UK Film Tax Relief – How does it work?

UK Film Relief

Overview
Creative industry tax reliefs are a group of 7 Corporation Tax reliefs that allow qualifying companies to claim an enhanced tax deduction, or in some circumstances claim a repayable tax credit when calculating their taxable profits.
These 7 reliefs consist of:

  • Film Tax Relief (FTR) – which is the subject of this blog
  • Animated Tax Relief (ATR)
  • High-end Television Tax Relief (HTR)
  • Children’s Television Tax Relief (CTR)
  • Video Games Tax Relief (VGTR)
  • Theatre Tax Relief (TTR)
  • Orchestra Tax Relief (OTR)

They work a bit like R&D tax credits, by increasing the amount of allowable expenditure against your taxable profits.
Film Tax Relief (FTR)
For the purposes of this blog I am concentrating on the Film Tax Relief. The FTR came into force on 1st January 2007, and all British films are eligible. It is not accurate that the FTR is 25% of the money spent on a film.  The truth is that it’s slightly less, and a more complicated calculation. In practice, it normally accounts for just under a fifth of the money a film spends in the UK.

  • For films with a total core expenditure of £20 million or less, the film production company (FPC) can claim a cash rebate of up to 25% of UK qualifying film production expenditure
  • For films with a core expenditure of more than £20 million, the FPC can claim a cash rebate of up to 25% of the first £20 million of qualifying UK expenditure, with the remaining qualifying UK expenditure receiving a 20% tax credit
  • The Tax Relief is capped at 80% of the total core production expenditure. See below.

To qualify for the relief a film must: 

  • Be intended for theatrical release (it doesn’t have to get a release; the filmmakers just must have a reasonable expectation that it could be sold to the paying public in commercial cinemas)
  • Have spent a minimum of 10% of its qualifying production expenditure within the UK. See below
  • Be officially “British”, meaning that it must either pass the Cultural Test for Film or be certified as an official co-production
  • Be made by a FPC who fall within the UK Corporation Tax net. 

UK EXPENDITURE REQUIREMENTS
To be eligible for Film Tax relief, a minimum of 10% of core expenditure must be ‘consumed’ within the UK.
The FPC can claim FTR on the lower of either 80% of total core expenditure; or the actual UK core expenditure incurred.
Core expenditure is expenditure on the activities involved pre and post-production of the theatrical release. However, this excludes expenditure on development and distribution, and all costs incurred while raising and servicing finance.
UK expenditure on services or goods ‘used or consumed’ in the UK. The used or consumed test is identifying the type of expense and focuses on the recipient or customer as the means of determining whether the expense falls into UK expenditure.
OTHER FPC CONSIDERATIONS
Whilst an FPC might also have responsibility for the development, marketing and distribution of the film, there is no requirement that it does so. The rules are slightly different in the case of co-productions.
An FPC need not be directly responsible for every aspect of every one of these activities, nor is a third party prevented from undertaking some of these activities on behalf of an FPC. It is standard industry practice to commission third parties to deliver specific elements of film production such as set construction, special effects or location work.
Where this is the case, a company will not be prevented from being treated as the FPC for tax purposes. However, an FPC must have some involvement in each of these categories; it cannot simply commission the entire production of the film from someone else without having any active engagement itself.
HOW THE RELIEF IS GIVEN
Costs of production for a qualifying theatrical release are deductible from the total estimated income from the film to calculate profits and losses.
The film production company will be eligible for an enhanced deduction.
The total losses of the film production company can be used to either be set against the income of the company for tax purposes; or be surrendered to the HMRC for a repayable tax credit, currently set at 25%.
The losses surrendered for any accounting period must be the lesser of: the amount of the trading loss in the period; or the enhanceable expenditure for that period less any amount in previous periods.
For more information about our Music, Media and Entertainment sector services contact Roy Butcher FCCA, Partner at Raffingers. Contact: roy.butcher@raffingers.co.uk.
You can also follow us on Twitter for more tips and updates.