Film funding problems with HMRC
Draft guidance published by HMRC suggests that the advance assurance facility for the Enterprise Investment Scheme (EIS) on which many film productions depend is much less, well, assured.
Initially the news was good: earlier this year the rules applying to EIS were relaxed to enable companies to raise up to £5m in a year (previously £2m). This positive change, allied with a number of others which similarly opened the EIS door to larger projects, was well received by the film and other creative industries. However, the new legislation also contained a requirement that there must be no “disqualifying arrangements” in any given EIS scheme. Initially there was a great deal of uncertainty as to what was meant by this new concept. Uncertainty was replaced by concern when HMRC published draft guidance on the issue and it became clear that the changes had the potential to disqualify certain structures which had previously benefitted from EIS.
Projects seeking EIS funding are heavily reliant on the advance assurance process. This allows companies to submit a proposal to HMRC for consideration and, if the project meets the EIS qualifying criteria, then HMRC will issue a confirmation that, on the basis of the information provided, the company will qualify for EIS This confirmation, known as “advance assurance”, remains one of the essential keys to unlocking potential investment because HMRC is normally bound by any assurance given (subject to certain qualifications). Advance assurance therefore provides investors, for whom EIS represents a critical component to the investment opportunity, with the comfort of knowing that the generous tax reliefs will be available to them. The importance of the advance assurance facility is accentuated in times where, as now, HMRC’s interpretation of new legislation is less than clear.
It is not surprising that, as a result of the introduction of the “disqualifying arrangements” concept, advance assurance applications are taking much longer to process (roughly double the 14 day period which used to be standard) because HMRC are having as much difficulty applying the concept to practical examples as companies and their advisors are.
In addition to the extra time required to process advance assurance submissions, the effectiveness of the facility has been thrown into unwelcome doubt as a result of HMRC’s draft guidance on the subject. Previously, companies and their advisers seeking advance assurance knew that, at the end of the process (which will usually involve a dialogue with HMRC), they would have obtained an answer as to whether or not their project would qualify for EIS. According to the draft guidance, HMRC is giving itself a third option, leaving open the possibility of a “we are not saying yes but we are not saying no either” response. The reason given in the draft guidance is that, where HMRC takes the view that there may be “disqualifying arrangements” “it is not always possible to determine what the purposes of any transactions or arrangements are until effect is given to those purposes”. In such circumstances, HMRC states that it will examine EIS qualification when relief is actually applied for (so after the funds have been raised) “rather than attempting to form a view in advance of the company carrying out its intentions”. The risks of this approach are clear and it appears that HMRC increasingly regards this as its default response in all but the simplest of cases. By way of example, we are aware of a newly incorporated film production company which was faced with just such a ‘third option’ response because HMRC was concerned that, as a result of proposed co-production arrangements, it could not be certain in advance if the company was too dependent on its co-producers to carry out the proposed projects.
If you are, as most are, reliant on advance assurance to commence fundraising, this non-committal response will be of no use.
It seems that, unless your project’s structure is straightforward and very clearly outside of the (less than clear) disqualifying arrangements criteria, you run the risk of being left in limbo by HMRC and without the ability to offer potential investors the comfort of knowing that the tax reliefs will be available when the time comes.
HMRC’s position on advance assurance results from being asked to interpret and apply legislation which is vague and lacking in clarity. The consequential detrimental impact that this will have on projects that have traditionally relied on EIS funding is regrettable, particularly at a time when other forms of finance are scarce.
Charles Leveque and David Scott, partners at London law firm Harbottle & Lewis LLP