Supporting the creative economy - Culture, Media and Sport Committee Contents

4  Funding and finance

83. According to written evidence from DCMS, the creative sector's ability to access finance is one of the key issues for the Creative Industries Council, a Government-industry forum. An Access to Finance working group presented a report to the Council in June 2012 which was subsequently published in December 2012.[154] The report made six recommendations to be taken forward by both Government and industry. . It identified potential gaps in the understanding of investors of how creative businesses work and recommended that the sector and Government worked together to champion investment opportunities in this sector, improve existing business financing interventions and establish new funding solutions.

84. Substantial sums of public money are invested in the creative arts. The Arts Councils from all four UK nations help fund creative risk-taking in areas that the commercial sector might be reluctant to support.[155] Arts Council England told us of the loans and business support they provide.[156] According to the written evidence from DCMS, the Technology Strategy Board granted over £30m in funding for over 300 creative industries-related projects between 2007 and December 2012.[157] Local authorities have responsibilities, not to mention economic interests,[158] to promote cultural activity in their areas. The BBC, funded by the television licence fee, is of course a major source of public funding for the creative sector. Channel 4's Alpha fund helps support small companies and start ups. [159] Sources of support for the film industry include the BFI, a charity governed by a Royal Charter, which awards Lottery funding to film production, distribution, education, audience development and market intelligence and research.[160]

85. Inevitably public funding is under pressure, a point illustrated by cuts in the budget of Arts Council England.[161] Given the essential role of public funding in sustaining the wider creative economy, it is crucial that adequate resources are available. Of course, the private sector should be encouraged as much as possible to invest in the creative industries. One good example is provided by advertising, which not only provides a major source of funding but is a creative industry in its own right. Evidence from the Advertising Association points to advertising as "a major creative industry and a critical source of funding for other creative industries". The Advertising Association's evidence goes on to express deep concern about draft EU Data Protection Regulation "which could damage direct marketing, internet advertising, and the UK economy both off and online".[162] Increasing use is being made of personal data to target online advertising better. While concerns around this have prompted reviews of data protection legislation, we do not think the targeting of appropriate advertising—essential to so many business models —represents the greatest threat to privacy.

86. The investment and advisory firm, Ingenious Media, noted that banks have largely withdrawn from providing debt finance and the availability of venture capital funding has declined sharply. Project finance is frequently a necessity, but can be expensive and is hard to find. Ingenious stated: "Meanwhile financing from within 'the trade', meaning the largely US-owned 'majors', usually comes at a big price in terms of loss of control."[163] They further comment on investors' lack of understanding of the creative industries but consider there to be no simple or obvious solution. Ian Livingstone pointed out to us the investable nature of the computer games industry[164] and mooted the possibility of establishing a creative industries bank:

    So, making sure that we are an investable sector, perhaps have a creative institute or a creative industries bank, in addition to crowd-funding to make sure that people see the real value and it is no more risky than any other traditional industries in the analogue world. The digital creative industry is very investable, because of the global potential of the content it is creating. We are so good at creating content, but we always seem to lose it, having to sell it short-term in return for project finance rather than going the whole hog and scaling it to its ultimate potential.[165]

87. We are disappointed by the blinkered and unimaginative approach of lending institutions. Investors need to talk to and engage with the creative industries which represent no higher risk than many accepted by the banks and which may produce considerable rewards.

88. The Enterprise Investment Scheme (EIS) offers tax incentives to investors buying shares in small companies.[166] Tax efficient benefits are also available to investors taking advantage of the Seed Enterprise Investment Scheme (SEIS) introduced by the Chancellor in his 2011 Autumn Statement; this aims to encourage investment in very small (fewer than 25 employees) new companies. Both the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme were described by the DCMS Minister, Edward Vaizey, as the funding "front door" for the creative industries.[167] The Minister did acknowledge the need better to communicate information about these schemes.[168]

89. Ian Livingstone raised a concern about the bureaucracy around the application of the SEIS and EIS, arguing that it should not overburden small companies.[169] Ingenious described the EIS as being "gummed up": "Not for the first time we observe an apparent disconnect between Treasury intentions and the will of Parliament on one hand, and the day to day practice of HMRC on the other, apparently aggravated by internal bottlenecks. This is a major concern for the sector."[170] Patrick Bradley, Director of Ventures, Ingenious, added that modifications could be made to the EIS to allow dividends to be paid in a tax-beneficial way thereby discouraging investors from making an early capital exit.[171] Changes such as these might go some way towards solving what Ingenious describes as the most intractable problem facing the UK's creative business sector: "its inability to grow companies to a scale at which they are capable of competing globally by retaining for re-investment the commercial returns generated by their creative successes."[172]

