The government has introduced a package of competitive tax reliefs to support the UK's creative industries and enable them to embrace new technologies (such as visual effects).
Current rules provide tax relief by way of an additional deduction from profits or surrender of a loss for a tax credit. The Chancellor had previously announced that the government would introduce new legislation to reform this to refundable expenditure credits to modernise the creative tax relief system, boost growth in the sector and ensure the reliefs remain sustainable, as well as ensuring that the benefits are maintained following the UK's implementation of the OECD's 'Pillar 2' reforms.
The new regimes will be similar to the existing tax reliefs in many ways, such as in terms of eligibility and the definitions of qualifying expenditure. However, a new Audio-Visual Expenditure Credit (AVEC) will cover film and TV programmes (replacing the various different reliefs for current film tax relief, high-end TV tax relief, animation tax relief and children's TV tax relief) and there will be a new Video Games Expenditure Credit (VGEC) for video games (replacing the current video games tax relief). There will be a 34% credit rate for films, high-end TV and video games (with a 5% uplift for animation and children’s TV to a credit rate of 39%) via AVEC, and a 34% credit rate for eligible video games projects via VGEC. Productions will be able to transfer between categories, with some exceptions to prevent abuse of the higher rates for animation and children's TV.
Other changes include:
- the definition of a ‘documentary’ for the purpose of AVEC will be amended to align with guidance used by the British Film Institute
- animation will be extended to include animated theatrical films as well as TV programmes
- AVEC will also introduce a new minimum slot length for high-end TV programmes of 20 minutes, on an episode-by-episode basis, and a definition for documentary programmes
- technical clarifications to the cultural tax reliefs for theatre, orchestras and museums and galleries
- in a move that will likely be welcomed by vertically-integrated companies, it has also been confirmed that companies will only be required to disclose connected party transactions to HMRC and charge connected parties at an arm's length price (rather than the previous proposal which was to cap the relief that companies could receive on connected party transactions, which some argued negatively prejudiced vertically-integrated companies from investing in each other as opposed to third party companies and therefore led to market distortion).
The government has issued a call for evidence on recent trends in the visual effects industry to inform the design of additional tax relief for expenditure on visual effects as a part of AVEC.
The new expenditure credits will be available to claim from 1 January 2024. New productions must claim under the new expenditure credits from 1 April 2025 and all productions must claim under the expenditure credits from 1 April 2027 when the current tax reliefs will end.
This measure is expected to have a negligible adverse impact on businesses in the creative industries claiming creative tax reliefs, however news of the reformed measures will be welcomed as an indication that the UK is a competitive place for creative industries.
