Saturday, February 4, 2012

How to get the taxman to finance your independent animated feature film

- Posted by Alex

This post is about tax, or rather about tax-financing. But stop!....don't click away yet! For anyone in the UK trying to finance an independent film (and every self-respecting animator has a film project in there somewhere) - this is one of the best ways to do it. It's called EIS - and it is a semi-miraculous way to get the taxman to pay for your project.

What is EIS? 
EIS stands for Enterprise Incentive Scheme. It is a tax-efficient vehicle for financing new enterprises, or indeed film companies.

Tax efficient vehicle? Can you speak English please?
OK - in simple terms, here is how it works: EIS is a government tax scheme, which gives your investors very attractive tax breaks, so that they start making money long before the film does. I'll say that again: the investors start making money long before the film does.

What? ....but that's impossible, isn't it?
No. Let's say you want to raise £5m for an independent animated film. You have a great script, great character designs, a budget, a business plan - you've even done a proof-of-concept trailer. Now you just have to attract investors. First, you set up an SPV (single purpose vehicle). This is the film company that will make the film. Let's call it Awesome Films Ltd. All the rights (script, designs etc) get assigned to Awesome. Now you go to investors - that's wealthy folks with lots of spare cash -  and get them to invest.

But why would wealthy people want to invest in your film? Isn't that kind of risky?
Yes, but your film is awesome, and they are going to make money right away - even before you start making it. Under EIS, they can write off the entire amount of their investment against their income tax bill, so that they pay 30% less tax - immediately.

So they get a 30% tax break? Right away! - that's amazing!
It gets better. If your film makes money (we hope it will!) your investors don't have to pay any capital gains tax on the profits. So, they get the profits tax-free. Also, if they get run over by a bus, the profits are not subject to inheritance tax either - their children will get the profits tax-free too. So, if your film does more than break even, your investors will do very well indeed.

Ok, that's all good, but what if the film makes a loss?
God forbid. But, if it does lose money, there is more good news - the taxman helps pay for the losses. Your investors are able to write off the losses against their income tax.

Incredible! Why does the British government do this?
Because they are desperate to get new businesses up and running, to grow the economy. So they are throwing money at business startups, not in the form of grants (which are very hard to get) but in tax breaks through EIS. If you follow the rules, EIS represents a huge government investment in your business.

How do you follow the EIS rules?
Well, you will need some professional advice to help you tick all the boxes. That means you need a good accountant and/or lawyer. But it is well worth it.

How do you know this stuff?
That is a secret. But it might have to do with a lecture I attended at a leading firm of London solicitors (lawyers) last week.

- Alex