2021 Creative Media Finance Update

Many of my clients have been in video games, entertainment media, and streamed content. Here is a little wrap up on financing them to go with the 2021 Budget, with a deeper dive into EIS and SEIS

Major factors

1.       General environment

2.      COVID-19

3.      Production restart insurance fund scheme

4.     EIS Scheme updates

5.      Availability of presales guarantees.

  1. Budget 2021

1. General Environment

A 21% fall in production in Q2/3 2020 has impacted the sector, leading to shortages of completed projects and over-supply of talent and workforce. Significant pressures on cash and finance have resulted in closure of many producers and mothballing of productions.

Public funders, BFI, BBC and Film4, screen agencies, banks, financiers like Head Gear, Great Point and Ingenious plus private equity are still active and  there is money there to invest in new productions, but barriers to entry are high and qualifying criteria steep.

Full collateralisation of smaller features is now entirely possible, leading to a “double bump” market – lots of £2-£5m streaming projects and lots of £100m+ theatrical projects.

Consumption is up on video, streaming, box sets, television and casual downloads. Theatrical is expected to recover from July 2021 and then very strongly from September 2021. Consumers have fallen back in love with visual content as an escape during quarantines and this is likely to continue.

2. COVID-19

Likely to be an issue until Autumn 2021 with substantial numbers of deferred projects coming back as the risk falls with vaccine roll out. Expect huge pressure on scarce talent and resources as projects will need to compete for them.

COVID appears to have increased budgets in the sector by 10-20% because of constraints and protective measures which all increase time to shoot.

Some risk that investors are now overcommitted as funding windows have overlapped and we enter new tax years where carry backs might have been utilised on other investments.

3. Production restart insurance fund scheme

A Government-backed £500m scheme for UK film and TV productions struggling to get insurance for COVID-related costs. Designed to help productions halted or delayed by an inability to obtain insurance for Covid-19 related risks to get back up and running, by giving productions the confidence they need that they will be supported if future losses are incurred due to COVID-19.

The Scheme Rules and supplementary Explanatory Notes, as published by DCMS and HM Treasury, can be found on this page. Applications must be made via the appointed Third Party Administrator, Marsh Commercial, and the application form can be viewed and submitted through this link. As per the initial announcement, future claims made under the Scheme can be backdated to 28 July 2020.

Where projects were deferred and found insurance impossible, this scheme is a lifesaver. Do note the sublimit of £5m and the need to have other insurance outside COVID-19 cover.

This scheme works well with completion bonds schemes and can fill useful gaps in insurance while COVID-19 remains an issue.

4. EIS Schemes

May 2019 HMRC statistics show £1.9 billion was raised via EIS during the 2017-18 tax year, a 1.5% increase from the prior year. This growth, albeit slight, happened despite the tightening of the EIS rules announced in the 2017 Autumn Statement.

Although investment into EIS increased, the rule changes created a shift in sector mix. The most notable change was in the media and entertainment sector. Before 2017, film companies accounted for nearly a third of EIS investments. In the 2017-18 tax year, film accounted for less than 10% of total EIS investments, which is a significant and abrupt drop.

HMRC have created a set of powerful barriers that have made EIS less attractive for movie and TV productions. The trend to use EIS to create multi-project production companies who act as producers and sales companies across 5 to 20 theatrical, artistic, streamed, and television projects is well established.

SEIS and EIS are increasingly being channelled via “compliant funds” which provides HMRC with additional confidence and governance.

However, SEIS and EIS remain very available and valuable to production companies. SEIS companies remain around 3x more investible than non-SEIS companies, and the tax breaks and conditions remain attractive (See benefits at end).

Companies that pass the key tests are finding that SEIS and EIS are still granted, albeit after slightly longer assessment processes.

When setting up a film or television production company remember that there are no bright lines between a qualifying and non-qualifying company, to deter gaming of the tax-advantaged venture capital schemes by tax planners, but the key factors that matter are:

·        Must have a risk to capital

·        Must have growth in employees, and/or customers, and/or turnover as clear planned objective(s)

·        Ownership and management should be “genuine entrepreneurs” with a financial interest in the outcome (as opposed to purely financial managers or experts in capital preservation)

·        What does the marketing material say about risk versus capital protection

·        Avoid duplicating the same framework in multiple domains

·        Should have ability to deliver projects regularly and profitably

·        May have multiple income streams, some of which are pre-determined (note clash with 100% pre-sold content)

·        Consider carefully any assets or valuable IP that is acquired with capital

·        Consider the amount and type of subcontracting used

·        Consider carefully the use of “SPV” companies and how they are funded

·        Consider carefully any completion bonds or sales company guarantees

We also recommend reading the Allenbridge Report on Tax-Advantaged Investing in the UK Film and Television Industry (2017 and now slightly dated)

SEIS and EIS Benefits

Start-up equity is a high-risk asset class, your investment will be illiquid and its value can also decrease over time.

The benefit you obtain from their reliefs will depend on your residence, domicile and tax status. Your ability to utilise the befits will depend on other taxable income, capital transactions, family status, and personal preferences. You should take paid advice from a qualified and regulated advisor before acting or not acting on any apparent opportunity.

SEIS

To qualify for these tax benefits, investors must abide by the following rules:

1.       You must be a UK taxpayer.

2.      You can only invest up to a maximum of £100,000 in any number of qualifying companies in each tax year.

3.      You must hold the shares for a minimum of 3 years. If you sell or gift the shares within the 3-year period, you will be subject to relief clawback.

