Section 35/481

Roddy Flynn

Section 35 History

• Introduced in 1987, almost coinciding with suspension of Film Board.

• Subsequently revised in 1989, 1993, 1995 and 1997 (when it became Section 481).

• 1987 - 1993 - £11.5 million raised through Section 35.

Section 35 History

• 1993 - Section 35 Radically Overhauled driven by Michael D. Higgins.

• 1993 - 1995 - £150 million raised but not necessarily spent through S 35.

• 1995/1997 - Following perception that Section 35 was

– a) relatively cumbersome for Irish producers

– b) being abused by phantom film companies

• the Finance act was amended to correct these problems

Section 35 History

• 1995 and 1997 changes incur wrath of film industry, especially in the light of overseas media reports suggesting that Ireland was no longer an attractive location for foreign productions.

• FMI currently seeking return to 100% tax-write as opposed to 80%

Section 35 - The Investors Perspective

• 1987 - Section 35 introduced as a tax relief for companies (not individuals) investing up to £100,000 per annum in the production of qualifying films.

• 1989 - relief increased by– increasing the amount to £200,000

– permitting investments of up to £600,000, provided the investment was into a single qualifying production company for the making of one film only.

Section 35 - The Investors Perspective

• 1993 - relief further increased:– £200,000 limit increased to £350,000– £600,000 was increased to £1,050,000– scheme was extended to individuals who can

now invest £25,000 per annum in film production

The Individual Investor Perspective or “How does Section 35 actually work?”

• R. Flynn invests £25,000 in “I Went Down”

“How does Section 35 actually work?”

• Flynn is allowed to claim back from the Revenue Commissioners (“write off”) all the income tax he would normally have paid on this £25,000.

• Therefore he can claim back £11,500 (46% - the higher rate of income tax - of £25,000).

• In effect, he is able to invest £25,000 in a film at a net cost of just £13,500 (£25,000 minus £11,500)

“How does Section 35 actually work?”

• Flynn fervently hopes that the film will at least break even, returning him his original investment, and leaving him £11,500 better off than he would otherwise have been.

• However, even if the film fails to break even and Flynn only receives part of his original investment back, he can still afford to lose £11,500 of his original investment before he has really lost any money.

• In short Section 35 offers a potentially very attractive tax-break to investors. Its attractiveness is predicated on the assumption that any investment in film is a very risky business and that to encourage such investment the Revenue Commissioners must offer a substantial incentive.

The Corporate Investor

• FlynnCorp. Invests £1,050,000 in “Michael Collins”

The Corporate Investor

• FlynnCorp. is allowed to claim back from the Revenue Commissioners (“write off”) all the corporation tax they would normally have paid on this £1,050,000.

• Therefore they can claim back £378,000 (36% - the normal rate of corporation tax - of £1,050,000).

• In effect, they are able to invest £1,050,000 in a film at a net cost of just £672000 £1,050,000 minus £378,000 )

Section 35 in 1995 - Doomsday?

• After two years of euphoria problems arose.

• Public perception of the film industry revival focused on pictures like:

Section 35 in 1995• However there was a perception in the industry

that design of Section 35 was insufficiently focused on aiding indigenous production.

• There was also some concern expressed about the seasonal nature of production. An unofficial “shooting season” emerged which saw virtually every project shot between March and September

Section 35 in 1995

• Concern expressed that S35 had been made too attractive. Returns from S35 investments ‘93-’95 (£IRm)

» ‘93 ‘94‘95

• Investment 11.7 42.5 42.1

• Return 0.0 3.4 11.4

• % Return 0% 8% 27%

Section 35 in 1995

• I.e. - On average an individual who put £25,000 into a S35 film would have received:

• Tax Rebate: £11,500

• Return of initial investment: £25,000

• Profit from film earnings: £6750

• Total Sum: £43250

Section 35 in 1995

• Perhaps of greatest concern was the perception that Section 35 was being actively abused:

• 1993 - 1995: £150m raised through S 35

• 1993 - 1995: £53m actually spent on productions

Section 35 in 1995

• Film Eireann - Established slate of pictures (Lord Lucan - The Motion Picture, a biopic of Jack Doyle, Sweeney Todd).

• After two years nothing had gone into production. Meanwhile several millions pounds of S 35 investors’ money sat in their bank account earning interest.

• In short it became apparent that Film Eireann had little interest in actually producing pictures

Section 35 in 1995

• Hence S 35 altered to achieve the following:– Favour indigenous productions– Favour off-season shooting– Reduce the level of S35 investment– Ensure money raised was actually spent on

films

Section 35 in 1995 - Actual Changes

• A limit of £7.5m S35 money could be raised per picture.• For sub £4m budget films, 60% of budget could be raised via

S35.• For budgets between £5m and £15m, up to 50% of the budget• For budgets between £4m and £5m a sliding scale operates (I.e.

60-50% of the budget)

• The working assumption underlying the changes was that Irish pictures were unlikely to have large budgets. Hence a mechanism that favoured low budget films favoured indigenous production

Section 35 in 1995 - Actual Changes

• Projects that began shooting off-season (October - January) were allowed to raised a further 10% through S35.

