Barriers to film investment dropped from plans, yet EU State Aid approval still needed.

The long predicted boost for UK film financing through the Enterprise Investment Scheme (EIS) is edging ever closer.

Draft legislation relating to new EIS rules from 6 April 2012 was published yesterday. To widespread film industry relief, barriers which threatened to prevent film production from benefiting when the cap on EIS is raised from £2 million to £10 million ($15.7 million) next year have been dropped.

One major stumbling block remains. The proposed EIS changes are still waiting to receive EU State Aid approval. An HMRC spokesman noted “that discussions with the EU are still in progress and we are therefore not in a position at present to comment any further.”

“UK film producers should indulge in a collective sigh of relief today,” commented Dave Morrison, an EIS expert at Nyman Libson Paul, although Morrison also observed that the confirmation the scheme would receive EU State Aid approval would add some much needed certainty.

As Morrison noted, “consultative proposals had led to fears over the impact on film production companies, but these have now been dropped in favour of more general clauses.”

“In general the changes are to be welcomed. The £1m maximum per individual and £10m per firm are very helpful and, together with the increase in the tax relief to 30% which took place at the start of this financial year, have taken EIS up to another level,” agreed Ivan Mactaggart [pictured], a partner at Trademark Films. “While the Seed EIS is also welcome the £150k maximum raise means its impact will be limited. However for small producer, sales agent and distributor start-ups it’s a godsend.”

Industry observers have welcomed the more flexible approach to EIS contained in the draft legislation although several are still calling for greater clarity in how the rules will be applied.

“It is good to see the Treasury backing away from the proposal to require all EIS companies either to have several employees or to meet a list of characteristics that could have prevented a substantial number of companies qualifying,” said Christine Corner, a partner at Grant Thornton. “Instead the intention is that from next 6 April companies raising EIS money will have to ensure that there are not “disqualifying arrangements”. The definition of this is not clear and we would hope that there will be further clarification and examples of how these rules will apply in practice.”

Corner noted that Companies thinking about EIS from April 6 still cannot be sure that all of the changes will be finally approved.

“The biggest question for me is how, in practice, HMRC will apply the “disqualifying arrangements” rules, which seem to rule out the common practice of running a special purpose EIS alongside your main business,” Mactaggart commented. “Will producers want to give away a chunk of their core businesses, and will they be able to agree a valuation with investors or will we be in the familiar Dragon’s Den “I’ll give you 40 grand for 110% of your business” scenario?” 

Read the official documents:

Draft legislation

Consultation feedback