Contrary to popular belief, investing in Irish film and television projects financed by Section 481 tax relief can represent a relatively low risk opportunity for Irish income-tax payers' provided that the project is produced by a reputable film producer.
The reason for this is the financing structure that is put in place, which guarantees a relatively modest return to the taxpayer investors based on successful completion of the production rather than success at the box office. With investors' returns based purely on the production risk, Section 481 investments have become a very reliable and popular option for middle-to-high-income taxpayers.
Approval of projects
Section 481 of the Taxes Consolidation Act, 1997, provides tax relief for investments in 'qualifying films'. A qualifying film is a film for which Revenue has issued a certificate under Section 481.
A certificate is issued by Revenue and the minister for arts, heritage and the gaeltacht has responsibility to ensure that it is appropriate for Revenue to issue a certificate, having regard to the categories of film eligible for certification and the contribution the film will make to either, or both, the development of the film industry in the state and the promotion and expression of Irish culture.
A certificate is issued on the basis of the information supplied during the application process. It is at this stage that investors are invited to subscribe for shares in a 'qualifying company'. A qualifying company is a company that is incorporated and resident in Ireland or one that carries on a trade in Ireland through a branch or agency. It must exist solely for the purposes of the production and distribution of only one qualifying film. A qualifying film is one in respect of which Revenue has issued a Section 481 certificate.
The following types of film, produced on a commercial basis with a view to the realisation of profit and produced wholly or principally for exhibition to the public in cinemas or through television broadcasting, are eligible for certification:
- Feature film;
- Television drama;
- Animation; and,
- Creative documentary (subject to conditions).
Revenue will examine the financial aspects of the proposal with regard to the legal, commercial and corporate arrangements for the production of the film. In particular, they will be concerned that the appropriate level of non-Section 481 funding is provided and that the budget and financial structures are appropriate for the proposed project.
Financial closing of a Section 481 transaction should not occur prior to the issuing of a Section 481 certificate by Revenue. On financial closing, funds raised from individual taxpayers are used to subscribe for shares in the qualifying company. The qualifying company, then, enters into a production, distribution and finance agreement with one or more of the other financiers of the film or television project.
The funds raised and subscribed for the share capital in the qualifying company must be spent on eligible expenditure. In essence, eligible expenditure means goods and services provided by EU citizens and/or Irish companies on the physical production in Ireland of a film or television series.
Shortly after financial closing, a Film 1 application form is submitted to Revenue by the Irish producer. On receipt of this application, Revenue issue Film 3 certificates to investors.
The individual investors can then use their Film 3 certificate to claim tax relief. PAYE taxpayers can have the relief coded onto their certificate of tax credits and standard rate cut-off point and claim the tax relief through their payroll. Self-employed investors can take account of the tax relief when calculating their preliminary tax based on the current year 90% option.
How the investment is structured
An individual taxpayer can invest up to €50,000 per annum under Section 481. The investor should ensure that they have sufficient income taxable at the marginal rate to enable them to claim relief at the top rate on the entire amount of their investment. Typically, the €50,000 investment is a part-equity/part-loan arrangement. The investor writes a cheque for €16,700 and takes out a loan for €33,300. The loan is usually pre-approved based on a credit application made to a bank in respect of the film project as opposed to the individual. The individual subscribes for shares for €50,000 and receives a Film 3 certificate confirming that investment.
The investor makes a claim to Revenue for tax relief at 41%, i.e., €20,500. Prior to making the investment, the qualifying company will have entered into a production, finance and distribution agreement with the Irish producers and/or other financiers of the project. Under this agreement, a cash pre-sale is negotiated and paid to an Irish bank. The condition of the release of the pre-sale is the successful completion, delivery and acceptance of the film or television project. If and when the condition is satisfied, the pre-sale cash is released and the shares in the qualifying company are bought back from the investors. The proceeds paid to investors on the completion of a successful project will be sufficient to repay the €33,300 loan plus interest. With the loan repaid, the investor has realised a return of €20,500 on an equity investment of €16,700 and has therefore profited by €3,800. Obviously, this is a net of tax return.
The Irish film industry relies strongly on the functioning and credibility of Section 481. Therefore, with experienced producers and experienced Section 481 financiers on board, the success rate in delivering projected returns on these investments has been high in recent years. Some banks operating in the Section 481 market offer a 100% finance option, i.e., they will also provide loans for the €16,700 equity investment. This means that taxpayers who have paid tax at 41% but do not have the equity cash available to them can avail of the relief at a slightly lower return.
Crowe Horwath are currently fundraising for a number of film and television projects including Vikings, one of the largest audiovisual projects ever undertaken in Ireland. It is a ten-part drama series with a budget of €32m financed by MGM and The History Channel.
Impact of changes in UK
In March 2012, the UK chancellor for the exchequer, George Osborne, announced an extension of the UK film tax credit to 'high-end' television production in the UK. In recent years, Irish film and television producers had been quite successful in attracting UK television projects to Ireland. These included projects like 'George Gently', 'The Ambassador' and, more recently, large projects like 'Primeval' and 'Ripper Street'.
So called high-end productions are defined as projects that cost in excess of ¬£1m per hour to produce. They will now be able to enjoy a tax credit worth 25% of their production cost in the UK, rather than having to come to Ireland to avail of Section 481 finance, which contributes up to 28% of the Irish cost of production. This will undoubtedly have a negative impact on Ireland's ability to attract larger UK productions to Ireland. However, it does create an opportunity for Irish film and television producers to target smaller UK productions, as those projects will be at a comparative disadvantage to the 'high-end' productions and will be more difficult to finance in the UK going forward.
The current scheme is in place until the end of 2015 and the government is considering a full review in line with a recommendation to extend it to 2020, as contained in the report The Creative Capital Report, adopted by government last year.
John Gleeson is a partner with Crowe Horwath.