What the UK Connected Party Transaction Rules Mean for AVEC Claims

When the UK’s Audio-visual Expenditure Credit (AVEC) went live in 2024, one of the headline elements was the enhanced reporting requirements around connected party transactions.

With connected party transactions continuing to be a key focus area for both producers and financiers alike, this guide breaks down what qualifies as a connected party transaction under UK tax rules, how these transactions impact AVEC claims and the key considerations productions should address when preparing their submission to ensure compliance.

What are the UK rules on connected party transactions?

The UK rules on connected party transactions are set out in the Corporation Tax Act 2009 (Section 1179DU of Chapter 4, Part 14A):

(1) Expenditure is excluded expenditure to the extent that it represents connected party profit, unless subsection (3) applies.

(2) For the purposes of subsection (1), expenditure represents connected party profit—

(a) if it is a payment to a person (“C”) in exchange for something supplied by that person,

(b) if the production company is connected with C, and

(c) if, and to the extent that, the amount of the payment exceeds the expenditure incurred by C in supplying that thing.

(3) This subsection applies if the amount of the payment is no more than would have been the case had the transaction been entered into at arm’s length.

Essentially, there are two key elements to note:

1. Connected party transactions are not in themselves prohibited; however, any profit element on those transactions (i.e., a mark-up to underlying hard cost) is initially excluded.
2. Subsection 3 provides a vital carve-out in that even if an element of profit is included, connected party transactions are allowable as long as they occur at arm’s length.

What does ‘arm’s length’ mean for AVEC purposes?

‘Arm’s length’ is taken to be the price at which a transaction would have occurred had it taken place between two unconnected parties in the open market.

There is therefore no set figure for any given transaction, and – clearly – there are elements of negotiation in price even between unconnected parties. What is important is that a production company can justify, with support, the value of any connected party transactions included in an AVEC claim.

Examples of such justification could include the following:

• If an internal producer is being charged to a production, having paid an external producer with similar experience and credits the same amount for a comparable production would be indicative of the transaction being at arm’s length.
• If internal crew are being used, reference to a Pact, Bectu or other union ratecard would indicate that the fees were charged on an arm's length basis.
• Reference to industry standards would be indicative of a transaction being at arm’s length – for instance, if there is a profit margin on underlying costs that is typically charged within a service line.
• Where the production is funded by a third party, their agreement to the budget gives some indication that internal costs are at an arm’s length because financiers would not approve a budget where costs were over-inflated (although this is not the strongest of arguments).

The above is not exhaustive or definitive and there will always be an element of subjectivity to assessing connected party transactions. The key thing is to be prepared to justify the charges if ever required to by HMRC.

Who are connected parties for AVEC purposes?

HMRC Guidance Notes CREC052100 define connected parties in considerable detail.

Broadly speaking, a company is connected to another company if:

• One company owns or controls the other;
• A single entity (person or company) ultimately owns or controls both companies (i.e., within a large group rather than just having the same direct owner); or
• A person owns one company and persons connected with that person (e.g., a spouse or children) own the second company.

From a practical standpoint, any company within the same group is connected, as are any companies ultimately owned by the same individual(s) – even if direct ownership is outside of a corporate group.

What are the connected party transaction requirements for AVEC claims?

A key feature of AVEC claims is that production companies must now submit an Additional Information Form (AIF) to HMRC alongside the tax return to support their claim.

Most of the form is summary information but the key additional element is the requirement to disclose connected party transactions.

However, the disclosure requirements are not excessive. Companies must only disclose:

• How many connected parties have been transacted with;
• The total value of the transactions; and
• For each transaction:
  • The name of the connected party;
  • The date of the transaction;
  • The value of the transaction; and
  • A description of the underlying goods or services provided.

This can be done via a spreadsheet upload; therefore, the administrative burden (assuming good production accounting records) is minimal.

How have the connected party transaction rules changed under AVEC?

In short, the only true change to the rules under the previous incentive regime is that a disclosure requirement now exists for connected party transactions.

While the eligibility (or lack thereof) has not fundamentally changed from the previous tax credit regime, the legislation has made it more explicit which is why it is garnering greater attention than previously.

Productions have never been allowed to claim an incentive or credit on non-arm's length costs as that would be claiming on profit, which has never been the intention of the incentive regime.

Is HMRC challenging connected party transactions in AVEC claims?

We have not seen any particular issue of HMRC challenging connected party transactions. Most productions that Entertainment Partners advises include connected party transactions within their claims and, to date, none have been challenged by HMRC.

It is unlikely that HMRC intended to reduce the value of potential incentive claims with the introduction of this disclosure requirement. Rather, it was likely a preventative measure to stop inappropriate and inflated claims being made and to give HMRC more data to be able to assess where this may be happening.

This view is supported by changes that were made to the legislation between its initial draft and final form. Initially, all connected party profit was excluded from eligibility, whether at arm’s length or not. Entertainment Partners, along with other leading industry voices, raised concerns on the applicability, practicalities and unintended adverse impacts that such a blanket approach would cause and HMRC ultimately altered the requirement to the current position.

What should productions do to prepare for a potential HMRC challenge of connected party transactions included in their AVEC claim?

Productions should take the following steps to prepare for a potential HMRC challenge of connected party transactions included in their AVEC claim:

• Identify, in advance, who your connected parties are.
• Have a way of identifying these within your production accounting records (EP’s SmartAccounting includes free fields where accounting teams can flag connected parties for individual transactions).
• Provide this information to your auditor or adviser.
• For any such transactions, particularly larger ones, document a short explanation, justification or calculation as to why the value is arm’s length that could be provided to HMRC in the unlikely event that one is requested.

The key thing is to over prepare. If HMRC were to query a transaction, having a readily available explanation will ensure you are prepared and make any enquiry process far smoother.

How Entertainment Partners can help you access the UK AVEC

If you’d like to know more about how to access the UK AVEC on your production, contact Entertainment Partners today!

With vast experience in global and domestic tax incentives, our expert UK team can help you to maximise your budget and can assist with structuring advice, Cultural Test applications and associated reports, film and TV incentives estimates, formal opinions to lenders, incentive claim submissions (including HMRC enquiry responses, if needed) and deal close support.