News | Media & Communications

Wednesday 22nd September 2004

The Inland Revenue has finally issued the long-awaited technical note explaining the new tax relief available to producers of "British films" (the "film tax relief"). The film tax relief will replace the relief currently available under s.48 Finance (No.2) Act 1997 ("Section 48 relief"), which is due to come to an end on 2 July 2005 (subject to the transitional provisions outlined below). Section 42 Finance (No.2) Act 1992, which allows the production cost of a film to be written off against taxable income over three years ("Section 42 relief"), will continue but no longer be available for low budget qualifying British films (those of £20 million or less).

The Film Tax Relief

The film tax relief, which will take effect from July 2005, allows a producer (defined as the company responsible for the activities undertaken worldwide to make the master version of the film and which owns that master version on completion) to claim a deduction for production expenditure on qualifying British Films with budgets of no more than £20 million. This is a welcome increase of £5 million.

For a company that is already trading, the producer of such a film will be entitled to a deduction of 150% of total production expenditure, which it can offset against income when computing its business profits. The enhanced part of the deduction (that is the 50% above actual production expenditure) may only be set against income from exploitation of the film, either in the accounting period when the film is completed or later ones. So for the first time the relief will include an incentive for films to be profitable.

Alternatively, a producer may surrender losses, up to a limit of 100% of production expenditure, to the Inland Revenue for a cash payment from the Inland Revenue equal to 20% of the amount of the loss surrendered. This payment will not be treated as income and so will be exempt from tax.

Companies that are not yet trading will enjoy an exception to the general tax rule. Pre-trading expenditure on low budget qualifying films will attract tax relief: a producer may elect to treat 100% of the film’s total production expenditure as a deemed trading loss (which it may set against profits or surrender for the film tax credit as above), and will also be entitled to treat an additional 50% of the film’s total production expenditure as pre-trading expenditure. That deduction may only be set against income from exploitation of the film (which will only arise later, when the company has begun to trade). The details of how this works in practice will need to be scrutinised carefully to ensure a producer has the continuing requisite relief to set off against its income from the film.

Unlike Section 48 relief, there will be no time limit for the new tax credit, providing some welcome stability for the industry as a whole and allowing long-term planning decisions to be taken (although the Inland Revenue will be monitoring it closely to evaluate it, and will review it in 2010, after 5 years of operation). The relief for co-production expenditure will extend to 100% of the co-production spend, and not just that in the UK, albeit the wording of the technical note is a little obscure here.

It is to be hoped that the film tax relief will be discountable for the purposes of acquiring production finance in advance of receipt of the credit. In Canada and Luxembourg, for instance, where similar tax credits exist, a sum up to the amount of the putative tax credit may be borrowed from certain financing banks to help fund the production, to be repaid upon receipt of the credit by the producer afterwards. It remains to be seen whether the same will become the practice in the UK.

Whilst sale and leasebacks utilising Section 48 relief will no longer be possible, as indicated above, Section 42 relief will continue as before (allowing production expenditure to be written off over three years) for higher budget films. Section 42 relief will remain in place to continue to try to attract big budget films (particularly from the US) costing more than £20 million to produce. The technical note makes it clear that expenditure qualifying for the film tax relief will not also qualify for Section 42 relief. However, it may be combined with other high-risk business tax incentives such as the Enterprise Investment Scheme, Venture Capital Trusts or the Corporate Venturing Scheme. The Inland Revenue will vet all applications for the relief itself, through the filing with the Inland Revenue of a corporation tax return.

Despite lobbying from some sections of the film industry, the Government has shied away both from tying the availability of the film tax relief to distribution – notwithstanding the Government’s rumoured frustration at the number of films made with public money that are never released – and also from creating a separate distribution credit, concluding that a tax measure to foster stronger links between the distribution and production sectors is not currently practicable. Nevertheless it intends to monitor the operation of the film tax relief and may reconsider the possibility of making it conditional upon a distribution contract being in place if changes in the distribution market make it feasible.

Whilst the technical note sets out the principles behind the new relief, the legislation regarding the film tax relief will not be published until next year's Finance Bill, which is likely to be in March or April 2005.

Transitional Provisions - Limited Extension of Section 48 Relief

The lobbyists have succeeded in persuading the Government to extend Section 48 relief to films where:

first day of principal photography is before 2 July 2005; and
completion is not later than 5 April 2006 (the end of that tax year); and
the acquisition date is not later than 31 December 2006.

Accordingly the film tax relief will apply to production expenditure incurred on a film where:
principal photography begins on or after 2 July 2005; or
principal photography begins before 2 July 2005, but either the film is not completed before 6 April 2006 or not acquired before 1 January 2007.

The new production tax credit will not be capable of being transferred to individuals or corporations save (perhaps) for discounting purposes, unlike Section 48 relief. It is unlikely that the new production tax credit will sustain the industry that has grown up around Section 48 relief – indeed it would appear to have been specifically devised to enable the film producer alone to receive the benefit of it.