Changes to the UK Film Tax Credit

The changes announced in the Autumn Statement to the UK film tax credit are welcome 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, so the film industry can consider itself favoured in recognition that “the creative industries not only make a valuable cultural contribution to the UK, they are also an important part of a dynamic and diversified economy” (Autumn Statement).

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

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

There is currently great competition for production capability. Studios and producers have to weigh up the advantages and disadvantages of where to produce films. In addition to evaluating quality, experience, and history (where the UK has always excelled), they also seek value for money. So, they look at the incentives offered by countries – Canada, for example, offers both federal and regional tax credits to film producers – and at the cost of producing in different countries (including those in Eastern Europe) which are inherently cheaper than the UK, and weigh up these factors against the advantages of producing in the UK. The new measures announced give further weight to the arguments in favour of the UK.

The changes are summarised below. It is intended that those listed in paragraphs 1, 2 and 4 below will 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 rate of relief on the first £20m of qualifying UK expenditure from 20% to 25%

At the moment, the film tax credit rate is 25% if qualifying expenditure is less than £20m, and 20% if it is more than £20m. This gives rise to the anomaly that a £21m film generates less tax credit than a £19m film.

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

The government will seek EU State Aid approval to increase the rate on the first £20m of UK qualifying expenditure to 25%, when it re-notifies the film tax credit relief 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 relief, at least 25% of total qualifying expenditure for a film must be UK qualifying 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 done, because there was no tax benefit (i.e., where UK spend was between 10% and 25% of 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; and the UK is at the forefront of innovation, as showcased by Framestore’s involvement in 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.  Modernising the Cultural Test

The Cultural Test, which must be passed for a film production company to qualify for the film tax relief, will be modernised “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 programmes, where points are allocated where the programme is set in (and the characters are from) not just the UK but also the EEA). 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 centre, to provide a sustainable supply of UK talent for the digital and creative industries.

Consultation on theatrical tax relief

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

Client Alert 2013- 333