Changes to the UK Film Tax Credit

In Britain’s annual Autumn Statement, a report on economic growth and government finances released by Britain’s Chancellor of the Exchequer (the British equivalent of America’s Treasury Secretary), the government announced an expansion of its film tax credit program by increasing subsidies and lowering the barriers to accessibility.

Amid increasing competition for international film and television production, the changes announced in the Autumn Statement are evidence of the government’s continued support for the audio-visual industry, following the April announcement of the tax credit for high-end TV and non-film animation projects.

The Exchequer estimates a benefit to the industry (and cost to the Exchequer) of £10m in 2014-2015, £20m in 2015-2016, and £25m in each of 2016-2017, 2017-2018 and 2018-2019. The effects of the Autumn Statement, as a whole, are revenue-neutral.

The changes are intended to further stimulate the UK film industry, and will:

• Make it more attractive to bring high-budget films to the UK
• Encourage international co-productions where the UK expenditure is less than 25%
• Encourage producers with a visual-effects budget of 10%-25% of the total budget to come to the UK for their visual effects

The changes are summarized below. Those listed in paragraphs 1, 2 and 4 below are intended to be enacted in the 2014 Finance Act, subject to EU State Aid-approval being obtained. This approval has been sought and is expected to be in place before April 2014.

1. Increasing the tax credit on the first £20 million ($32.7 million) of qualifying UK expenditure from 20% to 25%

At the moment, the film tax credit rate is 25% if the qualifying production expenditure is less than £20m, and 20% if it is more than £20m. Consequently, a £21m film generates less tax credit than a £19m film.

With effect from April 2014, the tax credit will be 25% of the first £20m of the UK qualifying expenditure, and 20% of the UK qualifying expenditure in excess of £20m. It should be noted that the tax credit continues to be given on the lesser of the actual UK qualifying expenditure and 80% of core expenditure.

Not only does this change remove the anomaly, it also generates an additional £1m of tax credit for films with qualifying expenditure in excess of £20m, as shown in the example below. 

2. Proposed increase in the rate of relief on qualifying UK expenditure exceeding £20m ($32.7 million)

The government will also seek EU State Aid approval to increase the tax credit for qualifying production expenditure in excess of £20m from 20% to 25%, when it renews the film tax credit program in 2015. 25% would then be the rate applicable to all qualifying expenditure (as it is for high-end television and non-film animation productions). The example below shows the extra tax credit that might be generated.  

3. Reduction in the minimum level of UK expenditure from 25% to 10%

Currently, to qualify for the film tax credit, at least 25% of total qualifying expenditure for a film must be UK qualifying production expenditure. With effect from April 2014, this will be reduced to 10% (although the 25% floor for high-value television and non-film animation productions will remain at 25%).

This will encourage European producers, in particular, to make co-productions with UK co-producers when they previously might not have because there was no tax benefit (i.e., where UK spend was between 10% and 25% of the total spend).

More importantly, this is likely to be a boon for the UK visual-effects industry at a time when visual effects are becoming an increasingly important element of film production. The UK is at the forefront of such innovation, as showcased by the London-based visual effects company Framestore’s work on the feature film Gravity.

At the moment, if a production’s visual-effects budget is between 10% and 25% of the total budget (and it is not otherwise being shot or produced in the UK), there is no financial incentive for the producers to have their visual-effects work done in the UK. That will now change, and should result in a greater influx of visual-effects work into the UK, and go some way to answering the concern highlighted by HM Treasury in its consultation paper of 2013 that, "there have been recent reports of visual effects activity moving overseas, with job losses at a number of UK visual effects companies, and some evidence of UK-based companies looking to open new branches overseas."

4. Modernizing the Cultural Test

The Cultural Test, which must be passed for a film production company to qualify for the film tax credit, will be modernized "to align it with incentives in other member states and to support visual effects and wider film production" (Autumn Statement). The details have not yet been published. This is likely to make it easier for films with European elements to pass the Cultural Test (if, for example, the film test is made similar to the test for high-end television programs, where points are allocated when the program is set in (and the characters are from) not just the UK but also the European Economic Area). It is also likely to provide further incentive for undertaking visual-effects work in the UK if (as seems probable) doing so assists a film to pass the test. Two further measures were announced which benefit the creative industries:

£5m funding for National Film and Television School’s Digital Village

The Oscar- and BAFTA-winning National Film and Television School (whose alumni include David Yates, the director of four of the Harry Potter films) will receive an investment of £5m from the government to expand and upgrade its existing facility into a world-class training center, to provide a sustainable supply of UK talent for the digital and creative industries.

Consultation on a Theatrical Tax Credit

The government intends to introduce new support for theaters, from April 2015, that recognizes the unique value that the theater sector brings to the UK economy. A formal consultation will be launched in early 2014 that will consider a limited tax credit for commercial theater productions and a targeted tax credit for theaters investing in new works or touring productions to regional theaters.

Client Alert 2013- 335