If you're looking for some much needed tax relief – and who isn't – you might be interested in availing of the film finance scheme, Section 481. However you'll have to act fast, as it's set to expire as of December 31st; and unlike Arnold Schwarzenegger in Terminator, it won't be back.
“Investors still have time but it is running out,” says John Gleeson, partner and head of Grant Thornton’s media practice, noting that investors will have to commit to an investment before Christmas to get tax relief for 2014. “We expect a significant excess of demand over supply by the end of the year,” says Paul Mee, partner at Mazars, adding “it’s human nature because it’s ending – people say ‘it’s the last chance so maybe I should do it now’. This is adding to overall demand”.
According to the Department of Arts, Heritage and the Gaeltacht, 51 projects were approved in the first 10 months of 2014, with Irish investors putting up €166.9 million. This compares with 68 projects approved by the Revenue Commissioners in 2013, with some €178 million invested.
What’s Section 481?
First introduced in 1991, Section 481 provides tax relief towards the cost of production of certain films, animation and television series. It was broadened in 1993 to include individual investors who can now invest up to €50,000 each year.
Its goal is to encourage investment in Irish-made productions and since 1991, hundreds of film finance schemes have been successfully completed, ranging from Disney cartoon DocMcStuffins, Irish movie The Guard to major television series like Ripper Street.
The biggest fundraising for a single project was Vikings, when the team led by Gleeson (formerly of Crowe Horwath) raised in the region of €30 million for series one and two.
What’s
available? Grant Thornton is currently fundraising
€40 million across 12 projects, including TV3's new soap, Red Rock; an animated version of the Zig and Zag Show; and RTÉ's satirical comedy, Irish Pictorial Weekly.
Mazars is looking to raise €4 million on two animation projects – a film, Norm of the North, and a TV series, Wissper – while advisors across the country will be raising funds for other projects. "We'll have no problem getting them closed, there is a significant excess of demand," says Mee.
But if you’re keen on the scheme, don’t opt for a project just because you’re familiar with it. “I would always discourage picking ones you know. We don’t bring a project to market unless it satisfies a number of strict criteria,” says Gleeson.
Who can avail of it?
Certain minimum income limits apply to those looking to avail of the relief, because you’ll need a certain amount of income taxed at 41 per cent to make the scheme worthwhile. If you’re single, you’ll need an income in excess of €45,000 to qualify; €54,300 for a couple with one income; or €78,100 for a couple with two incomes.
The greater your income however, the greater the possible tax savings. To achieve the maximum relief for example on €50,000, you’ll typically need income of €91,800 for a married person, or €82,800 for a single person.
Mee notes that there was a perception that it was only high net worth individuals who availed of the scheme but this wasn’t really the case.
“Quite a lot of people did a €25,000 investment as well,” he says, noting that advisors will typically offer tranches of varying investment amounts. Investing at €25,000 for example, would give a return of about about €1,500, while an investment of the order of €12,500 will generate a return of €750.”
Typically, Section 481 is an investment people make year after year.
“The absolute majority of investors have done Section 481 investments year in year out for donkey’s years,” says Gleeson.
I don’t have
funds: can I still invest? Yes you can as AIB lends specifically for the purpose of this scheme. This means that you have three options:
1) invest €50,000 from your own funds;
2) borrow €32,500 from AIB and match this with a cash payment of €17,500; or
3) borrow the full amount of €50,000. Borrowing has a cost however, and will diminish potential returns.
The €32,500 portion of the loan is structured in a special way with AIB which means that you will only pay interest at a rate of about 3.5 per cent on it, and if you invest in the scheme you will be pre-approved for this amount. The €17,500 loan is assessed under normal credit application with an interest rate of 8.2 per cent levied on it.
“An awful lot of people borrow 100 per cent. It can be very quick to get the refund back and repaying the loan shouldn’t cost too much in interest,” says Gleeson.
How does it work?
As the table (above) shows, the scheme works by granting you tax relief of 41 per cent on a €50,000 investment.
If you don’t borrow any of this €50,000, the maximum amount you can gain from it is a little more than €4,000, falling to about €2,500 if you incur interest on a loan.
If you make an investment now (and Mee suggests that most schemes will close by mid-December in order to be completed by year-end) it’s likely that you will get your Film 3 form back in January (it usually takes about six weeks). You could then file your 2014 tax return immediately and claim back the tax possibly in February/March.
The length of an investment ranges from 12-23 months, but this is predetermined and detailed in the memorandum and you should be made familiar with this before you invest.
Once you’ve completed this documentation, you will then need to claim your tax relief back from the Revenue. If you are a PAYE worker, you submit a Film 3 form (which can be downloaded from www.revenue.ie)
If you are self-employed, you can claim relief when you file your tax return for that year – so for example relief for 2014, will be claimed in October/November 2015. Where relevant, you may also be able to claim an overpayment of preliminary tax, as your final tax bill for 2014 will be less than expected due to the film finance tax relief.
What are the risks?
Section 481 is an investment, and like any investment, it does carry some risks. Whether or not a project is successful depends on the successful completion, delivery and acceptance of the series or film – not on if it’s a commercial success or not.
“The risk is delivery and acceptance – once it’s delivered and accepted the project unwinds and you get your money back,” says Mee.
If any of these doesn’t happen, then you might lose some, or all, of your money.
“The key thing is in order to secure tax relief and the loan, the entire money raised must be spent in Ireland and a completed film or TV series must be delivered,” says Gleeson.
However, Section 481 is generally considered as being low risk.
“It has evolved into a low risk tax structure. Its main challenge in earlier years was that it was perceived to be very risky,” says Gleeson, noting that this risk was scaled down by switching the emphasis to production risk, rather than investing in the creative or commercial success of a project.
Indeed since its inception in 1991, Gleeson says that there has been problems with three out of 500 projects.
“It’s pretty much a 100 per cent success rate,” he says, putting the success rate down factors such as the tight management of projects by promoters such as Grant Thornton and other financial advisors.
“Very tight due diligence is undertaken by both us and the bank,” Gleeson says, adding that in the past, when on the rare occasions there was any doubt that a project was running into trouble, promoters would have facilitated the raising of additional finance to make sure that investors got their tax relief and loans were repaid.
“Failure of a project would have meant that no one would have invested in it (Section 481) the following year – the entire industry would have imploded because no Section 481 (finance) would have been available.”
What’s happening in 2015?
From January, a new 32 per cent incentive is being introduced, which offers relief on qualifying expenditure for a production company based in Ireland, on up to 80 per cent of a project’s budget. The State will be assuming the production risk under this regime.
According to Gleeson, this new regime is akin to the R&D tax credit scheme which applies to the broader corporate sector.
But what does this mean for traditional Section 481 investors?
“There was a school of thought that suggested that they might pile into EIIS – but it’s not the same,” says Mee. “It’s not comparing like with like”.
Indeed the employment and investment incentive scheme (EIIS), which replaced the old business expansion scheme, offers investors up to 41 per cent tax relief on their total income in return for investing in new ordinary shares in qualifying SMEs for a three year investment period.
But as Mee notes, the EIIS involves “real risk capital”, and as such, the risks are considerably greater than Section 481.
As such, he expects just €5 million of the €150-170 million or so raised annually through Section 481 to go into the EIIS.
