Geoffrey Macnab asks why years-old UK film investment schemes are coming under attack and how investor confidence in UK film is being shaken by the allegations.
Industry opinion is sharply divided over recent allegations in the UK media about film finance and tax avoidance. While financiers are crying foul against HM Revenue and Customs, others are suggesting that the film partnership schemes were indeed abusive and deserve to be “outed” in the press.
Last month, The London Times quoted a source from HMRC as saying that it had 600 film schemes under investigation and that such “schemes are a £5 billion risk for us at least.”
Meanwhile in April, in what was described as “a landmark victory” for HMRC, a tax tribunal ruled that investors in the Eclipse Film Partners No 35 LLP scheme will not be entitled to tax relief (reportedly worth £117 million) because the scheme was concerned with tax avoidance rather than genuine trading.
The Eclipse case followed on the earlier decision by a “first tier tax tribunal” in favour of HMRC last September in a case against two film partnerships promoted by Future Capital Partners (Samarkand Film Partnership No 3 and Proteus Film Partnership No 1).
To many within the UK industry, these cases were an unwelcome reminder of the “bad old days” of sale and leaseback and Section 42 and 48 tax relief. Since then, UK Film Tax relief had been put in place and the stables had been cleaned - or so the industry thought. Amid much fanfare, Prime Minister David Cameron announced last year that this targeted tax break for the film industry would be extended until the end of 2015 - a clear sign that the film tax relief had received official blessing. The extension of the tax credit to high end TV drama, animation and video games in the March 2012 Budget was further evidence that the Government was ready to support the “creative industries” with fiscal breaks.
EU State Aid approval was given earlier this summer to the new UK EIS rules. The annual investment limit for qualifying companies under EIS can now be raised to £5 million (up from £2 million). The raise makes EIS more attractive as a vehicle for investing in film.
“Our investors perceive it (EIS) as something that is very much endorsed by HMRC. Quite clearly, HMRC are encouraging film investment to go through EIS with the tax credit,” says Nigel Thomas of producer/financier and EIS specialist Matador Pictures. “Certainly, some of our investors are refugees from some of the sketchier schemes that have been around, which honestly don’t seem to have had much benefit for the investors…the benefit seems to have accrued to the promoters, not the investors.”
On the face of it, then, the film financing landscape in 2012 seemed stable and transparent. The bad feeling between HMRC and film finance schemes was something from another time. Why, some wondered, were old controversies being raked over anew by the press?
Dave Morrison from accountants Nyman Libson Paul likens the recent skirmishing between HMRC and film financiers to what happened in Northern Ireland after the “Troubles.”
“If there was a war with the revenue (and the film industry), there was a ceasefire in 2007. There might be a few rogue groups carrying it on on both sides.”
Other film financiers strike a far less sanguine note. One prominent figure in the sale and leaseback era and still active today (speaking anonymously) suggests that HMRC has been leaking details to the media in a strategic way.
“What has been developed is a legislation by the media,” the financier suggests. “What the Revenue are doing right now is a war of attrition. They’re fighting cases that I think are very straightforward and should not be fought.” He added that, thanks to the controversy being aired so widely in the media, “investors have walked out they door. they just do not want to be involved in this sector anymore.”
The HMRC had no comment to make about the allegations it had been briefing the media but one Revenue source denied emphatically that anything had been done to compromise taxpayer confidentiality.
Another source (again commenting anonymously) was angry at the statement from the British Film Institute (BFI) distinguishing between “Government-approved tax reliefs…and tax schemes which have nothing to do with those statutory reliefs and just happen to use film as a vehicle for minimising the tax contributions of individuals.”
The attitude among some financiers is that the BFI should recognize that “actually, these outlandish tax deals most probably were legal and ultimately will be proved so.”
When financier Ingenious announced in mid July that it was initiating legal action against The Times and HMRC, the company placed a statement on its website stating its schemes had “brought much needed investment into the flagship industry of the UK’s flourishing creative sector.” They had also generated hundreds of million pounds in taxable receipts.
“A shrivelled up industry even more desperately short of risk capital,” is what observer threatens the UK will be left with if investors are “spooked” away from the film industry.
The UK is not becoming a cool place to come and make your movie. Investors are going to be attacked by the Inland Revenue, who don’t really fully understand (the sector). They (HMRC) are going to attack just because it is film.”
Whether or not the financiers are vindicated, the adverse publicity clearly isn’t doing the industry any favours.
Neil Thompson of EIS specialist Formosa Films points out that “a lot of city guys we deal with were saying they were staying away from film at the moment…because it has gone a bit toxic.”
At the same time, it is widely acknowledged that some of the film partnership schemes were indeed operating close to the bounds of legality. There are examples of a film partnership taking out a large loan to acquire distribution rights to certain films, the partnership itself buying those distribution rights and then leasing them back to the same film producer (within a very short period) for a payment spread over a 20 year period.The members of the partnership would then claim interest relief on the loans taken out to fund the purchase of the distribution rights. To the non-specialist, this certainly seems like chicanery.
“I saw one film which used a sale and leaseback, a production partnership and Section 481 in Ireland. All of those rely upon a certain amount of loss deduction attributable to investors. Does that mean that on a £5 million film, it has lost £15 million on day one (of shooting)?” one observer asks of the way more aggressive schemes operated.
Of course, all of this is ancient history. The cases that are being fought in the courts now relate to partnership schemes or the later GAAP schemes set up several years ago and that were dependent on “sideways loss relief.” (Such schemes worked by generating trading losses which high net worth individuals were able to offset against their earned income.)
Dave Morrison argues that the mature investors the film industry is targeting now are sophisticated and well informed enough not to be scared away by the recent recent press reports. “This is a golf club story that has just reached the Times,” he suggests.
Nonetheless, Morrison acknowledges that the stories in the Times and elsewhere aren’t helping investor confidence.
The hope now is that the media focus will shift away from tax deferral stories and back toward the films themselves. After all, the film tax credit is intended to deliver a benefit directly to the film producer, not to enable the so called “middlemen” to make money.
Whatever the rules that are in force, it remains inevitable that financiers will look for loopholes - and it is equally inevitable that the Revenue will seek to claw back unpaid or deferred tax.
“When you enter a climate where it is clear that Revenue and Customs have been told to get in every penny that they can, it is clear that they are going to start looking at things that depart from the straightforward, legislative relief that had been mandated,” one well-placed observer notes. “I am not going to be as simplistic as to say they (the financiers) had it coming (but) I don’t think anybody could say they are surprised that the Revenue is looking long and hard at these schemes.”