90. Notwithstanding the limitations of EIS and SEIS, they offer substantial incentives for investors to engage with the creative sector companies, many of them small and medium enterprises traditionally viewed as being relatively high risk particularly by blinkered financial institutions. Yet we were told that some potential investors are hesitant to engage with these schemes because of recent crack-downs on illegitimate schemes floated for tax evasion purposes. Of course, any tax relief schemes, however genuine, are open to abuse and HM Revenue and Customs are no doubt alert to this. However, these schemes are legitimate and should be promoted.[173]

91. The Government should vigorously promote both the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme. Given their particular importance to creative industries it is essential that their availability, and legitimacy, be communicated to the widest possible range of potential investors.

92. Among the novel alternatives to traditional financing models that are emerging is crowd-funding, which involves collective contributions from a wide range of individuals. Dr Jo Twist of the Association for UK Interactive Entertainment (Ukie) identified to us three models for this:

    There are basically three models that crowd-funding platforms operate largely, and Kickstarter falls under the first one, which is a donations model. This is where people will back a project and get a perk or something in return that is not equity-based. As I said, Kickstarter is the classic example of this model. In the US, under the Jobs Act, they are trying to change legislation so that they can allow or operate an equity-based model. The second is the debt model, where a wide pool of investors will loan money on agreed repayment terms and Funding Circle operates that model in the UK. Then we have the equity model, where people will take a stake in the company in return for an investment, and Seedrs is an example of a crowd-funding platform that operates this model.

    Crowd-funding has been broadly welcomed by all political parties, and the internet has enabled crowd-funding to happen in a way that is more structured. Unfortunately, FSA regulation hasn't kept up in step and in time with the digital economy and things that the internet allows people to be able to do. I think there is a bit of misunderstanding and a bit of fear factor, and what needs to happen is more guidance and more acceptance and recognition of crowd-funding as a legitimate way to get investment.[174]

93. Ukie acknowledges the Government's enthusiasm about the potential for crowd-funding to support the creative economy but notes that "there has been little coordination between Government departments to understand either the implications of crowd-funding or the regulatory changes needed to ensure UK businesses can make the most of this opportunity."[175] We believe that crowd-funding has significant potential, not least in that it might allow small creative start-up companies to retain control of their IP. The Government needs to examine whether existing financial regulation is hampering the growth of crowd-funding and whether more guidance can be made available to potential investors.

94. The DCMS Minister, Edward Vaizey, referred to the "many different business support schemes" for different sectors and acknowledged a need for "an element of coherence about the number of potential funds that are available."[176] Access to information on how to start up a business, gain funding and understanding intellectual property are all of vital importance to creative start-ups. The British Library's Business and IP Centre is one promising initiative in this area and we hope other libraries will follow suit. The Government has also been contributing to the training of business advisers.[177] The concept of virtual boards for SMEs also has promise: these boards will match entrepreneurs with experienced financial directors. John McVay told us that Pact would be investing in this initiative and working with Skillset and the Creative Industries Council to develop the concept.[178]

95. We recommend that the Government open and promote a clear channel of advice to creative individuals interested in setting up business—a creative business 'hub'. We anticipate this will include a key supporting role for public libraries as long-established knowledge centres.

154  Back

155   Q 311 Back

156   Q 141 Back

157   Ev 203 (DCMS) Back

158   Q 126 Back

159   Qq 613-616 Back

160   Q 30 Back

161   Q 126 Back

162   Ev w128 (Advertising Association) Back

163   Ev 247 (Ingenious Media) Back

164   Q 556 Back

165   Q 570 Back

166  Back

167   Qq 840, 842 Back

168   Q 842 Back

169   Q 587 Back

170   Ev 249 Back

171   Q 304 Back

172   Ev 246 (Ingenious) Back

173   Qq 522, 530 Back

174   Q 571 [The FSA has now become two separate regulatory authorities] Back

175   Ev 312 Back

176   Q 840 Back

177   Q 847 Back

178   Q 175 Back

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© Parliamentary copyright 2013
Prepared 26 September 2013