Press Releases
November 2011
Many benefits available to investors in British film industry, says tax expert
Profitable companies in the UK could benefit from the next block buster movie by diversifying their trading structures and investing in the British film industry, a tax expert says.
Keith Bell, a tax partner at Essex-based Chartered Accountants Rickard Keen, says investing in the burgeoning British industry could have a positive effect on cashflow, improve distributable reserves and have corporation tax benefits.
According to Keith, the concept of film investment has dramatically changed since favourable tax reliefs were introduced in the 1980's to encourage individuals to invest in the British film industry.
"Things have moved on considerably since that time and the beneficial tax regime to individuals has been withdrawn," he said.
"However, this has left the way for profitable limited companies to consider investing in an investment vehicle, typically a limited liability partnership (LLP), with a view to providing the finance for the making of one or more British films."
Typically the vast majority of costs of producing a film are up front and go into the production process. This will mean at that point, virtually no income will have been generated by the LLP and no certainty the film will become a blockbuster.
"This means that when the LLP is preparing its accounts in accordance with UK GAAP, the film must be valued at the lower of cost and net realisable value," said Keith.
"The net realisable value is most likely to prevail, and typically this might only be 15% to 20% of the actual costs incurred. However one must take into account the possibility of formal contracts being entered into and having an effect on this value.
"Inevitably, it is likely that a substantial loss will arise in that first accountancy period."
In this situation the loss is divided between the various LLP members, with the individual corporate investor offsetting this trading loss against their other trading profits within the same accounting year.
The loss allocation is agreed between the corporate members of the LLP, with the film investment company taking a smaller proportion of this loss.
However, as Keith explains, this loss can be turned around if the film is successful.
"As this is an investment opportunity, the LLP will agree that the film investment company can recover its outlay by having an enhance share of the revenue stream/profits arising from the box office following distribution," he said.
"However the corporate investor will still be entitled to a share of these future box office receipts and will therefore always end up with sufficient cash being distributed to more than meet its own corporation tax liability arising upon the film profits, with excess being contribution towards its own cashflow."
Furthermore, according to Keith, is an increase in the distributable reserves of the company, because there is a reduction in the company's reserve for corporation tax, thus enhancing their ability to pay dividends from its own distributable reserve.
A company can also reduce its corporation tax liability in year, while profiting from the film.
"A by-product of making such a corporate investment, in addition to the opportunity to profit from such films, is that by reducing the company's own corporation tax liability in one year, this may well have the effect of removing the company, if only temporarily from the need to pay corporation tax on a quarterly instalment basis, thereby potentially improving the company's own cashflow position," he said.
"The entry level for investment is normally £50,000, but where the potential corporate investor does not have a corporation tax liability of at least this amount, there is an alternative way of making such investment.
"In this case the minimum investment commitment by the corporate investor reduces to approximately £16,000.
He concluded: "Essentially there are many positive effects of investing in the film industry, with the associated benefits of being involved in the industry and having the opportunity to see the benefits of one's investment appearing on the national and worldwide 'stage'."