In the Autumn 2013 edition of RW Blears Alternative Investment Review, we highlighted how the British animation industry was highly optimistic about the introduction of the animation tax reliefs, in effect a 20% rebate on certain qualifying expenditure associated with the production of an animation programme.

Though the reliefs are still in their infancy with the first payments only arriving at UK animation companies in the last couple of months, this optimism does not seem to have been misplaced. There has been a significant increase in the number of UK based productions: CBeebies, the BBC’s pre-school channel, is doubling its output of shows and Channel 5’s Milkshake will shortly be broadcasting Pip Ahoy! and Toot the Tiny Tugboat, two new shows developed and produced in the UK. In a recently published article, the Observer commented that Britain is undergoing a cartoon boom.

Investors and animation production companies should be buoyed too that HMRC appears to have a good understanding of the animation industry and how it operates – and importantly, that animation companies will look to use a combination of the SEIS, EIS and Animation Tax Credits to attract investment.

HMRC appears to appreciate that many production houses will channel new shows through their own individual SPVs and are aware that these SPVs will then engage developers, producers, and providers of distribution, merchandising and licensing services to help develop, produce and monetise their shows. From an EIS and SEIS qualifying perspective, it is important that each SPV owns outright the entire intellectual property rights (IPR) in their show.

Where this is the case, HMRC’s view seems to be that the contractors who provide various development and production services to the SPVs will not be deemed to be carrying on the same trade as the SPV. As such, the SPV is unlikely to fall foul of s183 of the Income Tax Act 2007 which provides that no other person can be carrying on the same qualifying trade as an EIS company (or a qualifying 90% subsidiary).

Co-productions where more than one entity has a share of the IPR in a show are likely to be more problematic in HMRC’s eyes as demonstrated by its recent guidance note on EIS co-productions http://www.hmrc.gov.uk/news/eis-and-co-productions. pdf. Even where one party owns and is responsible for creating the majority of the IPR in a show, HMRC may deem the other parties to be carrying on the same qualifying trade. In this case, the majority IPR holder would not be a qualifying company for the purposes of the SEIS and EIS. That is not to say that any company involved in the co-production of an animation show will never be deemed to be a qualifying company for the purposes of the EIS and the SEIS but a degree of thought needs to go in to structuring and an advance assurance obtained from HMRC, before any offer is made to investors anticipating obtaining the SEIS and EIS tax reliefs.

Who is the animation production company for the purposes of claiming animation tax credits?
Bearing in mind that there can only be one “animation production company” eligible to claim animation tax credits in connection with a single show, in cases where animation houses use separate SPVs for individual shows and then provide production and development services to such SPVs who is the “animation production company”? Is it the SPV or is it one of the companies providing production services to it?

Our view – which has been informally confirmed by HMRC – is that it will be the SPV. This is because the Corporation Tax Act 2009 (as amended), where the Animation Tax Credits is set out, provides that the “animation production company” will be the company which not only carries on production activities but which is also responsible for delivery of the show and who enters into contracts relating to the show’s rights.

Accordingly, provided that the SPV has the final say on such matters and is on the hook for actually producing and delivering the show to the broadcaster, then it should be the SPV which claims the tax credits. In addition, though they are separate tax schemes, it would seem inconsistent that where a company’s qualifying trade for EIS and SEIS purposes is the production of a particular new animation show that such company was not put forward as the “animation production company” for the purposes of claiming animation tax credits.

Adam Lawrence is a member of RW Blears LLP who since joining has worked on a variety of corporate, tax and regulatory matters including the launch of one of the UK’s first SEIS funds.