Whilst the issue of shares benefiting from the incentives offered to investors by the Enterprise Investment Scheme (‘EIS’) and Seed Enterprise Investment Scheme (‘SEIS’) has been a fairly longstanding method of obtaining the vital investment needed by production companies to carry on production activities, the rules governing each of these incentives are complex and can be fallen foul of in any number of ways. The relationship between EIS/SEIS and the film and TV industry has been fraught for most of the last decade, with the introduction of the risk to capital condition in 2018.

However, between October 2021 to January 2025, a series of cases all in the TV and film production sector were heard in the First or Upper Tier Tax Tribunal (‘FTT’ and ‘UTT’ respectively) relating to the availability of EIS/SEIS, each with a distinct set of facts. The judgements from these cases provide helpful guidance and analysis when considering whether a particular set of circumstances may give rise to eligibility or disqualification issues. A consistent thread throughout the cases is discussion of whether the requisite ‘risk to capital’ and ‘qualifying trade’ conditions are met. In some instances (see CMAR case below, for example), the tribunals have recognised that – contrary to certain accepted wisdom – features of the film and TV industry such as co-productions and use of single-film SPVs are not in fact fatal to the availability of the tax reliefs. It might be time for film and TV companies to reconsider their relationship with EIS/SEIS.

The cases in question are as follows:

1. CHF Pip! plc v HMRC [2021] UKFTT 383 (TC) (‘CHF Pip’);
2. Inferno Films Ltd v HMRC [2022] UKFTT 141 (TC) (‘Inferno’);
3. Cry Me a River Limited v HMRC [2022] UKFTT 182 (TC) (‘CMAR’);
4. Coconut Animated Island Limited v HMRC [2022] UKFTT 303 (TC) (‘Coconut’);
5. Hoopla Animation Limited v HMRC [2023] UKFTT 24 (TC) (‘Hoopla’); and
6. Hoopla Animation Ltd v HMRC [2025] UKUT 28 (TCC).
7. Coconut Animated Island [2024] UKUT 75 (TCC)]

The purpose of this article is to work through a typical production cycle of a company seeking to issue EIS/SEIS shares, identifying at each juncture the potential pitfalls and points to note, considering in particular the outcomes of the recent cases and the rationale for such decisions. It should be noted that as of the date of this article, the Coconut case has been appealed to the Upper Tribunal and so is subject to a further judgement in due course.

Most trades are qualifying trades provided that they are conducted on a commercial basis with a view to making profits and the trade does not include a substantial amount of ‘excluded’ activities[1].  Whilst there is no legislative definition of ‘substantial’, HMRC have stated they will regard non-qualifying or excluded activities as substantial if they account for more than 20% of the total activities of the issuing company or group). The only excluded activity likely to be relevant in these circumstances is the receiving of royalties and/or licence fees – but even this activity is permitted for EIS purposes if 50% or more of the underlying intellectual property (or other intangible asset) generating such fees had been created by the production company. This point is specifically discussed in both CHF Pip and Coconut at paragraphs 123 and 62-65 of their respective judgments.

It is common for TV and film productions to involve more than one partner in its creation, with each party bearing responsibility for certain aspects of the product, which are then collated into a finished film or TV programme. HMRC’s general stated position is that co-production SPVs are unlikely to be able to issue EIS shares. This is due to the operation of section 183 Income Tax Act 2007, which requires that no part of the qualifying trade is carried on by a person other than the EIS company or a 90% subsidiary (the ‘Own Qualifying Business Condition’). In the case of a co-production, the production has been produced by the activities of more than one company. This typically results in failing the test of section 183.

However, in the CMAR case, the FTT took note that many film and television productions were co-produced and determined that the qualifying business activity in this case was that of co-production, and the involvement of another party did not fall foul of the Own Qualifying Business Condition. The FTT noted that it was “entirely satisfied that the activities of a co-producer are sufficient to constitute a discrete trading activity”. This is a significant decision which acknowledges the practical realities of production work and could potentially open the door to production companies which previously had disregarded their eligibility to issue EIS/SEIS shares.

HMRC guidance states that contracting out elements of film production is standard industry practice, however notes that “if the [production] subsidiary contracts out overall control of the activities to third parties, the investment in the parent is unlikely to be eligible; the group must retain control of decision making and be actively engaged in carrying out substantive and genuine film production activities”[2]. They also took a dim view of substantial contracting out. This view has been challenged in the courts.

Subcontracting is well-established practice in the film and TV production world. In the case of CHF Pip, HMRC sought to uphold its decision to refuse to issue EIS compliance certificates on several grounds. One of the grounds cited was that the company in question (Pip) had not been carrying on a trade. This was on the basis that Pip had no independent capabilities. Pip had no employees, all activities the company carried on were undertaken by group companies, it subcontracted all trading activity to third parties and HMRC therefore asserted it was unclear what the company actually did itself, other than receive income from IP created.

