VAT Registration and Compliance: A Guide for UK Productions

The UK is a fast-growing international hub for film and TV production thanks to its generous tax incentives (including the new Independent Film Tax Credit (IFTC), talented crew, dynamic filming locations and world-class infrastructure. As increasingly more projects are produced in the UK – including those which inbound from the US, Canada and Europe – it’s critical that production accounting teams understand the UK tax system and how variables like Value Added Tax (VAT) affect your project’s bottom line. 

What is VAT? 

VAT is a consumption tax levied on most goods and services sold in the UK. VAT-registered businesses collect VAT from their customers and reclaim VAT paid on business purchases. The net of VAT collected from customers and the VAT paid to vendors is paid to or recovered from His Majesty’s Revenue and Customs (HMRC) through the submission of regular VAT returns.

​​​Typically, one of three VAT rates applies to production goods and services:

• Standard rate (20%): Applies to most goods and services, including production-related expenses like equipment rentals, location fees and professional services.
• Reduced rate (5%): Applies to specific items such as renting certain energy-saving materials used in studios.
• Zero rate (0%): Applies to essential goods and services, including certain passenger transport for cast and crew (e.g., train fares, flights), children’s clothing and footwear and the creation of books, scripts and printed music used in production.

When to register for VAT: Understanding your options

UK production companies or special purpose vehicles (SPVs) must register for VAT if their taxable turnover (i.e., total income earned from sales):

• Exceeds the registration threshold (currently £90,000) in a rolling 12-month period; or
• Is expected to exceed £90,000 in the next 30 days

You do not have to register for VAT if you only sell VAT exempt or ‘outside of scope’ goods and services.

In addition, the UK operates a reverse charge mechanism. The reverse charge applies to services where: 

• The place of supply is the UK;
• The vendor belongs outside the UK;
• The customer is a relevant business person who belongs in the UK;
• The supply is not exempt (this includes exempt supplies subject to an option to tax); and
• For supplies not within the general rule, the customer is VAT registered in the UK. 

The effect of the reverse charge is that the supply is deemed to be made by the UK customer instead of the overseas vendor. Consequently, although the overseas vendor is making supplies of services that are within the scope of UK VAT, they are disregarded and so do not count as taxable supplies for the purposes of registering for VAT. 

Where, on the other hand, the relevant UK business customer is unregistered, any reverse charge services they receive must be added to their taxable turnover when considering the need to register. 

All productions must abide by these threshold triggers to avoid costly penalties. 

Production accountants can also opt for voluntary VAT registration ahead of reaching the taxable turnover threshold. 

For example, voluntary VAT registration can be helpful:

• During pre-production: Productions incur significant expenses during pre-production, including purchasing equipment, securing locations and hiring staff. Registering for VAT before paying these expenses allows your company to reclaim VAT on eligible costs, reducing your initial financial burden and improving cash flow. 
• Before securing funding: Being VAT-registered can enhance your production’s credibility, which can help to facilitate smoother investment negotiations during the funding period. Potential investors often prefer to engage with VAT-registered companies because it demonstrates a higher level of financial transparency and compliance.

You can also choose to register for VAT as production progresses and your company begins to make money. However, you must monitor taxable turnover closely. If you're approaching the VAT threshold, it's important to register as soon as possible to avoid late registration penalties.

Charging versus reclaiming VAT

For production companies and SPVs, VAT applies to a wide range of expenses, including equipment hire, location fees and professional services.

There are two ways VAT affects a production’s finances:

• It can be charged on services which you (the production company or SPV) provide.
• It can be reclaimed on specific costs which you incur.  

Charging VAT on production services which you provide

All VAT-registered businesses must add VAT to the sales price of their taxable goods or services. This tax is collected from your customers on behalf of HMRC.

It's important to apply the correct VAT rate to your sales (as set out above), as charging an incorrect rate can lead to compliance issues. Understanding when and how these rates apply will help you to budget accurately, avoid penalties and maximise your cash flow.
 
Collected VAT, also known as 'output tax,' must be reported and paid to HMRC via periodic VAT returns. More on that soon, but first—let’s look at the alternative VAT scenario.

Reclaiming VAT on goods and services which you pay for

When your business purchases goods or services from other VAT-registered vendors, you are charged VAT – sometimes referred to as input tax – on these transactions. When purchases are made for business purposes and relate to taxable supplies you make, your production can reclaim the input tax paid.

The above rates also apply to goods and services which you reclaim VAT on. In general, VAT can be reclaimed on production costs such as:

• Professional services provided by VAT-registered freelancers or companies
• Rental of professional equipment
• Set construction materials
• Costume and wardrobe purchases (excluding children’s clothing and footwear)
• Rental of office space for production purposes
• Purchase of production software

Reclaiming VAT is done by disclosing your input tax on your VAT return. For example, if a production company rents a studio space for £10,000 and is charged the standard VAT rate of 20%, they can reclaim the £2,000 VAT when filing their VAT return.

To be able to reclaim VAT on business purchases, production accountants must make sure they have a valid VAT invoice which meets HMRC’s requirements.

But remember, not all purchases qualify for VAT reclamation. For example, items considered to be for private or non-business use (e.g., expenses relating to entertaining clients or using a company car for personal use) are typically not reclaimable.

