Last month, when Chancellor Rishi Sunak unveiled the contents of his much anticipated ‘Covid’ Budget, the state of play for UK production companies was slightly more complex than usual. From another extension to the furlough scheme to billions of pounds worth of cash injections for the economy, there was a significant amount to get one’s head around.
In short, the measures announced in March were less about instant tax increases and more about the long term – setting out a road to recovery for what could be a rocky few years ahead.
As ever, the devil is in the financial detail. So, listed below are five key highlights from the Chancellor’s announcement, setting out what you and your media business should be looking at over the next few years:
Be mindful of rising corporation tax rates
One of the stand-out Budget headlines was that, from April 2023, corporation tax paid on companies’ profits will increase from 19% to 25%. The first £50,000 of profits will still benefit from the lower rate of 19% but profits over £250,000 will be subject to 25% and the effective rate of tax on profits between those two levels is increased to 26.5% due to the tapering between these amounts.
So, what can you do to mitigate for this? For those claiming any tax credits in the industry on a large-scale project, the norm has been to set up a separate company solely for that production, allowing you to access a maximum of 25% tax credit on your production company rather than utilising the 19% available if the production losses are offset against profits from other productions.
Going forward, production companies may want to reconsider this approach. From April 2023 if they have profits that would otherwise be taxable at 25% or 26.5% it may be more beneficial to offset the production costs against their company trading profits instead. Of course, there are also other commercial reasons for having a separate production company besides the tax benefit and it may also be that some companies may not have sufficient profits to offset the production costs. Nevertheless, it is certainly something production companies need to factor in and plan for going forward.
Owners, look at how you take out your salary
Whilst it may not be immediately apparent, corporation tax increases may mean that indie owners who work in the business need to review how they extract profits and are remunerated in the future. As it stands, owner directors generally receive a salary for their duties as a director and generally opt to receive any excess profits from the company by way of a dividend, as it is usually more tax beneficial to do so. However, because dividends are not deducted from taxable profits of a company, but salary is, once the corporation tax rate rises the tax difference between salary and dividends will be marginal; if your company is in the marginal band paying tax at 26.5%, paying a salary will be slightly more beneficial. Obviously, the impact on each organisation will vary depending on profit levels but it is something again that indies need to plan for.
Super deductions – why investing in your company over the next two years is no bad thing
In a bold approach to offset these corporation tax hikes, the Chancellor unveiled a ‘super deduction’ tax relief for businesses in a bid to encourage more investment over the next two years. This initiative is targeted at those companies investing in certain qualifying capital assets from 1 April 2021. The new measure will see them receive a temporary allowance that includes a ‘super deduction’ of 130% on capital expenditure. Companies with larger capital spend of over £1m per annum that would have previously qualified for only 18% relief per annum will be those who benefit most, although even those companies with smaller expenditure that would have previously qualified for a 100% allowance will get a boost of an additional 30% relief.
The super deduction rate only remains in place until 31 March 2023. So, for any post- production houses that may be thinking of upgrading their equipment, now would be a good time to factor this in when your cashflow permits it.
Take solace in what wasn’t in the Budget
There was no mention of Capital Gains Tax increases in this year’s budget and no mention of changes to Business Assets Disposal Relief (formerly Entrepreneurs’ Relief), much to the relief of many. However, this could likely be something the Chancellor returns to once he can see we are on the path to recovery.
For any independent production company that is considering selling, the consequences of any possible future Capital Gains Tax rises could be significant and so assessing the value of any potential sale this year could be a wise move. This has also left many considering whether an employee ownership trust is a good exit strategy.
Still take advantage of extended funds and schemes
The great news is that the UK’s Film and TV Production Restart Scheme has been extended until December, continuing to provide that all important Covid insurance for TV and film productions. The Chancellor also announced that the Government will provide a further £300m for the Culture Recovery Fund.
The furlough scheme has been extended to September 2021 and the self-employed income scheme has also been extended with a further 4th and final 5th grant. The good news on this is that it is now based on the 2019/2020 tax returns, which brings another 600,000 people into eligibility for the scheme and so will help some of those freelancers who were not eligible in its original form.
This article, by Moore Kingston Smith partner Val Cazalet, was published in Televisual on 9 April 2021