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Holiday Gifts for the Creative Sector -- From the UK Government

December 13, 2012

Following the UK Chancellor’s Autumn statement last week, the draft UK Finance Bill 2013 released on 11 December 2012 extends creative sector tax reliefs available under the UK Corporation Tax Act 2009 to certain television programmes and video games with effect from 1 April 2013.

For the most part, the draft legislation is in line with expectations following the UK Treasury’s consultation paper on creative sector tax reliefs. The new tax reliefs have been grouped into two categories:

  1. Television Programmes (animations being a type of television programme); and
  2. Video Games.

In effect, the tax relief will give rise to a tax credit that can be claimed in cash in respect of 25% of certain expenditure.

A summary of each tax relief is set out below, followed by a summary of how the tax relief will be calculated. The proposed new tax reliefs and the relevant cultural tests are subject to State Aid approval from the European Commission.

TV & Animation

A television programme will qualify for the tax relief if: 

  1. It is a drama (including comedy), documentary or animation that satisfies the relevant cultural test. The tax relief does not extend to advertisements, current affairs programmes, entertainment shows, competition shows, live performances or training programmes. If a drama or documentary contains 51% or more animation then it will be treated as an animation (this threshold has decreased from 75% which was the proposed percentage in the consultation paper and will be a major boon in attracting and retaining this kind of programming). 
  2. It is intended for “broadcast” to the general public. Guidance may be required as to what is meant by broadcast as this is not defined in the draft legislation. We assume “on demand” services will be included despite not strictly being broadcast. 
  3. At least 25% of the core expenditure is UK expenditure. Like the film tax relief, core expenditure is expenditure on the pre-production, principal photography and post-production of the programme and UK expenditure is expenditure on goods or services that are used or consumed in the United Kingdom. We expect guidance to be issued as to which typical television costs and recharges can be included as core expenditure (including production fees). 
  4. In the case of dramas and documentaries only, they are commissioned for a slot length greater than 30 minutes and have an average core expenditure of £1m per hour of slot length. It should be noted that, following responses from the industry, the reference to slot length is a change from the Government’s initial proposal of average core expenditure of £1m per hour of running time. This is a testament to the industry wishing to implement a test across the television sector which applies to all.

Video Games

A video game will qualify for the tax relief if:

  1. It satisfies the relevant cultural test and is not produced for advertising or gambling purposes. 
  2. It is intended for “supply to the general public”. Again, further guidance may be required on this point as this is not defined in the draft legislation and it is not clear whether intention to supply means the video game simply needs to be made available to the end user. 
  3. At least 25% of the core expenditure is UK expenditure. Core expenditure is defined as the costs incurred designing, producing and testing the game excluding initial concept design costs, de-bugging costs and maintenance costs. As with the television tax relief, UK expenditure is expenditure on goods or services that are used or consumed in the United Kingdom.

Tax Relief Calculations

Like the film tax relief, the television production company or video games development company (each a “UK Company”) must, like a film production company, fall within the UK corporation tax net). The UK Company can elect whether to: 

  1. receive a tax credit as a cash payment by surrendering losses from its trade for that particular programme or video game; or 
  2. utilise the losses that arise from claiming the additional deduction to offset future profits from its trade for that particular programme or video game (or once the production has ceased against the profits of UK group companies).

Additional Deduction

The UK Company will claim the relevant tax relief through its UK corporate tax return by way of an additional deduction.

The additional deduction is calculated by reference to the “Qualifying Expenditure”, which is the amount of Core Expenditure that can be brought into account for the current accounting period when calculating the profit or loss position of the trade for the particular programme or video game.

The amount of Qualifying Expenditure that can be used to calculate the additional deduction is the amount of Qualifying Expenditure that is UK expenditure (what we call here the "Qualifying Spend"). The Qualifying Spend is capped at 80% of the total Qualifying Expenditure.

The additional deduction is 80% of the Qualifying Spend. This is the same as the additional deduction available to film production companies making high budget films rather than the 100% additional deduction that is available to film production companies making limited budget films.

Tax Credit

The tax credit that can then be claimed by the UK Company is calculated by reference to the amount of losses surrendered by the UK Company to the UK tax authorities. The maximum amount of losses that can be surrendered is an amount equal to the Qualifying Spend. In exchange for surrendering these losses the UK Company will receive a tax credit (in cash) equal to 25% of the value of the losses surrendered.

Example Calculations

By way of example, below are the tax relief calculations for a television programme or video game with 100% UK Expenditure and a television programme or video game with 60% UK Expenditure.

Worked Example

(assuming one accounting period)

100%
UK Expenditure

60%
UK Expenditure

Qualifying Expenditure

100

100

Qualifying Spend

(“E” as defined in the draft legislation)

80

(capped at 80% of Qualifying Expenditure)

60

(being the amount of Qualifying Expenditure that is UK Expenditure)

Additional Deduction

(80% x Qualifying Spend)

64

48

Total Expenses of UK Company

(being the Qualifying Expenditure plus the Additional Deduction)

164

148

Assumed Income of UK Company

80

85

LESS Total Expenses of UK Company

(164)

(148)

Net Profit/(Loss)

(84)

(63)

LESS Losses surrendered to HMRC for purposes of claiming the tax credit (up to a maximum of the Qualifying Spend)

(80)

(60)

Profit / (Loss)

(4)

(3)

Tax credit payment from HMRC

(25% of losses surrendered to HMRC )

20

(i.e. 80 x 25%)

15

(i.e. 60 x 25%)

Additional points to note: 

  • Television programmes that are commissioned together under the same agreement are treated as a single television programme. 
  • For commissions that are already underway, costs incurred in an accounting period commenced before 1 April 2013 but ending after this date will be pro-rated and may qualify for the relief. 
  • Given that the current UK corporation tax rate is 24% (falling to 23% from 1 April 2013 and 21% from 1 April 2014), it is hard to understand in what circumstances a UK Company would decide to carry the losses forward. It is more likely that it will surrender them (to the extent possible) to the UK tax authorities in exchange for an immediate tax credit cash payment as described above. 
  • Even where a tax credit is claimed it is likely that there will still be some losses remaining (as shown in both worked calculations above). It may be possible for these to be used in the future to either offset future profits of the same trade or be surrendered to UK group companies once the production is complete in order to offset the UK profits of the group. 
  • It is intended that the tax credit due will be paid to the UK Company soon after the tax return has been received and reviewed by the UK tax authorities, although the precise timing is likely to be dependent on the number of claims the UK tax authorities receive. 
  • The cultural tests in the draft legislation are in line with the drafts that were issued earlier in the year. Unlike the cultural test for British films, the tests extend to nationals from the European Economic Area as well as the United Kingdom. It is anticipated that The British Film Institute may agree to be responsible for interim and final certification of British television programmes and video games, although this has not yet been confirmed. 
  • In line with the film tax relief, the new tax relief can be claimed on contingent and use payments to third parties. 
  • The film tax relief legislation remains in place and will continue to apply to feature films, including animated feature films.

If you have any questions on points raised in this update, please contact Lisbeth Savill (lsavill@omm.com), Sarah Caughey (scaughey@omm.com), or Rachel Moon (rmoon@omm.com).