments are up to date and that it
has complied with the ‘foreign entertainers’
withholding tax obligations, as the tax legislation
allows for the set off of amounts outstanding for
payment periods ending in the accounting period of
the film tax credit claim. It will also delay repayment
of the film tax credit. Anti-avoidance rules prevent
artificially inflated claims for additional deductions
or film tax credits.
Taxation of film production companies
While film tax credits are the most important part
of the tax regime for FPCs, they are not the only
part. As indicated above, the profit or loss of each
film is considered separately and is based on a
cumulative position of income and expenditure in
respect of the film.
To the extent that in an accounting period there is
a loss in respect of the film, this is carried forward to
set off against profits in the future from the same
film by the FPC.
At the time of the film either being completed or
abandoned, the FPC may elect that, so much of the
loss that does not relate to the additional deduction,
is set it off against profits of another trade the FPC
carries on, or to carry the loss back to a previous
accounting period (in accordance with the normal
tax rules), or to carry it forward as if it were in
connection with another film the FPC is producing,
or finally it may surrender the loss to another
company in the same tax group for set off against
that company’s profits for the period.
When the trade of the FPC is terminated, any
remaining losses of the FPC (including in respect
of the additional deduction not surrendered) may
be transferred for use in respect of another film
production of the FPC or transferred to another
FPC, which is producing a film, in the same tax
Because any loss carried forward relating to the
additional deduction can only be set against profits
from the same film (until the trade of the FPC is
terminated), it will usually be advantageous to
surrender the maximum amount of the
New high-end TV, documentary and
animation tax credits
The 2013 Finance Bill includes tax relief for
high-end television, documentary and animation
The relief is subject to potential change, but is
intended to come into effect from 1 April 2013.
Transitional rules will apply to productions
straddling that date.
The relief is similar to the existing film tax
legislation, providing for a payable net tax credit to
the production company of up to 20% of
Unlike for the film relief there is no reduction in
the credit available if the production costs exceed
Other points to note are:
• there must be a qualifying programme produced
by a qualifying production company
• the programme must be intended for broadcast
to the general public on television or the
• the programme must pass a ‘cultural test’ which
will be administered by the BFI
• at least 25% of the qualifying expenditure must
be UK expenditure.
Who to contact
T +44 (0)20 7728 3171
T +44 (0)20 7728 2155
There are two additional conditions if the
production is not an animation production:
• the programme must be greater than 30 minutes
in ‘slot length’, and
• the programme must have average qualifying
expenditure per hour of slot length (including
commercial breaks) of not less than £1million.
An animation programme is one where the
majority of expenditure on the programme relates
It’s easier to make decisions when you
know what your values are
Focused valuation expertise
Whether you are about to go through a merger,
acquisition, fundraising or a restructuring of your
business, are involved in a dispute or needing to
understand tax implications – the values involved are
likely to be an important commercial consideration.
Grant Thornton’s valuations team provides
expert support and advice in disputes, for
transactions or lending and in support of financial
reporting and tax matters – valuing businesses,
shares, or intangible assets such as film titles, music
libraries and IP rights.
Valuations increasingly have a global dimension,
which adds another element of complexity.
Therefore you need an advisor with a good
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which comprises over 500 specialist staff located in
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Using our experience and expertise to
benefit clients in the media sector
The range of our clients in the media sector means
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providing valuation advice. A selection of recent
credentials is set out opposite.
…an independent distribution company
specialising in music programming and
independent films. Grant Thornton was
engaged to assess the value of our client’s
media library to assist with capital funding.
…a group of television, film and new media
production companies. Grant Thornton has
provided valuation services for a range of
For more information, please contact
T +44 (0)20 7728 2644
T +44 (0)20 7865 2491
…a leading producer for factual and drama
content for major broadcasters worldwide.
Grant Thornton was engaged to assess the
value of IP rights owned by our client’s to
assist in financing negotiations.
…a distributor of independent films for
international audiences. Grant Thornton
provided valuation advice to the
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