HMRC has published a note to clarify the interaction between film or television co-productions and the Enterprise Investment Scheme (EIS). In the note, HMRC states that companies participating in a film or television co-production cannot benefit from the EIS unless they are closely related, as they fail to pass the necessary criteria set out in Section 183 of the Income Tax Act 2007 (ITA).
In a co-production (i.e. a film or television production involving more than one producer), each co-producer will be responsible for creating a certain part of the production and for raising the necessary finance to fund the production of their part. The respective parts will then be collated into a finished programme or film with the intellectual property created in relation to the programme or film being jointly owned by the co-producers, and income deriving from that programme or film being divided between them.
If a co-producer is responsible for creating more than 50% of the production, they are referred to as a “majority producer”.
Benefitting from EIS
The criteria that a company must meet in order to qualify for relief under the EIS are set out in the ITA. To qualify under the EIS, a company must, amongst other things, exist wholly for the purpose of carrying on a “qualifying trade”. A qualifying trade cannot, for the relevant periods set out in ITA, consist wholly or substantially of an “excluded activity”. One such excluded activity is “receiving royalties or licence fees” (s.192(1)(e) ITA).
In the past, HMRC has accepted in some instances that, despite a majority producer receiving royalties or licence fees in relation to a co-production, the majority producer is still eligible to be considered as a qualifying company for the purpose of the EIS. This is because there is an exception set out in s.195(3) ITA which states that if the receipt of royalties or licence fees is attributable to the exploitation of “relevant intangible assets” (in this case, the intellectual property in the co-production), then this will not be considered an excluded activity for the purpose of s.192(1)(e) ITA.
Taking a step back to look at s.183 ITA
However, HMRC’s new guidance states that before considering the applicability of s.192 ITA and s.195 ITA, consideration must first be given to the provisions of s.183 ITA.
S.183 states that for a company to be eligible for the EIS, only that company or a qualifying 90% subsidiary of that company should be carrying on the relevant qualifying trade. In the case of a co-production, the qualifying trade is being carried out by both the co-producer hoping for EIS eligibility and the other co-producer.
It is possible that such other co-producer could be a qualifying 90% subsidiary of the co-producer hoping for EIS eligibility. To meet this requirement though, the co-producer hoping for EIS eligibility would have to hold at least 90% of the share capital, voting rights and economic interest in its fellow co-producer. Given that co-productions usually arise where independent companies, often in separate jurisdictions, collaborate, this scenario would be unusual.
Qualifying 90% subsidiaries aside, HMRC has concluded that, despite a co-production resulting in a single product, the product’s creation is as a consequence of the trade of a potentially EIS qualifying company being partially conducted by another person, and therefore the eligibility test set out in s.183 is failed.
HMRC also confirmed in its note that these rules will apply whether the production is a qualifying co-production (as defined by s.1186 and s.1216AI Corporation Tax Act 2009) or an unofficial co-production.
However, the clarified rules do not affect a qualifying co-production’s entitlement to film or television tax relief.
Where the tax benefits of EIS relief are key for attracting investors, producers will now have to balance the advantages that relief confers against the loss of the benefits afforded by co-production structures. That will likely result in a single producer with various production activities outsourced.