It is five months since the latest SEIS/EIS rules were enacted (see our prior blog “Autumn Statement 2017 – SEIS and EIS implications”), and we are now starting to understand the effect, particularly within the film and TV sector which appears to be significantly impacted.

The complexity related to EIS and film companies results from the new “Risk to Capital” condition enacted on the 15th of March 2018. This condition, which gives more discretionary powers to HMRC, was introduced to ensure the schemes support early-stage companies with the potential to grow in the long term. The change was required as certain companies used the schemes to create tax motivated, low-risk investment opportunities, referred to as “capital preservation investments” (e.g., using EIS monies to buy property from which the company traded).

To now qualify for EIS, an enterprise must carry a level of risk that would typically deter investors; therefore, governmental assistance given by the EIS schemes enables the enterprise to raise the first rounds of finance (by reducing the risk of investment).

Like our film clients, I can hear you say: “But, surely film companies are high risk!” Although this may be true as a general statement, it all comes down to how HMRC now defines “risk”.

The Risk to Capital condition

The “Risk to Capital” condition needs to be met to qualify for EIS schemes, and is defined as having two required components:

(1) The company must have the objective to grow and develop in the long term; and

(2) The investment must carry significant risk that the investor will lose more capital than they gain in return (including tax relief and dividends/distributions).¹

Per the first component above, indicators to grow and develop include plans for increasing:

* revenues,
* customer base, and
* number of employees.

In the case of film production companies, where the films are made on a project by project basis, revenues and client base brought by a specific film will eventually decline shortly after it’s released. Therefore, film production companies raising capital for specific project(s) (i.e., the making of specified films) won’t be able to qualify for EIS, because the monies raised via EIS are being used for expenditure specifically for those film projects only (i.e., hiring of actors, location, props etc). Compare that to a technology company, that will be using the EIS investment to hire permanent staff or to invest in R&D that will provide a future/long term benefit, and you can see where HMRC is coming from.

The second component to the “Risk to Capital” condition, carrying significant risk, may also challenge film companies as HMRC doesn’t stop only in reviewing the business plan and the advance assurance application. HMRC will conduct their research to “create an overall picture of the investee company’s growth ambitions and the risk that an investment poses to investors’ capital. Factors to be considered may include third party information and information not disclosed by the company.”² HMRC ascertains whether the company has genuine intent to grow and develop in the long term and the level of risk posed to investors’ capital. In other words, HMRC can make a subjective decision.

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