4.     You cannot carry-forward your SEIS tax relief.

To be allowed to offer SEIS to investors.

1.       Your company must not have more than £200,000 of gross assets at the time that the shares are issued.

2.      Your company must not have been trading for more than 2 years.

3.      Your company must have fewer than 25 full-time equivalent employees.

4.     Your company can only receive a maximum of £150,000 through SEIS investments in its lifetime.

5.      You must be a qualifying company with a qualifying trade

What are the SEIS Tax Relief Benefits for Investors?

SEIS Income Tax Relief

If eligible, you can claim back up to 50% of the value of your investment in the form of income tax relief.

SEIS Capital Gains Tax Relief:

Disposal Relief:

Depending on your personal circumstances, if you sell your shares after having held them for at least 3 years, then you may be able to pay no Capital Gains Tax on your investment gains.

SEIS Capital Gains Tax Reinvestment Relief:

If you choose to reinvest gains from other non-SEIS investments into an SEIS eligible company, you will receive 50% Capital Gains Tax relief on the original investments.

SEIS Loss Relief:

If the business performs poorly and you lose money on your investment, you may also claim loss relief. The loss relief you can claim is at the equivalent rate to the highest rate of income tax you pay.

Applying tax relief to a previous year (carry-back):

You can use a carry-back facility allowing you to treat shares as if they were acquired in the preceding tax year.

SEIS Inheritance Tax Relief:

After holding the shares for 2 years, there will no longer be any Inheritance Tax on their value.

EIS

Investors must abide by the following rules:

1.       You must be a UK taxpayer.

2.      You can only invest up to a maximum of £1 million in any number of qualifying companies in each tax year.

3.      You must hold the shares for a minimum of 3 years. If you sell or gift the shares within the 3-year period, you will be subject to relief clawback.

4.     You cannot carry-forward your EIS tax relief.

You must not be connected to the EIS company (the meaning of connected being: (i) an employee (ii) partner (iii) a paid director)

You must be buying brand new shares that are not already on the market.

To offer EIS qualifying shares to investors, the company must abide by the following rules

1.       Your company can raise a maximum of £5 million in total in any 12-month period under EIS (if you raise more, only up to £5 million worth of shares with be eligible for EIS).

2.      Your company must not have more than £15 million of gross assets.

3.      Your company must have fewer than 250 full-time equivalent employees.

4.     The company must be a qualifying company with a qualifying trade

EIS Income Tax Relief:

You can claim back up to 30% of the value of your investment in the form of income tax relief. Therefore, if you make an investment of £10,000 you can save £3,000 in income tax.

EIS Capital Gains Tax Relief:

Disposal Relief:

If you hold the shares for at least 3 years, then all gains that accrue on those shares may be exempt from Capital Gains Tax when you come to sell them. T

Deferral Relief:

You will not have to pay Capital Gains Tax until a later date if you dispose of an asset (any asset) and use the gain you made on that asset to invest in shares in a company that qualifies for EIS. You will usually have to pay the Capital Gains Tax when you dispose of the EIS shares.

EIS Loss Relief:

If the business performs poorly and you lose money on your investment, you may claim loss relief. The loss relief you can claim is at the equivalent rate to the highest rate of income tax you pay.

Applying tax relief to a previous year (carry-back):

You can treat some or all the shares as being issued in the preceding tax year, if you had not reached the limit for the value of EIS shares purchased (£1,000,000) in that year.

EIS Inheritance Tax Relief:

You can generally claim Inheritance Tax relief of 100% after two years of holding EIS shares in a private company. This means that any liability for Inheritance Tax is reduced or eliminated in respect of such shares. However, this relief is not available if the shares are listed on a recognised stock exchange.

5. Availability of presales guarantees

Streamed Video on Demand is the key to unlocking most packages now. SVoD has grown dramatically and has returned good money to investors in a range of niche and specialist documentary areas as well as the blockbuster titles that were released direct to SVoD.

Production companies with strong sales partners and strong sales teams are in high demand in the sector because of this.

6. Budget 2021

Specific help for the arts has been announced.

  • £400m to help arts venues in England, including museums and galleries, re-open

  • £300m recovery package for professional sport and £25m for grassroots football

  • A total of £700m will go on supporting arts, culture and sports as they reopen

  • A £150m fund will help communities take ownership of pubs, theatres, shops or local sports clubs at risk of being lost

The reliefs for entertainment and hospitality will also likely apply to bars, restaurants and conference facilities at arts venues. Media and arts companies are likely to qualify for many of these as well. They include:

  • Incentive grants for apprenticeships to rise to £3,000 and £126 for traineeships

  • A "help to grow" scheme will offer smaller businesses management and digital training

  • VAT cut for hospitality firms to be maintained at 5% until September

  • Interim 12.5% rate to apply for the following six months

  • Business rates holiday for firms in England will continue from April until June

  • Reduced rate of 5% VAT for the hospitality and tourism sectors has been extended to the end of September, and will only go up to 12.5% after that, before returning to 20% next April

  • £5bn in re-opening grants for non-essential businesses of up to £6,000 per premises.

Action points

Our clients are going to need all the help they can get to raise growth capital, fund projects, finance development, and cash flow production. While these items all help, weaving them into a coherent financial strategy for you is what we enjoy the most.