The FTT decisively rejected HMRC’s arguments on this ground. The FTT confirmed that there was no principled difference between these activities being carried out by employees or by a subcontracted third party. Ultimately, what Pip received were items of considerable value (78, 11-minute animations of the programme) and the position would be no different had Pip’s own employees created and produced the animations. The FTT also acknowledged that outsourcing these activities was for sensible commercial reasons.

The decision in CHF Pip was cited in Inferno Films, in which the FTT agreed that subcontracting production activity was a ‘perfectly standard approach in the film industry’, and the only realistic option for small production companies in their infancy.

The FTT in Coconut also found, in alignment with the decisions that came before in CHF Pip, Inferno and CMAR, that the absence of an objective to increase the numbers of employees was not of any significance, because “there is compelling evidence that trades in the animation section are generally conducted through sub-contractors for very sound commercial reasons”.

Whilst the FTT in CHF Pip did conclude that outsourcing or subcontracting can constitute a trade, a further requirement is that the trade is conducted on a commercial basis with a view to profit. The FTT in CHF Pip confirmed that although the commerciality test was subjective, a reality check was needed, with the likelihood of profits arising relevant to whether there was a real subjective view. In CHF Pip, Pip had operating losses for the seven years prior to EIS share issue, with the FTT considering that their subjective view of likely profits was completely unrealistic and therefore failing this test, so denying the company EIS relief.

The risk to capital condition took effect from 15 March 2018 and is a principles-based test to determine if, at the time of investment, a company is a genuine entrepreneurial company with an objective to grow and develop, and whether there is significant risk to loss of capital (that is potentially greater than the net return).

Generally, it is currently accepted (perhaps wrongly…) that HMRC will restrict EIS where the company seeking to issue EIS shares is an SPV or other entity which only produces one film at a time, which could be argued not to have the objective of growing and developing, as required by the risk to capital condition.

In the case of Inferno, however, the FTT helpfully clarified that the nature of the film industry meant that a production company only producing one film at a time was not indicative of a single-project company and this would not preclude the availability of EIS shares. The FTT found in this case that there was sufficient evidence of the company’s desire to make further films and the fact they were not making more than one at a time was purely indicative of the limited financial resources available to them. As such, the FTT concluded, there was at the time of the share issue an objective to grow and develop its trade in the long term.

HMRC tried to argue in Inferno that it could not be reasonably concluded that the risk of loss of capital could be more than the investor’s net capital return as any loss could be offset by film tax credits. It was held that the net investment return was extremely speculative and entirely dependent on the success of the film. The distinct possibility that the investors could lose all their investment was not affected by the availability of tax credits – so this part of the risk to capital condition was met.

A similar conclusion was reached in the CMAR case, where the FTT acknowledged the use of SPVs in the film production industry and found this was not fatal to meeting the risk to capital condition. As with Inferno, the FTT found that it is common for production companies to only have capacity to make one film at a time and this could not reasonably preclude a company from having the requisite intention to grow and develop its business.

The use of SPVs is addressed explicitly in the HMRC Manual. VCM8560[3] states, in relation to an example of a production SPV being established, that “if the SPV were set up as an independent company, outside a group structure headed by the film company, investment in the SPV would not qualify for relief as the SPV will not grow and develop”. This, however, is not consistent with the conclusions reached in Inferno and CMAR as set out above, and therefore it remains to be seen how HMRC will navigate the tension between how it considers the rules apply, and how the FTT has applied them.

As a practical matter, the taxpayer’s position will be strengthened even more if there is an intention to produce a slate of future opportunities.  Indeed, in Coconut, the FTT considered that the company’s three stage process for growing the business (broadly starting with ‘webisodes’ online, then moving to traditional broadcast methods, and then monetising further through licensing and merchandising), whilst optimistic, was an ‘entirely credible’ commercial model and for that reason concluded that there was an objective of growing and developing its trade in the long-term. The FTT also helpfully concurred with the decision in CMAR as regards the symbiotic relationship between the issuing company and a larger group of which it was part, considering that “it was possible for both to prosper from the arrangement in the same way that the publication of a successful novel can produce a healthy return for both publisher and author alike”.

The FTT’s decisions in CHF Pip, Inferno and Coconut all appear to be at odds with HMRC’s interpretation of the rules, as HMRC’s view as put forward in these cases is that in these circumstances, the company is effectively a vehicle to fund development projects which are actually delivered by others. However, the FTT acknowledges and does not appear to be concerned by large scale subcontracting, on the basis this represents the commercial reality for many production companies.

However, it is not all plain sailing. It is worth noting that in CHF Pip, the tribunal concluded that it was not reasonable to conclude that Pip had the objective to grow and develop its trade in the long term, on the basis that the risk to capital condition has an objective element and the evidence provided by Pip as to its long term objective was wholly unrealistic when tested against the company’s trading and financial performance.

Under the EIS rules, where there are ‘disqualifying arrangements’, the company seeking to issue EIS shares will be unable to obtain relief. Broadly, the disqualifying arrangement rules are intended to exclude from the scheme companies which are established solely for the purposes of accessing the tax relief.

