Section 481 Explained
We’d like to tell you in 10 easy steps how you can make a wise investment, support Ireland’s film industry and bring much needed revenue into the country. But Section 481, whilst clever and useful, is not terribly easy to explain. Gordon Gaffney does his best.
Section 481 (S481) is an incentive scheme designed to promote investment in film by allowing tax relief for the investor. Prior to researching this article my knowledge of the scheme was a little like Grandpa Simpson’s grasp of American history in that it felt like I had pieced it together mostly from sugar packets.
Some of the discoveries I made include:
- S481 is used to raise only part of an overall budget and not 100% of funding.
- It can be used for low-budget (less than €1m) productions. Brian Gormley, a solicitor with Philip Lee Solicitors, recently worked on a €260k budget project that raised finance through S481 (although the net benefit can be lower on a low-budget production). So it’s not just for big budget productions such as Camelot.
- It’s not all multi-millionaire investors avoiding paying tax at 41% on huge cash sums. According to Claire Raftery of Bank of Ireland, 95% of investors actually borrow some or all of the sum they invest.
- It’s a tax break that instead of directly leading to zombie hotels or zombie banks can instead create actual zombies.
How does it work?
The maximum amount that can be invested by an indiviual is €50k per year, and plenty of people make investments at smaller levels. Since Anglo’s reanimation as a Bank of the Living Dead they are no longer providing finance for S481 investments so an investor will now go to a bank like Bank of Ireland, typically with €16,500 cash to invest. If they are deemed a good risk the bank will lend them €33,500 to bring it up to the maximum €50k. This €50k is used to buy shares in a Special Purpose Vehicle (SPV) created by the production company for each project. This money is available to an ‘eligible’ film from first day of principal photography. And what makes an eligible film? Eligible spend is spend on any Irish or EU citizen/resident while working in Ireland and spend on goods and services purchased in Ireland.
Once the investment is made the SPV applies to Revenue for a Film 3 certificate for each investor. This takes about 6 to 8 weeks. If the investor is a PAYE worker they will be issued an amended tax certificate by Revenue after only a few months. The investor receives a tax refund in their payslip of 41% on €50k, which is €20,500, which means they’ve made a €4000 profit on their initial investment of €16,500.
So how does the remaining €33,500 plus interest get paid back to the bank? Right at the beginning the total amount of loans that will need to be repaid plus the amount of interest they will have accrued after the 12 months is worked out. The producer then raises funding sourced through channels such as the Broadcasting Authority of Ireland, the Irish Film Board, RTÉ or other funding to pay this total. This exact amount, usually about 72% of the total amount to be raised through S481, is lodged into a special account called a ‘defeasance’ account. Most importantly, this amount has to be in place before S481 funding is sought. The investor’s money (shares) must remain in the SPV for 12 months after which time the SPV will arrange to buy back the shares from the investors with the money in the defeasance account. So after one year, if all goes according to plan, the investor’s loan has been paid off.
It must be remembered that there is a genuine risk for the investor because if the film is abandoned or there is a breach of the certificate (eligibilty stuff again!) Revenue have the power to claw back the relief from the investors and require it to be repaid.
So what is the benefit to the producer? They have to raise funds through private investors and through industry sources (like the Film Board). Surely that’s twice the work? It can seem that way but what is crucial is that the amount that is raised through private investors gives a net 28% budget benefit to productions on their first day of principle photography. 28% more funding is 28% more explosions or 28% more Liam Neeson or whatever a good producer can get. 28% more can make all the difference.
So, after successful delivery of the project, the investor is happy, the bank is happy and the production team get their extra 28% in funding available at start of shooting, so they’re happy too. So where is the catch?
Long term economic value
At first viewing the two obvious losers in the arrangement are the audience members having to sit through Leap Year without the prior knowledge that it is in fact a post-post-modern Hollywood satire, and Ireland’s taxpayers themselves who apparently lose out on tax income by issuing a tax rebate of €20,500.
But Revenue actually have very strict criteria that productions must meet in order to be ‘eligible’ to ensure as much as possible that everyone wins and the country doesn’t lose out. So what seems like a loss of €20,500 in tax on a €50,000 investment in the short term is actually money well spent as it ensures that most of the film’s expenditure is being put back into the Irish economy.
