Tax credit for games, television animation and high-end television
Enterprise Investment Scheme
Seed Enterprise Investment Scheme
Tax credit for games, television animation and high-end television
The United Kingdom's creative industries have welcomed the introduction of corporation tax reliefs for the production of culturally British video games, television animation programmes and high-end television productions, similar to the reliefs already in place for films. A consultation will take place in Summer 2012 and legislation will be included in the Finance Bill 2013, to take effect from April 1 2013, subject to state aid approval.
This measure stems from the government's stated intention in the Budget to "support technological innovation and help the digital, creative and other high-technology industries" as part of its ambition to make the United Kingdom "the technology hub of Europe". The change comes after months of high-profile lobbying by the industry.
The Enterprise Investment Scheme (EIS) is a scheme designed by the government to help smaller, higher-risk trading companies to raise finance by offering a range of tax reliefs to investors that purchase new shares in such companies. It has therefore been adopted by funds wishing to raise finance for slates of productions, and by production companies raising finance for individual productions.
The maximum investment amount in a 12-month period is capped at £2 million, but the government has decided to raise this limit to £5 million, subject to state aid approval from the European Union. The industry's response to this change has been mixed, as a higher cap of £10 million had been widely expected. Some see this as a missed opportunity, but others feel that £5 million is a sufficient increase to give the media production sector the boost that it needs.
Subject to state aid approval, legislation will also be introduced in the Finance Bill 2012 to increase:
- the thresholds for the maximum size of qualifying company for the EIS from gross assets of no more than £7 million immediately before the share issue and £8 million thereafter, to gross assets of no more than £15 million before investment and £16 million thereafter; and
- the limit on the number of employees in a qualifying company from 50 to 250.
Raising the maximum size of a qualifying company, in assets and employees, does not necessarily lend itself to production companies, which characteristically have relatively few employees (relying more on freelancers) and generally do not own many assets. Instead, the changes open up the market to larger, more asset-rich companies, and production companies may find themselves with tougher competition for fundraising in the EIS investment market.
The following advantageous changes to the EIS have also been announced, to be effected by the Finance Bill 2012:
- As expected, the maximum annual amount that an individual can invest in a company will be increased from £500,000 to £1 million for fiscal year 2012/2013.
- In order to qualify for tax relief under the EIS, an individual may not possess or be entitled to acquire more than 30% of the loan capital and issued share capital of the company. In future, loan capital will be disregarded for the purposes of this limit.
- In order to qualify for relief, the shares must not be entitled to present or future preferential rights to dividends. In future, the rules will be relaxed to allow shares to carry a preferential right to dividends, provided that their amount and the date on which they are payable is not dependent on a decision of the company, the holder or any other party, and providing that the dividends are not cumulative.
- At present, in order to be eligible for EIS relief in respect of an amount subscribed for shares issued by the issuing company in a tax year, the investor must subscribe for at least £500 of shares in that company. This minimum limit will be withdrawn.
The government will also introduce a new disqualifying purpose test to exclude companies established for the purpose of accessing relief, and to exclude the acquisition of shares by a qualifying company in another company. The exclusion of companies established for the purpose of accessing relief will need to be handled with care by fund managers and further elucidation on this test would be valuable.
In challenging financial times, when individuals are cautious of investing in higher-risk industries such as film, television, theatre and related media, these changes are to be welcomed, but the fact that the changes require state aid approval before being implemented leaves the industry with some uncertainty. Approval is expected in the next few months.
Seed Enterprise Investment Scheme
From April 2012 the government will introduce the new Seed Enterprise Investment Scheme, providing income tax relief of 50% for individuals who invest in shares in qualifying seed companies, with a limit for each investor of £100,000 for each tax year. There will also be a capital gains tax holiday, so that capital gains realised on the disposal of assets in the 2012/2013 tax year that are invested through the scheme in the same year will be exempt from capital gains tax.
The £150,000 limit on the amount that a company can raise means that this scheme does not support the activities of high-cost production, but it could be used by new or young companies for their development slates or for other development activities. Among other qualifying conditions, the value of the company's assets must not be greater than £200,000 immediately before the relevant shares are issued and the number of full-time equivalent employees must be under 25.
For further information on this topic please contact David Scott or Kate McCullagh at Harbottle & Lewis LLP by telephone (+44 20 7667 5000), fax (+44 20 7667 5100) or email ([email protected] or [email protected] ).