• Tax relief for individual and corporate investors was reduced from 100% to 80%

• S35 certification would only be granted to films made by production companies established solely for the purpose of the production of one and only one film production. Further tax relief would only commence from the date of principal photography of the project (I.e. when production actually commenced - no more phantom pictures).

1997 Changes

• Reflecting the increasing capacity of the indigenous industry but also a concern that previous changes had “scared off” foreign production:– Limits on the amount of investment that can be raised

doubled to £15m (peak period) and £16m (off-peak).

• Similarly, in an attempt to encourage the development of the Irish post-production sector:– Projects post-produced in Ireland could increase the

amount raised from S35 by 10%.

Section 35 - Producers Perspective

• Producers assert that Section 481 funding allows them to benefit by 12-13.5% of the budget.

• Up to 60% an be raised through Section 481 financing from Irish taxpayer investors if the producer raises the remaining 40% of the production and can guarantee those investors proceeds (pre-sales) from the film of between 46.5% and 48% of the total budget of the film.

Section 35 - Producers Perspective

• As a consequence the producer has funded a total of between 86.5% and 88% of the production budget and the production account has 100% funding.

• This is because the Section 481 investors are willing to fund 60% of the budget in return for their entitlement to the proceeds referred to above. The benefit of Section 481 is realised by the producer as soon as the financing is established and in place and immediately contributes its benefit to the production

budget.

Section 35 - Producers Perspective

• Example: Budget US$5m

• Producer's 40% US$ 2,000,000S. 481 Investors 60% US$ 3,000,000Production budget 100% US$ 5,000,000

• Film Producer pay its budget share (40%) US$ 2,000,000Film Producer pays presale, say (48%) US$ 2,400,000Total cost to Film Producer (88%) US$ 4,400,000

• Net gain (12%) US$ 600,000

Section 35 - Dept. of Arts perspective

• Dept. requirements:

• Production Company must be resident in Ireland and be established solely for the purposes of production of a qualifying film.

• A qualifying film must be certified as such by the Minister for Arts taking into account a range of economic and cultural considerations. (This provision was introduced in 1994.)

Section 35 - Dept. of Arts perspective

• In examining an application for certification, the Minister follows Statutory Guidelines. Films should:

– "make a significant contribution to the national economy and Exchequer and/or act as an effective stimulus to the creation of an indigenous film industry in the State”

– The Minister also theoretically bears in mind the “importance of the promotion, development and enhancement of the national culture through the medium of film.”

Section 35 - Dept. of Arts perspective

• Principal statutory requirements:

• - Film must be produced solely or principally for cinema or television broadcast, on a commercial basis with a view to realising a profit;

• - Not more than 60% of the cost of production may be

raised under Section 481 • - investments must be raised as share capital of the

Production Company;

Section 35 - Dept. of Arts perspective

• - Not less than 75% of the work on production of the film must be carried out in the State (an exception to this requirement can be given by the Minister provided not less than 10% of the work is carried out in the State, and where the exemption is given, Section 481 relief can be raised up to the percentage of the work carried out in the State provided this is within the overall 60% limit);

• - The investments must be at the risk of the investors.

Value of Section 35

• Section 35/481 funding as a percentage of Irish audiovisual expenditure 1993 - 1997

• ‘93 ‘94 ‘95 ‘96 ‘97

• Total Expenditure 50.4 133.1 100.1 97.3 123.4

• Irish Expenditure 13.7 50.8 55.0 62.4 76.2

• Section 35 11.7 42.5 42.1 40.6 53.9

• S35 as % of Irish Expend. 85% 83% 77% 65% 71%

Section 35 Issues

• “Investments must be at the risk of the investors.”

• Serious doubts have been raised regarding the real risk associated with S35 investment.

• Accountants placing S35 money will only consider projects with presales and a completion bond.

• Does this mean that S35 is only invested in “sure things”?

Section 35 Issues

• Critical Distinction between market risk and production risk.

• Market risk - that faced by a completed film on release: the risk that the viewing public will or will not pay to see the film.

• Production risk - that the film won't get made and delivered and that the production company remains solvent with no creditors unpaid.

Section 35 Issues

• “By and large, for investors making a tax investment, their risk is assessed on production risk, not market risk. Subject to the presale actually being in place, and subject to the film being delivered on time and within contract, the investors can get a return on their investment, broad figures for which are given at the outset. They're not generally taking a risk on the film's reception in the market place.”

• A&L Goodbodys

Section 35 Issues

• However it can be argued that presales and completion bonds do not entirely obviate risk:

• Presales can fall through if the sales agent feels that the picture delivered is not the picture they were promised.

• As for completion bonds...

Section 35 Issues

• Completion bond - only legally enforceable once the last penny of the financiers money towards the budgeted costs is in.

• But…

• Organisations such as the Film Board, Channel 4 and Eurimages fund on a tranche basis - releasing funds gradually to pictures (part on signing, part on first day of shooting, part on rough cut).

• If any investor pulls out midway through the completion bond disappears.

• Full details of the scheme are contained in Section 481 of the Taxes Consolidation Act, 1997