Before the Budget today, there was considerable concern that due to abuse in EIS schemes offering investors low risk return EIS schemes in the TV/film/creative sectors, EIS relief would be totally withdrawn for this sector. However, this is not the case, BUT there is to be a new “principles-based” test to apply across all sectors. This will prevent limited risk schemes qualifying but should allow entrepreneurial film, TV and media EIS to continue to qualify.
The new test is intended to ensure that EIS (and SEIS/VCT) schemes are focussed towards investment in companies seeking investment for their long term growth and development. It is not intended to affect independent, entrepreneurial companies seeking to expand. Tax motivated investments, where the tax relief provides all or most of the return for an investor with limited risk to the original investment (i.e. preserving an investors’ capital) will no longer be eligible.
The new test will be introduced into the Finance Bill 2017-2018 (to be published 1 December 2017), to apply from Royal Assent (expected July 2018).
The new “risk to capital” condition depends on a “reasonable view” being taken as to whether an investment has been structured to provide a low risk return for investors. The condition will have two parts: (i) whether the company has objectives to grow and develop over the long term; and (ii) whether there is significant risk that there could be a loss of capital to the investor of an amount greater than the net return.
HM Treasury comments that the test in part (i) mirrors an existing test. It is not clear if this means the existing “growth and development” condition or whether it means that the “long term” will be taken to be the three year investment profile currently required for EIS, etc., or something longer.
All relevant factors will be considered in the round in applying the test, but some considerations will be specifically included in the legislation – e.g. whether income from an asset forms a substantial part of the trade; and the company’s ownership structure (alluding (possibly negatively) to companies owned by fund mangers as nominees for investors). Single asset businesses may qualify particularly where employees are to be engaged and the asset is not being used to provide a protected low risk return. However, arrangements where the return is generated by a single asset created and then sold at the end of the holding period, with the return above a target return being capped are clearly intended to be caught. Thus, going forward single purpose film production projects with limited growth/return will be targeted.
It is noted that different sectors do have different operating models, e.g., film and media production companies often use SPVS, and this in itself will not be detrimental since this structure is in line with normal commercial practice. Indeed, “the new conditions will allow the use of SPVS involving a production company seeking investment for its long term growth and development with the intention of reinvesting profits for future activities”. An example is given of an investment in an independent film production company seeking to fund a production via an SPV as part of its plans to develop and grow its film making trade over the long term. This would qualify provided that the investor remains at significant risk.
Moreover, it is specifically clarified that outsourcing will not in itself be a reason not to qualify. Investment in an animation EIS company where creative work is outsourced to freelancers in order to “develop, market and exploit” characters should qualify”. In such a case, outsourcing is not an indicator of capital preservation investment.
Further detail will be provided in the draft Finance Bill and Wiggin LLP will provide more analysis then.
Finally, HMRC are promising a 15 day turn around for companies applying for Advance Assurance by Spring 2018 for the vast majority of applications.
Please contact your usual Wiggin contact or Sue Crawford if you would like further information.