Arrangements are “disqualifying”[4] if both of the following conditions are met:

1. The main (or one of the main) purpose(s) of the arrangements is to secure that the issuing company carries on a qualifying activity and that the shares issued by it qualify for tax relief.
2. Either:

• Condition A:  an amount representing all or most of the monies raised under the scheme, is, in the course of the arrangements, paid to or for the benefit of a party to the arrangements (or a connected person); or
• Condition B:  in the absence of the arrangements, it would be reasonable to expect that the greater part of the issuing company’s qualifying activities would have been carried on as part of another business.

In Hoopla, the FTT concluded that there were disqualifying arrangements on the basis that monies raised from the share subscriptions were in fact paid to the production company for producing the show. The main issue in these circumstances was that the production company was a counterparty to the Production Services Agreement and therefore a ‘relevant person’. The key point to take from this case is that any type of arrangement whereby sums are paid to a closely related company are likely to be disqualifying arrangements, even if the terms of any such agreement between the parties are on arm’s length terms.

A similar decision was reached in Coconut, where the FTT noted that “the fact that the production services agreements gave rise to the legal obligation to make the payments (and were therefore the immediate cause of those payments) and that those agreements were on arm’s length, industry-standard, terms does not mean that those agreements (and the payments to which they gave rise) did not form part of the “arrangements”. In analysing the impact of disqualifying arrangements, one has to look at all the relationships of the companies involved. In this case, a majority of funds raised by the company was paid to or for the benefit of a closely related company. When Coconut appealed, the UT upheld the FTT’s decision on the basis that ultimately, the payment of funds for production services was to a group member who was also held to be a party to the arrangements. The FTT, whilst not strictly required to because Condition A was met, did consider the relevance of Condition B to the arrangements. The FTT considered that in this case, there was persuasive evidence which showed that the relief under EIS/SEIS was ‘essential’ to the ability of Coconut to fund the component activities of its ‘qualifying trade’. This suggests that in the absence of arrangements, nobody would have carried on the component activities of Coconut’s qualifying trade.

HMRC’s guidance in this area envisages that productions are carried out by wholly owned SPVs of a larger parent company. Typically, the parent company would enter into a production services agreement (‘PSA’) with the SPV to ringfence expenditure so as to maximise on the availability of film or high-end TV tax credits (now having been partially replaced by the audio-visual expenditure credit and fully replaced by mid-2027). In Coconut, it should be noted that this was not the case, with the CHF Group holding 49% of the voting and economic rights in Coconut, with the remaining shares being held by investors through a CHF group nominee company.

Following the decisions reached by the FTT in Hoopla and Coconut above, particular care will need to be taken, and expert advice obtained when determining the terms of any PSA to ensure that there are no disqualifying arrangements which prejudice the availability of EIS/SEIS.

In January 2025, the Upper Tribunal (‘UT’) dismissed Hoopla’s appeal, affirming that the company’s share issuance did not qualify for EIS due to disqualifying arrangements. The UT upheld HMRC’s view that payments made under a production services agreement to a related company, Entertainment, constituted disqualifying arrangements because the funds were paid to a “relevant person”, determining that Entertainment was a “party to the arrangements” and that the payments were “for the benefit of” a relevant person, thereby breaching Condition A of the EIS provisions. This decision aligns with the precedent set in Coconut, reinforcing the strict interpretation of disqualifying arrangements in the context of EIS eligibility.

We must also mention the advance assurance process. This is a means by which a company can obtain assurance from HMRC that, on the basis of the information provided, an investment in a company is likely to qualify for EIS/SEIS tax relief. Rules. In CMAR, whilst the issue of advance assurance is not discussed at length in the judgment, it is noted that CMAR requested advance assurance, and it was subsequently granted by HMRC. CMAR won on every point presented to the tribunal, with the tribunal determining that (i) CMAR met the risk to capital condition, (ii) the fact the qualifying activity was a co-production, this did not fall foul of the Own Qualifying Business Activity Condition[5] and (iii) there were no disqualifying arrangements.

Clearly, whilst there is a time and financial investment to be made in making an application for advance assurance, which must be supported by business plans and financial forecasts, it provides film and TV companies with an opportunity to set out their proposed plans and have HMRC assess their compatibility with the EIS/SEIS, which, on the evidence of CMAR, may have merit if the company’s eligibility is later questioned.

The EIS/SEIS offer significant tax reliefs that can potentially make investment in film and television companies more attractive. While historically there has been some uncertainty over whether such companies meet the qualifying conditions (particularly since 2018), recent legal cases as outlined above suggest that they may, in fact, be eligible. Given these developments, film and TV companies should carefully assess their position and consider whether their investors could benefit from these schemes. Seeking expert advice on eligibility and structuring could open up valuable funding opportunities while ensuring compliance with the evolving regulatory landscape.

[1] Excluded activities include (i) dealing in land, shares or commodities (ii) property development (iii) farming (iv) the operation or management of hotels or nursing home (v) financial activities (vi) leasing (vii) shipbuilding and coal and steel trades (viii) receiving royalties and licence fees and (viiii) energy generation activities.

[2] https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm8560

[3] https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm8560

[4] Section 178A Income Tax Act 2007

[5] Section 257DC ITA 2007