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Reform of Film Tax Relief

At the Budget 2005, the Chancellor announced that the Government would introduce a new tax relief for film production in the UK to replace that currently in place.

Following consultation with the film industry, details of how the relief would operate were announced at the Pre Budget Report on 5 December 2005. Further details were announced as part of the Budget on 22 March 2006 and legislation to implement the new relief is contained in the Finance Bill 2006.

Finance Bill 2006

The relevant legislation is set out in Chapter 3 of Part 3 and Schedules 4 and 5 of the Finance Bill 2006.

The Chapter and the two Schedules:

  • set out the underlying tax treatment of Film Production Companies;
  • set out the rules for the new film tax relief;
  • remove the tax regime previously available on the production and acquisition of British films; and
  • put on a legislative basis an existing Extra Statutory Concession which applies to sound recordings.

The main features of the new tax relief are that it:

  • is provided directly to a Film Production Company (FPC) and is not available to those whose involvement in film making is restricted to providing finance;
  • is available to an FPC making culturally British films, intended to be shown in cinemas, where at least 25% of the total qualifying production expenditure is incurred on filming activities which take place within the UK.

A culturally British film is one which meets the criteria of a new test which will be administered by the Department for Culture Media and Sport. Further details and guidance can be found on their website under Guidance documents for British Films Cultural Test.


The new relief:

  • is calculated on the amount of the qualifying UK expenditure up to a maximum of 80% of the total qualifying expenditure, defined as expenditure incurred on pre-production, principal photography and post production;
  • provides both an additional deduction which can be set against income from the film and a payable tax credit which can be claimed from the Government as part of the normal processes for Corporation Tax returns; and
  • allows any unused additional deduction left over when the trade ceases to be transferred to the production of another a British film either by the same company or by another company within the same group.

For films where expenditure on pre production, principal photography and post-production is £20 million or less (‘limited budget films’), the enhanced deduction is equal to 100% of total qualifying UK expenditure and for other qualifying films, up to 80% of total qualifying UK expenditure.

The enhanced deduction can be surrendered for a payable tax credit worth 25% of the amount surrendered for limited-budget films; for other films the payable film tax credit is worth 20% of the amount surrendered. In both cases, the credit is calculated up to a maximum of 80% of the total qualifying expenditure.

Further details can be found in frequently asked questions.


The basic tax treatment of expenditure on the production and acquisition of films was previously governed by sections 40A-D of the Finance (No 2) Act 1992 and, for individuals, sections 134 and 135 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005).

Tax relief was provided by section 42 of the Finance (No 2) Act 1992 and sections 138 to 140 of ITTOIA 2005 which allowed expenditure on the production or acquisition of British films to be matched against income from the film or written off over three years. Section 48 of the Finance (No 2) Act 1997 allowed such expenditure on low budget British films to be written off immediately. And section 41 of the Finance (No 2) Act 1992, and the parallel income tax provision at section 137 ITTOIA 2005, provided relief for preliminary expenditure prior to commencing principal photography.

The new relief will be available to British films intended for theatrical release which commenced principal photography on or after 1 April 2006. Films starting principal photography before that date will qualify for tax relief under sections 42 and 48, provided the film is completed by 1 January 2007. Where such films are completed after that date, they will be eligible for the new film relief.

Tax relief for the acquisition of films which started principal photography before 1 April 2006 and completed by 31 December 2006 will be available under sections 42 and 48, provided the acquisition takes place before 1 October 2007.

The new tax treatment for film production companies, and the way in which the new film tax relief will be calculated, removes the need for section 41 of the Finance (No 2) Act 1992 and this section will cease to apply to films from the date of Royal Assent.

The special tax treatment whereby expenditure on films is treated as revenue rather than capital also applies to expenditure on sound recordings under Extra Statutory Concession B54 (Tax relief for expenditure on films, tapes and discs). The Finance (No. 2) Bill contains legislation which preserves this treatment and puts it on a statutory basis.