Film Tax

Companies that make films are currently taxed under a set of rules introduced in last year’s Budget, which treat each film as a separate trade, and then provide additional relief for production companies making British cinema films.

New rules will be introduced under which companies making films (including films which are not intended for cinema release) may elect to be taxed under general tax rules, rather than under the 2006 tax regime. Elections can be made for all future films, and any film that started principal photography in the last two years. An election, once made, cannot be revoked.

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Changes to the Venture Capital Schemes and Enterprise Management Investment Incentives

The employee test

Companies raising money under the Venture Capital Schemes must have fewer than 50 full-time employees on the date the relevant shares are issued.

This rule only applies to investments by venture capital trusts using funds raised after 5 April 2007.

For the purposes of EIS and the corporate venturing scheme (“CVS”), this rule applies to shares issued on or after the date the Finance Bill receives Royal Assent (likely to be in July 2007).

The Investment Limit

In any twelve month period, the maximum that a company can raise under any of the Venture Capital Schemes is limited to £2 million. Any monies raised in excess of these amounts during any twelve month period will not qualify for EIS or CVS relief and will not be a qualifying holding if invested by a VCT.

This rule only applies to investments by venture capital trusts using funds raised after 5 April 2007.

For the purposes of EIS and CVS, this rule applies to shares issued on or after the date the Finance Bill receives Royal Assent.

90% subsidiaries

At the moment, where a qualifying trade is carried on by a subsidiary, that subsidiary must be directly owned by the qualifying parent company. From 6 April 2007 this rule will be relaxed – the trade can be carried on by indirect subsidiaries (provided they are at least 90% owned).

Intangible Assets

New rules will be introduced to allow relevant intangible assets (usually IP) to be transferred around a group of companies without jeopardising tax relief under the Venture Capital Schemes, or the qualifying status of any EMI options. The new rules will take effect from 6 April 2007.

VCTs – the 70% test

A VCT must at all times hold at least 70% by value of its investments in qualifying holdings. However, where cash is raised from a disposal of a qualifying holding (provided it has been owned for at least six months) that cash will, from 6 April 2007, not be treated as an “investment” for six months following the disposal. In other words, the VCT will have a six month window in which to reinvest or distribute that cash before it impacts on the 70% test.

VCTs – Non-withdrawal of approval

New regulations will be introduced to allow VCTs to retain their approval even where they are in breach of the conditions for eligibility as a VCT.

EIS – Approved Fund

An investor in an EIS approved fund will be able to claim EIS income tax relief as if the fund had closed on the date the shares are issued to that investor. Under current rules this is conditional on at least 90% having been invested within 6 months of the closing date.

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