While VAT principles generally remain consistent across the production industry, different types of productions can face unique VAT considerations, for example:

• Frequency of VAT filings: Depending on the stage and size of production, the SPV may choose a different filing frequency to manage cashflow against the administrative task of preparing the VAT return.
• Mixed VAT rates: Productions may be required to use different VAT rates depending on the details outlined in distribution, syndication, or licensing agreements
• 'Outside of scope’ goods and services: Some aspects of production, such as the sale of finished projects to international markets, may be outside of scope for VAT.
• ​​​International VAT implications: Many UK-based production companies operate internationally, whether filming abroad, hiring foreign crew members or selling content to international distributors. In these situations, VAT compliance can be complex, with different rules applying depending on the country involved. 

Filing VAT returns

To file a VAT return, you must first register with HMRC and receive a unique VAT registration number. VAT returns are filed digitally in line with HMRC’s Making Tax Digital initiative, which was introduced in 2019 to mandate digital record-keeping for VAT registered businesses.

Filing a VAT return involves reporting the total VAT collected on sales (output VAT) and the VAT paid on eligible purchases (input VAT) in a particular period.

If output VAT exceeds input VAT, the production company must pay the difference to HMRC. If the input VAT is higher, a refund should be issued.

VAT returns are typically filed monthly or quarterly, with submission and, if applicable, payment due one month and seven days after the period ends (but can be submitted earlier). Late submission or payment can result in penalties under HMRC’s new points-based system, where repeated failures lead to financial charges.

Avoiding VAT penalties

Productions that fail to comply with VAT regulations can face serious financial and legal consequences. The severity of the penalties depends on the nature and extent of the non-compliance.

• Late VAT registration penalties: If a production company fails to register for VAT on time (i.e., after exceeding the £90,000 threshold), HMRC may impose a late registration penalty based on the VAT owed from the date the company should have registered. The penalty is a percentage of the VAT due, increasing as the delay continues.
• Late VAT return filing penalties are tracked using a points-based system: HMRC assigns penalty points for missed VAT return deadlines, and if a company accumulates a certain number of points, it incurs a £200 penalty. Every subsequent missed return triggers an additional £200 penalty.
• Late payment penalties: If VAT is not paid within 15 days of the deadline, a 2% penalty applies. If payment is still not made by 30 days, the penalty increases to 4% of the outstanding VAT. After 31 days, additional daily interest (4% per annum) is charged until the full amount is paid.
• VAT repayment delays or denials: If a production incorrectly claims VAT refunds (e.g., claiming VAT on non-recoverable expenses or failing to provide proper documentation), HMRC may deny the refund or delay processing while they conduct a review. HMRC can revoke the VAT registration for repeat offenders, preventing the habitually non-compliant production from charging or reclaiming VAT, which can damage your production's credibility with investors, vendors, and clients. HMRC can also trigger audits and investigations. If a production is determined to have deliberately underreported VAT or engaged in fraudulent activity, penalties can be severe and can even include criminal charges.

Managing VAT compliance for a healthy cash flow

To maintain accurate budgets and ensure smooth cash flow, production accountants should:

• Factor VAT payments into budget forecasts: Accurate forecasting of VAT liabilities and potential refunds allows for better cash flow management by making sure funds are available to make VAT payments as they become due.
• Keep detailed records of all VAT invoices and receipts: Accurate record-keeping supports the verification of VAT claims and safeguards against potential audits. Employing digital record-keeping systems can streamline this process, making it easier to store and retrieve necessary documentation.
• Only claim VAT on eligible items and verify that the correct rates are applied: Not all production costs are eligible for VAT reclaim. Avoid incorrect claims by checking VAT eligibility of services like travel, accommodation, and international transactions.
• Stay on top of returns to avoid cash flow delays: Missing a deadline can result in penalties and interest charges, adversely affecting cash flow. Adding reminders and using digital tools can help you to consistently meet deadlines.

Simplify VAT management and compliance with SmartAccounting

Managing VAT compliance can be time consuming and complex. SmartAccounting streamlines VAT management, reporting and compliance with:

• MTD compatibility: SmartAccounting is HMRC-recognised and fully compatible with MTD rules.
• Exchange rate integration: SmartAccounting seamlessly integrates with HMRC to automatically fetch and update exchange rates to be used for VAT calculations, ensuring accuracy and compliance with HMRC standards.
• Pre-configured, customisable VAT codes: save time and ensure accurate processing with pre-configured VAT codes which align with HMRC guidelines or customise your own codes to align with your existing chart of accounts.
• VAT calculated automatically on transactions: Selecting the relevant VAT code on a line item in SmartAccounting will automatically calculate the VAT amount.
• Comprehensive VAT reporting suite: SmartAccounting offers a diverse suite of VAT reports, including a VAT reconciliation report which identifies variances between VAT box totals and Trial Balance VAT totals, supporting accurate VAT charges or claims.
• Automated tax codes for Reverse Charge and Import VAT mechanisms: SmartAccounting helps to ensure accurate mapping to VAT report boxes, streamlining compliance and simplifying tax reporting for productions handling complex import transactions.
• VAT discrepancy notifications: SmartAccounting increases transaction accuracy by alerting users to VAT mismatches, enhancing compliance and reducing errors.
• Extensive VAT guardrails: SmartAccounting enhances the integrity and accuracy of financial records by implementing robust controls over VAT code modifications and assignments.
• Prevention of double taxation in ledgers: SmartAccounting helps to prevent overstated VAT reporting on transactions by ensuring that VAT codes cannot be assigned to transactions being coded to a VAT trial balance account.

Want to see how SmartAccounting can streamline VAT compliance on your next production? Contact us today!

This article contains general information we are providing on a subject that may be of interest to you. Nothing in this article should be considered tax, accounting, or legal advice. You should consult with your own tax, accounting, or legal advisors regarding the applicability of this information to your specific circumstances.