22 March 2007

Michael Simkins

http://www.simkins.co.uk

Budget adds to woes of UK film industry

As part of his 2007 Budget, Chancellor Gordon Brown has announced new qualifying company rules which will affect investors under the Enterprise Investment Scheme (EIS), the Corporate Venturing Scheme (CVS) and the Venture Capital Trust (VCT) scheme. The new rules will also affect the companies attracting investment under those schemes.

EIS, VCTs and CVS are designed to encourage investment in high risk unquoted companies by providing a range of tax reliefs to investors who subscribe for qualifying shares in qualifying companies that carry on qualifying trades. While the EIS provides reliefs on investors' direct equity holdings in qualifying companies, VCTs provide reliefs for indirect portfolio investments administered by professional fund management companies.

EIS in particular was considered as a bright prospect for a number of companies involved in film production, especially when used in combination with the new UK Tax Credit, particularly to back a slate of films. A number of businesses have recently been set up, working with EIS and the new tax relief.

The main changes announced in the Budget are twofold: a new investment limit and a new employee test.

The new investment limit will apply to a company raising money under the venture capital schemes (EIS, VCT and CVS). For an 'investment' to qualify for relief under the EIS or CVS, or be treated as a qualifying holding of a VCT, the company (or group of companies) must have raised no more than £2 million under any or all of the schemes in the 12 months ending on the date of the relevant investment. If the limit is exceeded, none of the shares or securities within the issue that causes the condition to be breached will qualify for relief under the EIS or CVS, or rank as a qualifying holding for a VCT.

Secondly, under current rules, there is no restriction on the number of employees of a company raising money under the venture capital schemes. The new rules will require that a company (or group of companies) raising money under the schemes must have fewer than 50 full-time employees at the date on which the relevant shares or securities are issued.

The new employee test and the new £2 million limit will apply:

(A) to the EIS and CVS regime, where shares are issued after the date on which the Finance Act 2007 receives Royal Ascent (expected to be before the end of June);

(B) to the VCT regime in respect of investments made out of funds raised by VCTs after 5 April 2007.

The changes are understood to have been driven from the European Commission, based on concerns regarding illegal state aid. The UK Film Council Chief Executive John Woodward commented, "today's move was certainly not what the Government, the industry or the UK Film Council would have wanted and neither was it expected". As reported in Early Warning 286, the Commission insisted in November of last year on major changes being made to the proposed cultural test for British films before giving the new film tax relief state aid approval.

Comment

The new employee test and the new £2 million investment limit seem clearly designed to ensure that only investments in small high risk companies are to qualify for the applicable reliefs. It comes at a bad time for the UK film finance industry, following an announcement in March (see Early Warning 297) of severe restrictions on the ability of individuals in so called GAAP partnerships to claim sideways loss relief through investing in British films. It is also a further blow to British film producers who have been hoping that EIS structures would provide the means of raising money in order to leverage the value of the new UK tax credit.

Tim O'Shea
298

This update is © Michael Simkins LLP. It is for general guidance only. Legal advice should be sought before taking action in relation to specific matters. Where reference is made to Court decisions facts referred to are those reported as found by the Court.

Visit our website at http://www.simkins.co.uk or contact us at earlywarnings@simkins.com for more information about Michael Simkins LLP media law services.

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