(Post Apocalypse Finance)

Dave Morrison of Entertainment Accountants Nyman Libson Paul looks at Tax Incentives in an austere economy.

On the basis that you are reading this in early 2013, then the latest set of intermittent  predictions forecasting the end of the world in December 2012 did not materialise and we are pleased to wish all Moviescope readers a ‘happy new year’.

In the absence of a post apocalyptic world, it is fairly safe to assume that at least one ‘post apocalypse’ movie will be made during 2013, what is possibly less predictable is exactly how many might be financed. The plight of the ‘western’ economies is well documented and things are likely to be uncertain for some time as politicians appear to crave short term electoral impact rather than any long term structural change that might only bear fruit long after they have left office. Film finance is, along with the wider economy, facing a potentially unpredictable 2013.

Despite such gloom and cynicism, we may, nevertheless, be about to witness a political gift with long term benefits. We are on the cusp of witnessing the introduction of TV Tax Credits in the UK, very similar in structure to the existing UK Film Tax Credit and designed to encourage further audio visual production in Britain.

The workings of the UK Film Tax Credit have been well documented previously in Moviescope but, as a reminder, the key points are that so long as a film qualifies as ‘British’ then up to 20% of production expenditure consumed in the UK can be claimed in cash from the UK Government through the tax system. In future this should also apply to High End TV Drama and Documentaries (costing at least £1m per hour), Animations and, err… Computer Games.

Now you may not think that Computer Games are relevant to Moviescope readers but it is worth bearing in mind that we are in a world where convergence is becoming a key driver in the way we deliver and consume content.

Arguably, post apocalyptic settings are great for computer games but I digress, the cultural identity of computer games being beyond the remit of this article, or is it? Let’s start with the fact that a TV production or animation needs to be ‘British’ (post apocalypse or otherwise) and the draft legislation, as for Film Tax Credits, requires that a production must either gain 16 points in a British Cultural Test or be produced under an Official Co-Production treaty.

At the time of writing final details of the Cultural Tests are not available although the indications are that the tests will be expanded to deem European, as well as British, culture as valid. This may seem counter intuitive but I am constantly reminded that the average person from the Netherlands probably has a better grasp of English grammar than many ‘Brits’, certainly in the case of footballers anyway, so perhaps not as leftfield as one might at first assume.

Well spoken Dutchmen apart, given that most of the draft legislation published on 11 December 2012 is clearly modelled on the existing Film Tax Credit model, it is no surprise that the proposed Cultural Tests are similar too. Nevertheless, the animation and video games Cultural Tests have raised some eyebrows. For example, points may be awarded if a game or animation is set in the UK (or another EEA state), the lead characters are British (or from the EEA) or the story is from the UK (or EEA). Recognisable characteristics from the Film Cultural Test, but it is questionable whether characters and locations in many computer games represent anywhere in particular! This is, therefore, acknowledged by granting some ‘cultural’ points towards qualification if the locations, nationalities, species etc are indeterminate. An interesting concept! This is not replicated in the High End TV Drama Cultural Test, but neither is the requirement that 6 points are required from Section A (in which these locations, nationalities and species tests are contained). So are we beginning to see a divergence, with Films and High End TV Drama sharing characteristics whilst Animations appear to be leaning towards to Computer Games end of British/European/indeterminate culture?

The alternative qualification criterion is, of course, that the production is made under an official co-production treaty. There are a number of official co-production treaties between the UK and various countries (but not the USA) as well as the European Convention on Co-Production (ECCC). The only problem is that some of the treaties don’t cover TV Productions, including the ECCC so, for example, if you are planning a Co-Production with an Irish producer and planning to double up with the Irish ‘Section 481’ incentive then you may need to think very carefully about how things are structured.

We should not ‘look a gift horse in the mouth’ but as 2013 unfolds there is still time to voice opinion before the new TV Tax Credits come into effect on 1 April. But enough of 2013, how about an end of term report on the new EIS regime during 2012?

Hindsight is a wonderful thing, and when we get to an appropriate juncture I will be delighted to give my opinion. However, it is a little difficult to assess the position at the moment. Raising finance is difficult in this post ‘banking crisis’ apocalypse, maybe because we are also in a post ‘sale and leaseback’ (Section 48) apocalypse too. Not only are the media still reporting on cases concerning the old sale and leaseback regime from pre 2007, we have recently seen organisations such as Future Capital and Ingenious Media savage Parliament’s Public Accounts Committee over what is increasingly looking like a political witch-hunt as the public are softened up for the introduction of a General Anti-Avoidance Tax Rule. This is unhelpful for Film Producers because the good guys are not, seemingly, being distinguished from the bad ones. Going out to raise finance in a climate where our industry’s reputation is being tarnished makes life difficult, even with the enhanced EIS Tax Reliefs on offer to investors.

The effectiveness of EIS has also been hampered by the introduction of some Anti-Avoidance legislation known as ‘Disqualifying Arrangements’ which is rather vague and gives HM Revenue and Customs (HMRC) potential latitude in applying the rules. This is great for tackling tax evasion as it gives HMRC flexibility to adapt to new ‘schemes’ but the price being paid is the uncertainty for those trying to raise finance. This uncertainty is likely to have delayed a number of EIS launches during 2012, as has the fact that investors are able to get better tax breaks, particularly during 2012-13, through investing in smaller SEIS schemes, EIS’s young baby sibling! At the same time the FSMA/FSA regulations provide further ‘red tape’ obstructing the raising of finance and the implementation of the Retail Distribution Review by the FSA could have further impact on the ability to raise finance.

Is it just the idiosyncrasies of government and politics that means that with one hand Tax Incentives are offered through Tax Credits and EIS but then great energy is spent discrediting tax planning and making it ever more difficult to market EIS raises due to FSA regulation?

Perhaps we should all consider relocating to one of those indeterminate places that count towards the TV Animations and Video Games Cultural Tests? Or maybe a post apocalyptic world free of politicians is desirable, anyone know a decent ‘benevolent dictator’?

Cynicism aside, those of us who are, nevertheless, optimists will see that the ‘glass is half full’. So, don’t panic, keep calm and relish the UK Tax Credits, film does have a future in the UK and Moviescope readers have roles to play. Please hold on, your contribution is important to us.

Dave Morrison