10 Myths About the UK Film and TV Tax Credit – And Why They're Not True
It is no secret that the UK is experiencing an unprecedented production boom. Fueled by the rise of streaming and global demand for fresh content, the UK is seeing record levels of inward investment in film and TV production.
As well as world-class crew and infrastructure, the UK’s position as a global production hub stems from its generous tax incentives. And yet, misconceptions remain as to how the UK tax credit works, and who it applies to.
Here, Joseph Chianese, SVP & Production Incentives Practice Leader at Entertainment Partners, and Lloyd Gunton, Director of Creative Sector Tax Reliefs at FLB Accountants (an Entertainment Partners company), break down 10 common myths about the UK film and TV tax credit.
Myth #1: Only London productions qualify
There is no denying that London is the production capital of the UK. However, the surrounding nations and regions are emerging as competitive production hubs, with world-class studios and stage space designed to soak up the capital’s overspill.
The devolved administrations have all shot to fame by being home to major high-end television (HETV) productions in recent years, like Game of Thrones (Northern Ireland), Outlander (Scotland) and Sex Education (Wales), to name a few. In England, smaller regional production hubs have also emerged, predominantly in Liverpool, Leeds, Manchester and Bristol.
While crewing up in these smaller regions used to be a challenge, organizations like The Production Guild of Great Britain and ScreenSkills have done an incredible job of building and nurturing crew bases outside London to support the boom. And local governments and organizations are doing their best to attract productions, with regional incentives which can be applied for, in addition to the UK tax credit, to increase the overall level of soft money available.
Myth #2: You need to have an established company in the UK
While it is true that you need to be a UK limited company to qualify for the tax credit, this company can be an “off the shelf” special purpose vehicle (SPV) set up purely for the purposes of the production. This SPV can even be wholly owned by a foreign entity (but it must be a company subject to UK corporation tax).
In general, setting up a UK SPV is straightforward – if all the paperwork is in order, incorporation happens in a matter of days.
It is worth noting that the UK entity must be contractually responsible for all aspects of production from pre-production through to delivery (but don’t worry, the UK company can subcontract elements out to other entities). It is therefore vital that the UK company is set up well in advance of the start of principal photography, ideally at the very start of prep, to ensure that this requirement is met.
Myth #3: There is a cap on how much productions can spend
Many people confuse the 80% expenditure cap with a cap on spending, but this is not the case. The 80% expenditure cap just means that the tax credit is capped at 80% of your total core expenditure (so even if you have 100% UK-qualifying expenditure, the tax credit is only payable on 80%).
Many productions thus choose to outsource certain elements of production (e.g., VFX) to other countries, whose own incentives regimes can be used to increase production’s total credit.
The UK tax credit regime is compatible with most overseas incentive schemes allowing productions to maximize the available incentives from a financing perspective. However, careful consideration is needed from a legal and structural perspective to ensure that the structure allows for access to the different incentives.
Myth #4: Brexit has made it harder to pass the Cultural Test
Several years ago, the UK government changed the Cultural Test legislation to ensure that it also covered the European Union (EU) and European Economic Area (EEA), and this legislation remains in place following Brexit. As such, Brexit itself has had a limited impact on productions’ ability to pass the cultural test.
This means that cast and crew will be qualifying persons for the purpose of the cultural test if they have either UK or EEA nationality or residency. For clarity, this is entirely separate to spend on those individuals qualifying for the UK tax credit.
Myth #5: Foreign expenditure does not constitute qualifying spend
The UK tax credit is based on a concept known as “used or consumed,” which means that any spend that is incurred on individuals or companies providing services that are used by the production in the UK, or consumed by the production in the UK, will qualify for the tax credit. This is irrelevant of the nationality of the person providing the service or the location of the company providing the services or goods.
For example, the cost of an international star who provides acting services entirely in the UK would fully qualify for the UK tax credit, as would the cost of purchasing and shipping wigs from the USA to the UK for use in the production. It should be noted that the converse is also true (i.e., the cost of a UK national or resident performer who performs only in overseas shoot elements would not qualify for the UK tax credit). The key is the location of the use or provision of service, not nationality.
