June 1, 2017

Direction of Enterprise Investment Schemes after Autumn Budget



The recent UK autumn budget affected a number of areas, including that of the Enterprise Investment Scheme. This article examines the current state of play.

Enterprise Investment Schemes are structures that invest in new, small UK firms and are seen as ways that relatively ordinary investors can support venture capital-type business areas, garnering significant tax breaks. The EIS model has been around in the UK since the 1990s, surviving a mix of Conservative, Labour and coalition governments. In the recent UK autumn budget statement delivered by finance minister Philip Hammond, these structures retained significant tax advantages.

Film-related investment schemes haven’t enjoyed great publicity in certain respects; a number of movie-related schemes, offering large tax breaks, have fallen afoul of the UK tax authorities. Defenders of EIS structures, however, say they are legally robust and should not be branded in the same way.

Enterprise Investment Schemes put money into a variety of sectors, such as the media and technology fields. A firm operating in this space is Goldfinch Entertainment. Kirsty Bell, managing director and founder of Goldfinch explains why the recent budget measures of the government are positive for the EIS sector.

Media-based Enterprise Investment Scheme companies had a nervous wait for the Budget on 22 November – as indicated in a lot of the pre-Budget public relations.
For months there had been concerns that part or all of the media related investment would, in future, be excluded from the EIS. In large part, this suggestion arose from criticism of media EIS schemes that we here at Goldfinch Entertainment believe to be entirely misconceived and unfair.
First, the good news, which is that media as an investable asset class remains under the EIS umbrella. Better still, some media companies will be eligible for the more generous EIS reliefs unveiled by the Chancellor [Hammond]. Hammond doubled the annual investment limits for “knowledge-intensive companies”, from the £5 million ($6.72 million) that all EIS companies can raise to £10 million. Individual investors can invest up to £1 million a year in EIS companies. From April 2018, they will be able to invest £2 million, of which at least £1 million must be with a knowledge-intensive company.

The big question is to what extent will media businesses be eligible for the increased allowances for knowledge-intensive companies? It will depend on the detailed definitions, but we can get some idea from the Budget. There is a research and development test, under which a company’s research and development costs must have accounted for at least 15 per cent of operating costs in one of the last three years or ten percent in every one of the last three years. At least 20 per cent of the employees in its research and development unit must hold a master’s degree or higher qualification. The rules are not the easiest to manage and specialist advice should be taken, and careful management of the R&D created.
It is fair to say that overall the media industry’s R&D spending is average, rather than anything more, with obvious variations between research-intensive games companies, for example, and makers of television programmes.
Of more interest, perhaps, is a second criterion, which is that the company needs either to have created or be in the process of creating, intellectual property. Here, for rather obvious reasons, the media sector is, overall, likely to find it easier to qualify. Film in particular is one of the oldest serial creators of IP.
Again, the games industry – in which Britain is a world leader – will probably find it relatively straightforward to demonstrate having generated new IP. Companies write code to create an image, They develop the tools that will bring a game to life. So many games are entirely new that it would be hard to argue that they have not created IP.
Determining IP may be a trickier proposition with many film and television productions. The tools have already been created, in large part, and a lot of the bigger-budget film and TV shows are re-makes. In other words, the companies created IP years ago, and are subsequently milking it for all it is worth. However, companies we deal with often create formats which are IP and highly valuable internationally to exploit. It would be difficult to argue that the latest James Bond or Batman film contains fresh new IP. On the contrary. It is precisely because these brands are so powerful and well-established that people will pay to watch the latest release despite frequently having little idea of what the storyline is about.
The broader worry is that the focus from the Treasury will be on tax incentives on the R&D side – for tech companies, for example – while the IP aspect will be eclipsed. That would be bad news for media companies, but such a development may be made likely because of the unfair criticism directed at media EIS schemes in recent years.
They have quite wrongly been tarred with the same brush as completely separate tax-efficient film-investment schemes, many of which have been discredited. We know this in our own business – we mention films and, for a lot of investors, the red flags immediately go up. They had read in the papers about footballers or other wealthy celebrities who lost money when one or other film scheme was ruled out of court.
Not only is media EIS investment completely different, regardless of who is behind it, but the correct approach in this area differs from that of many, entirely reputable, firms in the field. Our ethos at the start was to bring to the table a very simple and transparent proposition, using the same basic business principles that would be applied when considering opening a restaurant, for example, or a new manufacturing business.

What is the market? What should the project cost? Will we get it back?
The film industry as a whole rarely if ever takes this approach. It is largely still star-driven with little consideration given to target audience or marketing strategy for the end product with multiple finance sources, many layers of fees and poor review of costs and budgets.  Many of the EIS media schemes are passive investors in this old broken model which means they are unable to dictate and guide the end product and thus recoupment back to investors.
By contrast, we take a strong hand in how our projects are moulded. We are executive producers. We have our own production company and our own distribution company. We are anything but passive.
No properly costed and planned film, or any other media projects, needs to be a blockbuster success to earn decent returns for investors. We not only know this but have proved this. We have recently proven this with our first EIS exit.
We would have liked a little more from the Chancellor regarding Including the Seed Enterprise Investment Scheme (SEIS), the junior version of EIS, in his doubling of investment limits for knowledge-intensive companies. Reexamining this would help to bridge the financing gap between smaller and larger firms. In some ways, it is surprising that he did not.
However, overall this is good news for EIS in general and the media industry. The government consulted on what should and should not qualify for tax-efficient investment. It did the digging and asked the questions, and listened to the answers.
Its conclusion, correct in our view, is that EIS is working well – albeit in need of some tweaks – and media companies should remain within it. In short, the Budget is a big tick in the box for EIS, a major thumbs-up from the government.
It is a clear and confident investment in the industries that are the future of this country.

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