Fluidity is grateful to Wiggin LLP (www.wiggin.co.uk) for the following explanation of

S-EIS and EIS in the film sector.

NB. Fluidity Films has no commercial connection with Wiggin LLP and this is to be used as a guide only and is not an invitation to invest. Potential investors should always discuss investments with their financial advisors. Film investment is a risky activity and you may not receive back what you originally invested.

Summary of Enterprise Investment Scheme (EIS)

· EIS provides income tax relief at the rate of 30% on equity investment by individuals in unquoted trading companies

· Gains on EIS shares can be tax free and losses off-settable against income tax. Gains on capital assets can be deferred by reinvesting in EIS shares

· Thus, EIS offers a total tax saving and deferral of nearly 60% of the investment. Downside risk for 50% tax payers is effectively capped at 35% of original investment

· The annual investment per individual is limited to £1m. For shares issued after 6 April 2012, companies can raise up to £5m p.a. through EIS (and other VCT reliefs) – subject to final EU approval, expected imminently

· An “active trade” is needed: special rules allow licensing of intellectual property. So EIS is available for most projects in the film industry (from pre-development through production and on to distribution), along with games/app development and music recording

· Investors with stakes greater than 30% or who are employees/directors do not normally qualify

Overview of EIS

EIS is a UK Government scheme that provides tax reliefs for investors who subscribe for shares in smaller unquoted trading companies. The scheme can be used to raise finance either for initial start-up or for expansion. EIS funding can be used in conjunction with other financing e.g. bank debt, production incentives (e.g. UK film tax credit), pre-sales or equity investment.

The maximum investment in any one tax year per individual is £1 million. The maximum each company can raise in any year from EIS (and other EU State Aid sources, e.g. venture capital tax reliefs) is currently £5 million for shares issued after 6 April 2012 (subject to final EU State Aid approval which is expected imminently). Note that the UK film tax credit does not count towards this £5 million State Aid limit.

The primary tax relief takes the form of a reduction in the investor’s UK income tax relief at a rate of 30% on the amount invested. Additionally, any gain arising on a disposal of the shares after three years should be free of capital gains tax. Investors can also defer any recent capital gains on any other assets by re-investing all or part of the gain into an EIS company. Losses made on the disposal of EIS shares can be set off against capital gains tax or, in some circumstances, income tax. As a result of the reliefs, an individual could have a total tax saving and deferral of nearly 60% of his investment. Conversely, if his investment totally fails, his net loss would be limited to 35% of his initial cash outlay.

Since these tax breaks are so attractive they are restricted to genuine “at risk” investments in smaller trading companies. The investment must remain in place for a minimum three year qualifying period. Historically the scheme has been limited to companies with gross assets before investment of up to £7 million, and £8 million post-investment, with fewer than 50 full time employees. However, it is proposed that these limits (for which formal EU State Aid approval is awaited) be increased to £15/£16 million and 250 employees for share issues from 6 April 2012.

To satisfy the aim of the tax breaks, the focus is on “active” trades so financing and asset rich activities have always been excluded. Licencing of intellectual property where the value has been created by the company is expressly allowed, thereby enabling companies in the media sector such as TV and film production to qualify. Indeed, the EIS scheme has proved most attractive to the media and film sector. A broad spectrum of companies – including film development, pre-production, production, post-production, CGI, games/aps development and music recording/production companies – have all qualified. It is also possible to establish an “EIS Fund” as a collective vehicle to diversify investment risk in an EIS wrapper. These can be HMRC approved or unapproved: both offer the generous EIS tax breaks and a spread of risk.

Outline of Scheme Rules

Throughout its relevant three-year qualifying period, the EIS company must:

· Be an unquoted company (Note: The UK AIM market is “unquoted”)

· Be a trading company, carrying on a qualifying trade

· Exist for genuine commercial purposes, and not be part of a scheme for the avoidance of tax

· Not be a 51% subsidiary of another company, or otherwise under the control of another company

· The company must not be in “financial difficulty”

· The company must have a permanent establishment in the UK. Historically it had to have its business wholly or mainly carried on in the UK so the relaxation of this requirement permits EIS relief for non-UK operating companies (e.g. in the US or elsewhere)

In addition:

· An investor cannot be ‘connected’ with the EIS company – i.e. broadly cannot own more than 30% of the shares/votes, directly or indirectly

· Individuals who are paid directors or employees of the EIS company at the time of the issue of shares are normally disqualified from claiming EIS relief. Otherwise, qualifying investors can, in certain circumstances, be paid for their work provided that the total remuneration package is reasonable

· The money raised by the EIS share issue must be wholly used for the qualifying business activity within a 2-year period

· Schemes that underwrite the equity risk, e.g. guarantees or exit arrangements, will not attract tax relief

· To prevent abuse, there is a “no disqualifying arrangements” rule. Thus, the scheme will not attract tax relief if the shares are issued in connection with artificial arrangements whereby the EIS company is effectively a hive-off of a larger pre-existing enterprise or a mere shell lacking risk and substance. However, HMRC have assured Wiggin LLP that this rule is not intended to catch genuine commercial arrangements in the film and creative industries. Moreover, the rules should not prevent the normal film industry practice of setting up an SPV to make the film, or typical “sub-contracting” arrangements.

Seed Enterprise Investment Scheme (SEIS)

To complement EIS, since 6 April 2012 SEIS offers smaller early stage companies a similar scheme to EIS.

· Income tax relief of 50% of the investment for individuals who invest in qualifying companies, irrespective of their marginal rate tax

· Annual investment limit of £100,000 per individual; cumulative limit of £150,000 over 3-year period for company

· Gains arising on the disposal of other assets in 2012/13 will be tax free if reinvested in SEIS in same year

· Company’s gross assets immediately pre-investment must not exceed £200,000, with less than 25 employees

· Funds raised must be for genuine “new” (i.e. less than 2 years old) trading venture. Relief not denied if trade is never commenced – so SEIS helpful for exploratory projects (e.g. film development or games/apps creation)

· Most of the EIS restrictions (e.g. unquoted, independence, no exit/guarantee arrangements) apply equally to SEIS.

Conclusion

The EIS scheme has gained particular popularity in the film sector – offering not only the upsides of income and capital gains tax reliefs but also downside mitigation. EIS players can be divided into those that are genuinely aiming to recoup large returns for investors specialising in new entrepreneurial businesses and those playing as risk-free a strategy as possible to preserve capital and convert the 30% tax relief into a fixed return over the 3 year play. As mentioned, the UK Government perceived that certain schemes lacked substance and risk and have tightened the rules from April 2012 so that only genuine small entrepreneurial businesses qualify rather than hive-outs from large existing businesses. Greater care may be needed in structuring schemes in the future, but EIS funds will nevertheless continue to provide valuable resources to the UK film sector. The SEIS scheme will be an important tax relief (worth a maximum of 78% with the income tax relief and tax free holiday) attracting smaller investments into risky start-ups

Fluidity has used a number of tax efficient EIS (Enterprise Initiative Schemes) to finance its films.

We have introduced over 125 new investors to film finance. Investors enjoy newsletters, early access to scripts, stills, rushes, and special premieres with cast & crew.

We are now looking to raise development funds through the government’s new Seed-EIS

(S-EIS), which offers even greater tax relief.

The funds will be used to develop Fluidity’s slate of films. The first film into development is a brilliant, but neglected literary adaptation by one of our finest 19th Century writers.

Opposite is an excellent description of S-EIS and EIS from law firm Wiggin LLP.

Please click below or contact us for more information about the funds.

DEVELOPMENT FUNDS