Myth #6: Costs incurred before pre-production do not constitute qualifying spend
Broadly speaking, costs incurred from pre-production up until post and delivery qualify for the UK tax credit. While this sounds restrictive, under the “used or consumed” concept, services which are rendered before pre-production may still qualify for the UK tax credit.
The key element is whether the production was “purposive” (i.e., fully expected to go ahead or virtually greenlit) or “speculative” (i.e., in very early stages with a lack of certainty over whether the production would get made). Purposive spend will qualify, whereas speculative spend will not. This is a subjective area and advice should be sought on whether a cost is qualifying. However, “big ticket” items (e.g., scripts) incurred before pre-production will generally qualify as core spend.
This may be a key element for productions to keep in mind when they are determining whether they meet the 10% minimum UK qualifying spend requirement.
Myth #7: Only big budget films qualify
This is a common misconception and a great example of how film-friendly the UK tax credit is. Unlike other countries, there are very few restrictions on which films qualify for the UK tax credit. For example, there is no upper or lower limit on the budget for qualifying films or indeed the tax credit that can be claimed.
As well as the general requirements (e.g., the company being the “Film Production Company” for the production and incorporated in the UK, at least 10% of the project's core expenditure being UK expenditure and passing the Cultural Test), the main condition is that a film be intended for theatrical release. This applies to anything from small documentary films and independent features to major studio blockbusters.
For lower budget (generally independent) films, the intention to exhibit or compete on the festival circuit is generally considered acceptable in the absence of having not yet secured a formal distribution deal.
Note that additional rules apply to qualify for the HETV tax credit, including a minimum spend of £1m per hour of slot length.
Myth #8: Only scripted content qualifies
While it is true that live events, news broadcasts and reality or quiz shows do not qualify for tax credit, documentaries are eligible. It is worth noting that the term “documentary” is not well defined under the current legislation and has led to some confusion, so this is one area which the government is expected to clarify in its ongoing consultation.
Myth #9: The UK tax credit rate is increasing to 34%
When Chancellor of the Exchequer and Finance Minister Jeremy Hunt announced last month that he is introducing a new audio-visual expenditure credit with a rate of 34% for film, HETV and video games and 39% for animation and children’s TV, there was some excitement that the UK tax credit (currently 25%) was increasing to 34% and 39%, respectively.
However, this was somewhat of a red herring. While it is not yet known what the exact increase will be, the new audio-visual expenditure credit is expected to result in an effective incentive rate of 25.5% on qualifying expenditure for films and HETV shows and 29.25% for animation and children’s TV.
Myth #10: It takes forever to get the tax credit
In the UK, tax credit applications are made through the UK company’s year-end tax return. Companies can generally choose any date for their year-end, so they can align it with when they intend to wrap and deliver the production so as to start the claim process concurrently with the completion of the production.
It is not unusual for interim claims to be made at the end of principal photography, followed by a final claim once the project has been delivered – interim claims do still require full submission of company accounts and corporation tax return.
The UK scheme is also quick to release payment – if the claim is put together by a reputable firm, claims are validated and paid swiftly. A production could reasonably expect to receive payment for its claim within 10-12 weeks of submission of all documents to the tax authorities.
How Entertainment Partners can help
As the UK incentives landscape continues to evolve, the Entertainment Partners team wants to make sure you understand how it impacts your productions. Keep an eye on our site for updates and if you ever have questions or need support, please contact us.
If you decide to explore the UK as a filming destination, reach out to FLB Accountants (an Entertainment Partners company). FLB is a UK-based chartered accounting firm with expertise in media and entertainment accounting, tax and tax incentives, finance and accounting. They also provide film and TV tax credit incentive opinions and manage tax credit claim submissions, work with producers to help finalize budgets and advise on budgeting, and provide deal close support for independent and multi-party financed projects.
Want to learn more about the UK tax credit? Check out our recent Master Series, What Productions Need to Know About the UK Tax Relief.
About the author: Lloyd Gunton recently joined FLB from Saffery Champness where he worked for 7 years in the specialist Film and Television Team. Lloyd has worked with a wide range of productions from low budget independent films to high-end television dramas and Hollywood blockbusters, assisting his clients with accessing and maximising the tax credit that is available to the productions.