HMRC Answers Key Questions on New UK Audio-Visual Expenditure Credit

We recently reported on the UK’s new Audio-Visual Expenditure Credit (AVEC) following the publication of draft legislation which sets out how the new tax relief regime will work. Now that the dust has settled, we have held discussions with HMRC’s (aka UK HM Revenue & Customs) specialist Creative Sector department on the interpretation of some of the new legislation and guidance and what it will mean for productions in practice.

Is the AVEC a variable or fixed relief?

The actual AVEC rate of 34% for film and TV and 39% for animation and children’s TV is fundamentally a fixed rate.

As covered in our previous article, this rate is subject to corporation tax at the main rate of corporation tax which is currently set at 25% – hence giving the effective receivable relief rates of 25.5% and 29.25%, respectively.

The new legislation does not explicitly provide a mechanism for linking changes in the rate of relief to changes in the corporation tax rate; therefore, in theory, future changes in the tax rate would lead to a change in the effective rate of the relief.

When we discussed this with HMRC, we were informed that any linkage of changes in the relief rate to changes in the corporation tax rate would be a policy decision on the part of the government and therefore not something that HMRC could comment on itself.

Inherently, this does lead to some level of uncertainty.

Does that mean productions could receive less than budgeted for?

Based on the current legislation, that is a theoretical possibility (with an emphasis on theoretical).

However, both Conservative and Labour politicians have historically been supportive of the incentives for the creative sector, and it would seem unlikely that they would take a deliberate approach to reduce the incentive in the event of a change in corporation tax rates down the line.

The recent increase in corporation tax from 19% to the current 25% rate is the first ever increase in the main rate of corporation tax since its introduction in its current form in 1974. Therefore, this is not a rate increase that has a significant historical precedence from an expectations perspective.

Even if a rate increase were to take place, there would be significant industry pressure on the government to ensure that it did not impact the net benefit of the AVEC. Given the historic support for these incentives, as underlined in the recent consultation that preceded the introduction of the AVEC, any impact on the AVEC would be unexpected.

For further context, a 2021 study on the impact of the reliefs on the wider economy indicated that the return on investment for the firm relief was 8.31:1 and 6.44:1 for HETV. There have been other studies that have further supported the economic benefit and a November 2022 report commissioned by HMRC indicated that:

8 in 10 production companies reported that a less generous rate of relief would have resulted in their productions having smaller budgets or not taking place at all. By contrast, 7 in 10 reported that an equivalent more generous relief would have led to them increasing their production budgets.

This finding implies that downwards movement of the rate of relief would have a larger impact than upwards increases in the relief, another reason why the government would be unlikely to allow changes in the main rate of corporation tax to impact the AVEC.

I’ve heard that related party and intra-group transactions are now excluded from AVEC calculations, is that true?

No, that is not the case. As previously reported, HMRC has introduced restrictions on the eligibility of related party transactions so that AVEC is only available on the true underlying cost of a transaction and not any profit element.

In practice, this means that if Company 1 pays connected Company 2 £100 for a service, and providing that service costs Company 2 only £75, Company 1’s qualifying expenditure will be limited to £75 for tax relief purposes. This applies across an entire group irrespective of whether there are three, four or more companies in the “chain” leading to the claimant company.

An important exclusion from this is that expenditure relating to leasing, hiring, or accessing locations or buildings for principal photography will not be restricted. Therefore, intra-group costs for studio space do not follow the above restriction – provided of course that the cost charged are at arm’s length rate as required for all intra-group transactions.

You previously mentioned that TV production fees were subject to further review – has there been any clarification?

 Yes, we have now received clear information from HMRC that production fees are not considered intrinsically eligible for the AVEC in the way that they generally were previously under the outgoing tax credit regime.

According to HMRC, this is because production fees are often viewed as the production company’s or group’s margin on the show and therefore represent profit as opposed to a true cost.

We have clarified with HMRC that if a production fee (or an element of it) can be clearly, accurately, and reliably attributed to actual underling costs, then that element can still be considered eligible.

Clearly, any costs that could be attributed to the production fee in such a scenario could not be part of any recoveries or recharges within the budget, either for that production or for other productions within the group (i.e., a group cannot claim for 50% of the time of an individual on three different productions in the same period as that would cover 150% of the cost base and therefore be ineligible).

Given this, it would be likely that any AVEC claim including treating a production fee as qualifying would need to be ready to justify that treatment to HMRC, as it would now counter the default expected treatment.

Does this mean we can no longer charge a production fee in HETV productions? 

 No, there is no issue at all with charging a production fee within the budget of an HETV show.

It is vital to note here that the only restriction being imposed is on AVEC eligibility, not on the appropriateness and allowability of production fees or any other related party costs within a budget. It is still fine to have production fees, recoveries, and recharges within budgets; however, there are now restrictions on when these can have credit claimed.

Recharges and recoveries follow the same rules: to the extent that they can be allocated to actual underlying costs there are eligible, if not then AVEC cannot be claimed on them.

Can I still move from film to TV if my exploitation model changes (or vice versa)?

In short – yes.

Before the pandemic (and up to changes introduced from April 2022), it was possible to move from TV to film but not the other way around, which created a problem for productions whose expected exploitation models changed during production (e.g., if a streamer acquired all the rights to a film midway through production).

As noted, this was addressed from April 2022 and the new legislation and move to AVEC has protected productions’ ability to switch between reliefs depending on their intended exploitation model.

This has now been confirmed by HMRC, which also noted that the intent of the legislation is that if a production is intended for both theatrical release and broadcast (including streaming), then the theatrical release intention is given priority. Therefore, the production would claim the film AVEC rather than the HETV AVEC by default.

That said, moving between the reliefs does require some thought, as the qualification rules are different.

How Entertainment Partners can help

If you decide to explore the UK as a filming destination, reach out to Lloyd Gunton, UK incentives expert who can offer support from advising on tax credit estimates, to providing formal opinions to financiers on tax credits and structuring advice to maximize incentive value, through to handling the interim and final claim processes, and right up to cash receipt.

And when you’re ready to start shooting, EP has the digital solutions you need to manage your UK productions from prep to wrap, including digital onboarding, timesheets and payroll. If you’d like to learn more about how we can support you, please get in touch. 

Neither Entertainment Partners nor FLB Accountants are providing legal, tax or financial advice in this article to be relied upon. This article is for information purposes only. Please do take advice on this area where your specific circumstances can be considered.