Reforms to audio-visual tax reliefs
After a short consultation period, the government announced its proposals for changes to the audio-visual tax reliefs on 15 March 2023.
Broadly, the proposal is to bring the four audio-visual tax reliefs [Film Tax Relief (FTR), High-End Television Tax Relief (HETV tax relief), Animation Tax Relief (ATR) and Children’s TV Tax Relief (CTR)] into a single scheme, with a similar, but separate, scheme for video games.
It should be noted these changes do not apply to the other cultural reliefs for theatre, orchestra, and museums and galleries exhibition tax relief.
Draft legislation dealing with the proposals will be published in Summer 2023 for comment.
Change in the way the relief will be calculated
The current reliefs are calculated as an adjustment to taxable profits in a company’s tax computation. In the future, the relief will be calculated directly from qualifying expenditure. The new credit will be very similar to the RDEC R&D relief that applies to large companies.
There will in fact be two credits as follows:
- Audio-Visual Expenditure Credit (AVEC): including films and high-end TV programmes, animations and children’s TV programmes; and
- Video Games Expenditure Credit (VGEC).
What will the rates of relief be?
The new credits will attract the following rates of relief:
- Films, high-end TV programmes and video games will have a headline rate of 34%. This equates to 25.5% after corporation tax at 25%.
- Animations and children’s TV programmes will have a headline rate of 39%. This equates to 29.25% after corporation tax at 25%.
Qualifying conditions
Existing qualifying conditions for each category of production broadly remain unchanged, subject to a limited number of exceptions that are detailed below:
- For High End TV, the minimum slot length will be reduced to 20 minutes from 30 minutes. This will apply on an episode-by-episode basis.
- The new legislation will include a definition of ‘documentary’ based on guidance by the British Film Institute: ‘a factual or realistic programme based on real events, place or circumstances and intended to record or inform’. This definition will apply to both the Audio-Visual Expenditure Credit and the current high end TV tax relief.
Other technical changes
There are some other changes that are relevant:
- EEA expenditure will be excluded from the qualifying costs of the Video Games Expenditure Credit. Instead, expenditure will qualify if it is incurred on ‘goods or services used or consumed in the UK’. The eligibility criteria for the Video Games Expenditure Credit will require a minimum of 10% of expenditure to be on goods or services used or consumed in the UK, in line with the rules for the film and TV tax reliefs. HMRC will work with industry and provide further guidance on how ‘used or consumed’ will apply in the video games context.
- The £1 million per game subcontracting limit will be removed for the Video Games Expenditure Credit.
- The 80% expenditure cap will be maintained for all reliefs but will be kept under review. The government recognises that the existence of this cap could lead to companies placing more ‘portable’ expenditure such as visual effects and animation elsewhere.
Transition to the new scheme
Although we will need to wait until the draft legislation is published, it would appear that:
- The new credits will be available for accounting periods ending on or after 1 January 2024.
- Productions that have claimed relief under the current system will be able to opt into the new regime.
- Current tax reliefs will close to new productions from 1 April 2025.
- Productions that have started before 1 April 2025 will be able to continue to use the existing regime until 31 March 2027.
Administrative changes
There will also be some administrative changes as follows:
- All claims, under both the existing reliefs and new expenditure credit system will be required to be made digitally, and more information will be required as part of a claim.
- The government will implement several measures across all the creative sector tax reliefs to address incidental features of the current legislation, unintended when drafted, which cause anomalies or make operation of the rules difficult for claimants or HMRC. These measures include:
- Amending the time limit for making a claim to two years from the end of the period of account to which they relate, rather than 12 months from the statutory filing date. This will prevent companies which do not receive a notice to file, either because they fail to register or notify HMRC that they are no longer dormant, from benefiting by having more time to make a claim.
- Introducing a power for HMRC to collect overpayments in specific circumstances, such as when a company withdraws its claim.
- Clarifying the position where expenditure can potentially qualify for relief under both the creative tax reliefs and the research and development (R&D) schemes.
- The government will be introducing an anti-abuse measure on payments between connected parties to restrict qualifying expenditure to the costs incurred by the group.
- The government will legislate to prevent credits being paid out to companies that are undertaking in difficulty. There is a similar provision that applies to EIS relief.
How can Moore Kingston Smith help?
The above is a summary of the proposed changes, and it will not be possible to advise in detail until the draft legislation is published in the summer. Once the legislation is available, we will look to provide further information on how these changes will affect clients, especially those in the media sector.