UK: Incentives for the creative sector

The UK Government defends the country’s pole position in high-quality productions.

One thing we do really well in the UK is producing high-end television programmes like Downton Abbey, animation programmes such as Wallace & Gromit, and blockbuster video games such as the “Need for Speed” series. So when recently a number of high-profile and ostensibly “British” television programmes, such as “Titanic” and “Ripper Street”, were produced in other jurisdictions, notably the Republic of Ireland, the UK Govern-ment got worried!

The Film Tax Relief (FTR) system, introduced in 2006, has been very successful. The UK film industry now contributes over £5bn a year to UK GDP and there has been a 70% increase in the UK film production workforce since 2007. Not only this, but FTR, just like the new Patent Box rules and R&D Tax Credits, has also resulted in an increased overall tax take to the Treasury through enhanced VAT and PAYE receipts.

Unsurprisingly the proposed new tax relief for the creative sector (released on 11 December 2012) is based around the FTR model. Given that it is the Chancellor’s avowed intention that the new relief should be “the most generous available in the world”, it was also no surprise that it was well received.

How does the relief work?
Just as with FTR, the tax relief will only be available to UK companies which fall within the charge to corporation tax (note that LLP’s will not be eligible, but co-productions will) and to productions where “core expenditure” is at least £1m per programme hour and at least 25% of this core expenditure is UK based. There are no minimum expenditure limits for animation or games, by the way.

Companies for this purpose are deemed small or large pending on whether core expenditure is more or less than £20m. Small companies can claim an additional deduction worth 100% of the lower of either UK expenditure or 80% of total core expenditure. Large companies are restricted to 80% of this figure. If a company is loss-making it can surrender the additional losses for a cash credit.

In summary, a small company will be able to claim an additional 20p on every pound of core expenditure, besides the tax relief it would normally obtain on the expenditure, and a large company can claim an additional 12.8p.

Definitions
As with all legislation, “the devil is in the detail”, and not all the terminology has an obvious meaning. Here are two of the key definitions:

• Core expenditure is expenditure on pre-production, principal photography and post-production of the programme. Certain development, distribution and finance costs are not eligible. Production fees will qualify towards the £1m threshold, provided they are less than 10% of the pre-production budget. For animation the cost of relevant quality assurance should qualify, but not service maintenance costs.
• The Cultural Test. 16 points out of the same 31 in the original test are still needed. Points will be awarded for British locations, characters, dialogue, demonstrating British heritage or creativity, developing activity taking place in the UK and use of British developers. The main difference to the film Cultural Test is the expansion of the “cultural content” section to include the EEA (European Economic Area), not just the UK.

What programmes are eligible?

• dramas, documentaries and comedies with a slot length of more than 30mins and core expenditure of at least £1m of direct production cost per hour
•  Programmes must be intended for broadcast on TV and also the internet and for digital distribution via mobile phones. Games must be available for “commercial release”.
• Dramas and documentaries are treated as animations if their really animated content is at least 51%
• Several programmes commissioned together will be treated as one, but the relief will be applied separately to each commissioned programme.

Non-eligible programmes include advertisements, news, current affairs and discussion programmes, quiz, game and chat shows, competitions, live events and training programmes. Games producers will be required to self-certify during the claims process that video games do not contain pornographic or other extreme material.

Author
Christopher Jenkins
christopher.jenkins@ecovis.com