[ARCHIVED CONTENT] Reform of film tax incentives: FAQS

29 July 2005

The Reform of Film Tax Incentives: Promoting the sustainable production of culturally British films

Frequently asked questions

1. Why is the Government consulting on the new tax relief?

To provide the opportunity to ensure that the new relief will contribute effectively to the stability and sustainability of the UK film industry, by allowing the industry the opportunity to consider and comment on the practical operation of the relief.
The consultation timetable will provide the film industry with certainty in the short term to plan future production by providing advance knowledge of the structure of the new relief before an orderly transition to the new relief can be effected.

2. Why are the current reliefs being replaced?

The current reliefs have been reviewed and found to be inefficient and ineffective at meeting Government objectives. The new relief will provide better value for the taxpaying public by removing the leakage of Government support to third parties.
The film industry accept that the financing structures that have been developed around the current reliefs have contributed to the prevalence of abuse.

3. When are the responses to the consultation document required?

4. What are the main features of the proposed new relief?

It will be provided directly to film-makers.
It will apply to culturally British films; as defined by a new test that DCMS are consulting on.
It will apply to relevant UK production expenditure provided a minimum level of spending is met; up to a maximum of 80% of the total budget in accordance with EU State aid rules.
For films costing £20million or less, it will give an enhanced deduction of 50% to be set against income and allow a payable tax credit of 30% of relevant UK production expenditure;
For all other qualifying films, it will provide an enhanced deduction of 25% to be set against income and allow a payable tax credit of 25% of relevant UK production expenditure.

5. What films will be eligible for the new relief?

A film will need to meet two criteria to be eligible for the new relief. It will firstly need to meet the conditions of a new test to identify culturally British films, which DCMS are consulting on; and it will need to meet a minimum level of UK production expenditure.

6. Why are there different rates for different films?

One of the Government’s objectives for film tax incentives is to provide support for culturally British films that might not otherwise be made, where clear commercial potential cannot be identified in advance. Such marginal film projects tend to have small production budgets.
Small films therefore merit a higher level of support than large films where the sheer scale of the production budget means that only projects with clear advance commercial potential are made.

7. What is the minimum level of production expenditure in the UK?

The precise level is a matter to be addressed as part of the consultation to allow Government to consider industry representations on the trade-offs between allowing flexibility for producers and maintaining a critical mass of underlying infrastructure, creative and technical expertise.
It will be set at an appropriate level, but no higher than 40%.

8. Why is the Government changing the current gateway to tax relief?

Under the Films Act 1985, a film only needs to meet the requirement that 70% of the production expenditure be incurred within the UK to qualify for tax relief. There is no requirement that the film be culturally British in content or subject matter.

Without any mechanism for ensuring that only culturally British films can access tax relief, it is highly likely that European Commission will consider the new relief incompatible with State aid rules.

9. Why is the maximum expenditure entitled to the new relief restricted to 80%?

It is not intended that the new relief disadvantage unnecessarily producers who incur some of the expenditure on a film outside the UK. Therefore, the maximum claim for the new relief will be available even when up to 20% of the production expenditure was made outside the UK, in accordance with the European Commission’s recommendations.
Other expenditure over and above the 80% maximum would be subject to normal tax treatment.

10. Why is the new relief restricted to UK expenditure?

Most filmmaking countries offer tax incentives for film production, but the UK is currently alone in allowing tax incentives to apply to world-wide expenditure.
The review of the current reliefs suggested that this feature means that the link between promoting the production of culturally British films is weak and means that, in some cases, there will be an active disincentive for producers to base more of the production of a film in the UK.

11. Why is the new tax relief available only to corporates?

This reflects current practice in the film production sector. Films are produced by limited companies which are set up specifically for that purpose.
Due to the high risks and costs involved, a limited company provides the most suitable vehicle for film production and their use is universal within the film industry.

12. Will we still be able to use sale and leaseback financing structures?

Because the new relief can only be accessed directly by film makers, and not by intermediaries such as banks and partnerships, sale and leaseback structures are no longer necessary for tax purposes.

13. Will the reliefs be permanent?

The Government is not setting a time limit on the new relief. We have stated an ongoing commitment to support the UK film industry.
However, the relief has to reflect external factors such as EU guidelines on state aid. An application will be made to the European Commission for state aid approval and therefore the new relief will comply with their guidelines which require State aids to be time-limited.

14. When will the new relief be implemented?

The intention is to introduce the new relief from 1 April 2006.
However, a delay to a later date might prove necessary to obtain formal State aid clearance from the European Commission.

15. Why isn’t the change happening now?

Formal consultation on the new relief will give the film industry the opportunity to understand how it is intended to work in practice, and comment on certain aspects of the relief.
The current tax reliefs for film production will continue to be available until the new relief is introduced.

16. What is a culturally British film?

A film which contributes in its broadest sense to British film culture. The definition embraces films which tell British stories, but also those films which, in their production, have had a substantial British input which has contributed to the nature/character of the film.

17. Why are DCMS consulting on a new cultural test for films?

Principally, because the European Commission requires that State support for film has a firm cultural basis. Requiring films to pass an objective cultural test, in the broadest sense of “cultural”, is the easiest way to demonstrate this, and thus safeguard the relief.
The test on which DCMS are consulting would allow for a film to qualify through a variety of routes - whether it has UK cultural content, whether it uses UK facilities and whether it uses the required personnel. We are asking people whether we have got the categories right, whether the points are allocated correctly to those categories, and how many points film-makers might be required to get.
Overall, the test should provide predictability to producers and ensure that films which contribute to British film culture and infrastructure are supported.

18. What would happen to co-productions?

A co-production will be afforded the treatment under the new relief in the same way as any other film provided the qualifying tests are met.