Here are some examples of what percentage of the total budget can be raised through S481.
If we take a production with a €1m total budget, all of which is eligible Irish spend then 80% of that is allowable for S481 funding. So that means that up to 28% of €800,000 (the 80%) can be raised through S481, giving a net benefit of €224,000.
In another scenario, a €1m production has only €600,000 which qualifies as Irish spend. As that €600,000 is less than 80% of the total budget, all of the €600,000 is eligible for S481 funding. So up to 28% of this can be raised though S481, with a potential total of €168,000.
‘So the definition of eligible spend in S481 leads to the ‘net benefit 28%’ seen in S481 literature,’ explains Mark Byrne, Business and Legal Executive of the Irish Film Board. ‘If you bring an Irish crew to the uk, for example, you can’t claim S481 on that. Paulo Sorrentino, who is directing This Must Be the Place’, he’s an Italian director (and therefore an eu citizen) so for the time he works in Ireland he is eligible spend. But Sean Penn who is the leading actor and American is not eligible spend.’
Revenue issues a S481 certificate, which is a three-page document setting out the conditions, and investors need to see this before they invest. The S481 paperwork is just a part of the legal work that a solicitor firm does on a project, and for a first-time S481 producer the list looks daunting. ‘Revenue’s main role is checking that what the producer says is Irish spend is actually Irish spend,’ says Brian Gormley. And there’s a lot of paperwork involved.
Here are just some of the documents you have to provide:
- Production agreement showing the relationship between the S481 SPV and the production company
- A subscription agreement, which shows what the investors have signed up for
- A payment instruction agreement that upon successful delivery of film that the S481 bank will pay the return to the investors
- Production schedules
- Budgets with Irish and non-Irish spend
- Cashflow charts
- All rights documents
According to the Department of Arts Culture and Tourism, in 2002 twenty-two projects were certified by Revenue with €87.9m spent in Ireland. In 2009, forty-four projects were certified with €106.7m spent in Ireland, and the scheme is in place until 2012.
After shooting, an audit is performed to ensure that the money that was earmarked for Irish spend is actually spent in Ireland. If it hasn’t been then the investors may lose their tax break. Producers can spend a number of years after a film is completed dealing with any queries Revenue have with compliance. So how do you ensure that the producer did what they said they would and doesn’t do anything to breach Revenue’s terms?
‘There’s a lot of self-regulation,’ Mark Byrne continues, ‘S481 facilitators rely hugely on a producer’s reputation and they check to see that a producer has consistently delivered S481 projects. S481 is based on completing the physical delivery of a 90-minute film. That film doesn’t have to be very successful but from the Film Board’s point of view, we want the finished film to be what we wanted, that is exploitable and of a certain quality.’
What kinds of projects are eligible?
The incentive applies to feature films, creative documentaries, television drama and animation. It doesn’t apply to commercials, reality TV, game shows or soaps.
Mark explains its advantages: ‘The UK tax break does not apply to television which is why big budget UK shows such as Primeval are shot here. Also in the UK and US you make the film first, get an audit, send the audit in, get a tax return and 6 months later, if everything is ok you get a cheque back. Here the money is available on the first day of shooting.’
So without having such a competitive tax incentive as S481, it would be highly unlikely that the Emmy Award-winning The Tudors, Camelot, BBC Drama George Gently, and big-budget Hollywood features like King Arthur and Reign of Fire would have been shot here. And the positive effect on Ireland’s economy is hard to quantify because it’s not only encouraging investment and providing employment. Using Ireland as a location also has a very important, recognised effect on our tourism industry.
Paul Donovan of Grand Pictures adds that for the experienced producer, S481 is a huge advantage. ‘At Cannes, for example, you can show that the 20-25% of Irish spend from S481 is going to come through and people understand that, it’s not dependent on subjective criteria such as certain casting.’
Paul’s advice to first time producers is to ‘surround yourself with experienced people, talk to an experienced S481 provider who will talk you through the requirements, have your budget for Revenue as detailed as possible but don’t overcomplicate things.’
OK Paul, we’ll do our best.
This article first appeared in Issue 134 of Film Ireland Magazine.