The recently published draft legislation for tax reliefs for high end television, animation programmes and video games followed months of consultation by the Government and will be introduced with the April 2013 Budget, subject to EU state aid approval.
The new tax relief for high end television programmes
Until now the government did not provide any targeted reliefs for the high-end television sector and it bases its new tax relief on the already successful film tax relief, which was introduced in 2007.
The Government’s principal aim in introducing the new tax relief for high end television programmes is to promote the British creative sector, which makes a significant cultural and economic contribution to the United Kingdom.
In addition to high-end television programmes, the new relief will also cover animation productions and video games development.
The relief boosts core television production expenditure by providing production companies with an enhanced tax relief, via additional tax deductions in its corporation tax, or by enabling production companies to claim a payable tax credit from HMRC of up to 20% of the production costs (the exact percentage being dependant on the type of expenditure). The additional tax deduction is based on enhanceable expenditure which is defined as the lower of either the UK core expenditure or 80% of the total core expenditure.
To qualify for the relief a company must:
i. be responsible for pre-production, principal photography, post-production and delivery of the relevant programme;
ii. directly negotiate, pay for rights, contracts and goods and services in relation to the relevant programme; and
iii. be actively engaged in the production, planning and decision making during the pre-production, principal photography and post-production.
Conditions to qualify for the relief
There are a number of conditions for a relevant programme to qualify for the relief. These are that (i) a programme must be intended for broadcast, (ii) at least 25% of the core expenditure must be UK expenditure, and (iii) a relevant programme must satisfy the “Cultural Test” and be certified by the Secretary of State as a British programme.
1. Intention to Broadcast
A relevant programme must be intended for broadcast to the general public, this includes the internet. This condition is tested at the time of production activities beginning, which means that even if the intention to broadcast does not subsist the programme will still qualify.
2. Minimum UK Expenditure
At least 25% of the core expenditure of a relevant programme incurred by the company must be UK expenditure, which is the amount spent on goods or services, consumed or used in the UK. In the case of qualifying co-productions this expenditure must be incurred by the co-producers.
3. Relevant programmes and the Cultural Test
To qualify as a relevant programme, a programme has to meet four conditions:
A. Type of programme
The programme has to be a drama (including comedy), a documentary or an animation.
B. The programme must not be an excluded programme
Programmes which are excluded fall within the following categories:
ii. current affairs and news;
iii. quiz, game and panel shows and other similar programmes;
iv. programmes including a competition;
v. live broadcasts and broadcasts of a theatrical performance or artistic performance given otherwise than for the purpose of being filmed; and
vi. programmes produced for training purposes.
C. Programme Length
A relevant programme must be commissioned to fill a period of time of over 30 minutes. This condition has raised some concerns as the current interpretation of the legislation means that programmes of exactly 30 minutes length would not qualify for the relief. A series will be considered as one programme to allow production costs to be averaged over the course of the series.
D. Core expenditure
The tax relief is only available for core expenditure, which covers the spending on pre-production, principal photography and post-production. The average core expenditure per hour of slot length in relation to the programme must be at least £1 million.
A company’s activities in relation to a programme are treated as a trade separate from any other activities of the company, and it is deemed as beginning to carry on the separate trade when pre-production commences or, if earlier, when any income from the programme is received. Detailed guidance is expected to be published soon and it is anticipated that recharges or justifiable overheads will be allowable.
The Cultural Test
In order to be eligible for the relief any production must be certified as culturally British. HMRC has published The Cultural Test (Programmes and Video Games) Regulations 2013, which sets out the test a company has to pass before obtaining a certificate to qualify for the relief. In comparison to the Film Cultural Test, the Cultural Test for the new reliefs includes the European Economic Area (EEA) as well as the UK.
The test is based on a points system, with companies having to be awarded at least 16 points to qualify. A programme can also pass the test, without obtaining the sufficient number of points, if it is made under one of the UK’s international co-production treaties (namely those with Australia, Canada, France, Israel, New Zealand and Palestine). For the full details of the Cultural Test for dramas and documentaries please see Appendix A.
For programmes, other than co-production programmes, points are awarded for:
i. programmes which are set in the UK or another EEA state (up to 4 points);
ii. programmes with characters depicted that are from the UK or another EEA state (up to 4 points);
iii. programmes which depict a British story or a story which relates to another EEA state (up to 4 points);
iv. the percentage of original dialogue that is recorded in the English language or in a recognised regional or minority language (up to 4 points);
v. the contribution of the drama or documentary to the promotion, development and enhancement of British culture (up to 4 points);
vi. the percentage work that is carried out in the United Kingdom (up to 3 points); and
vii. whether certain personnel are citizens of or resident in an EEA state (up to 8 points).
Tax Relief for Animation Production
The animation tax relief forms part of the high end television relief and the rules follow the same principles as outlined above. In comparison to television programmes, however, an animation programme can qualify for the relief in one of two ways:
i. being a programme that is animation (which is not defined in the draft legislation); or
ii. being a programme that is a drama or documentary which contains animation.
An animated programme does not have to meet the requirements of slot length or the minimum core expenditure per hour of slot length.
All other requirements outlined for the high end television relief also apply to animation productions. For the full details of the Cultural Test for animation programmes please see Appendix B.
Tax Relief for Video Games
The provisions for the tax relief for video games are virtually identical to those for television and animation. As with dramas, documentaries and animation, a video game must be intended for supply to the general public. Video games are interpreted to include the game’s soundtrack.
The core expenditure in relation to a video game means the designing, producing and testing of the video games, but does not include any expenditure incurred in designing the initial concept for the video game, nor does it include any expenditure incurred in debugging a completed video game or carrying out maintenance in connection with a game.
As with television and animation, video games will also be required to pass the Cultural Test to qualify for the relief. For the full details of the Cultural Test for video games please see Appendix C.
The proposals outlined above are to be introduced in the April 2013 budget, but are still subject to EU state aid approval. The relief will have effect for accounting periods beginning on or after 1 April 2013. Where a company’s accounting period straddles this date, the accounting period is to be split into two separate periods and the profit will need to be apportioned between the two periods on a just and reasonable basis.
The new reliefs will be welcomed by the creative industry and with the introduction of these tax credits the Government has confirmed its commitment to the UK’s creative sector. It is predicted that the introduction of these reliefs could generate an additional spend of millions of pounds per year in the UK in the creation of new TV series and games.
This article is based on the draft legislation and is subject to change prior to being passed as law.