The Art of Film Finance and Investment
By Robert Graham
Posted: 2nd June 2016 08:31
This has always been considered a very high risk area but with careful project management and government incentives much of the risk is removed.
The first stage is to identify what type of film is to be made. That can be a very difficult task for most producers, many of which will have worked on their ‘baby’ for, in some cases, years. Many will not be thinking about the end user or if anyone will even want to see their film.
Every film needs to be seen as a business and a profitable one. But how is that possible?
The film company will consist of film makers that work with integrity and transparency and do so as a team for the benefit of the film. Experienced people who want to make a profitable film and are aware of the necessity to minimise the production costs and yet maintain production value. In other words: no wasted costs.
Like any product or service, a film production company starts at the basic level before spending any money by asking the market what it wants. How is that achieved? Firstly, by speaking to distributors in the UK and US to see what they think will sell. In creating that dialogue, ideas of genre and cast can be shared so that once agreed – and before seeking finance – UK and US distribution is already in place.
Many producers fall at this hurdle as they will have already made the film and then have to try and sell it through festivals all over the world which is very expensive. It is also then too late to tweak the film for a different market. By partnering with distributors it is possible to cut out two complete layers of cost – a sales agent and the high costs of attending festivals and markets.
Various countries may require different content or artwork in which case a specific edit if needed can be done in the post production stage after including distributors in the process. It is a far stronger proposition to present to potential financiers or investors with a guaranteed route to UK and international markets.
For investors the best and most tax efficient structure is to create a Seed Enterprise Investment Scheme (SEIS) or an Enterprise Investment Scheme (EIS) or a blend of both. These are pre-approved by HMRC so investors have confidence in a genuine project.
SEIS allows a 50% tax credit on investment and an EIS allows 30%. 50% CGT can be written off on an SEIS and 100% CGT can be deferred on an EIS for the duration of the investment. Both carry inheritance tax exemptions after two years. Both allow tax relief on any losses at the investors highest rate of tax. After three years all profits are completely free of tax.
Additional incentives can be in terms of the UK film tax credit. HMRC can pay 20% of the production costs on a British film back to the company. This can be ring fenced for investors reducing their risk considerably.
Establishing a route to market beforehand means the film will be sold faster and, as its market place has been established, returns can enjoyed much earlier. Once the film has broken even profits can be shared between investors and the film makers. Distributions made to cast and crew, if part of their contracts, are classed as additional core expenditure and additional tax credit claims can be made with no limit to the amount or quantity of claims made.
This is what makes UK film so attractive. A very successful film can make multiple claims creating an alternative revenue stream. This can then be distributed in the usual way. Those distributions relating to cast and crew create additional claims.
It is possible to build a model this way that is then self-funding. Most of the profits on film 1 are used to partly or fully finance film 2 and so on. Each new film is a partnership with distributors and retailers. Once this model is followed it will be noticed by major players and can lead to ‘pick ups’ by major Hollywood studios.
Long after the film has wrapped up, the ‘business’ continues. There are continuing compliance issues such as VAT, statutory accounts and corporate returns. Producers need to factor that in for at least the first three years of an investment.
It is very important for producers to seek the advice of a film experienced accountant who is fully aware of the potential pit falls of a company and those that surround making a movie. Share issues, SEIS and EIS qualifying period compliance, tax and statutory accounts. This professional should be known by the British Film Institute who will certify the film as British which is vital for the tax credit. That professional also should have a good working relationship with HMRC specialised film tax unit. Incorrect tax credit claims can lead to not only non-payment of the claim but penalties as well.
That professional accountant can also help raise finance through investment broker contacts and explain the tax process to potential investors and ensure no breaches of compliance which could destroy an approved scheme.
Film investment into HMRC pre-approved schemes with experienced professionals and an in built route to market is now a significantly lower risk alternative investment. It also has the added bonus of meeting cast and crew, visiting film sets and premiers and being part of the excitement that is the movie industry.
Robert Graham is a director of Graham Associates (International) Ltd a multiple award winning firm of International Accountants. He is also a director of Independent Moving Pictures Ltd that finances and produces features. Robert is also an Executive Producer and has been involved in over 40 completed films with a further 15 in development and production.
Robert can be contacted on 0207 917 1727 or by email at firstname.lastname@example.org