The creative sector has access to some fantastic tax reliefs and, indeed, there are opportunities to ensure claims are truly maximised. Broadly, an additional tax deduction can be obtained and where you’re not able to utilise this there is scope to surrender for cash. Dependant on circumstances, the claim can be worth up to 20 pence in the pound on core expenditure.
However, each relief has its own set of rules and requirements that need to be fully considered. Failure to do so can endanger the reliefs claimed.
Let’s explore some of the opportunities and pitfalls.
One general pitfall is that costs included within a claim need to be settled within four months of the year end. Otherwise, relief will only be given in the year settled. Merely leaving the amounts as outstanding on intercompany, for example, is unlikely to suffice. However, settlement does not necessarily mean payment, for example intercompany balances owed and owing could be offset.
If we consider television, this applies only to certain types of programmes (comedy, drama, documentaries, as well as children’s TV). It can be easy to fall foul of these rules unless they’re fully understood, for example for comedy, drama, and documentaries there must be an average spend on core expenditure of £1m per hour slot length.
Turning to the theatre, relief is available where productions are for educational purposes. However, the intention is for the audience to be educated and it would not be possible to argue that the production is, for example, educating the participants as to production or indeed like skills.
For video games, there is a specific rule restricting the amount of subcontract cost included in any game to £1m. Care must be taken where, for example, there are group recharges for staff provided, to ensure that such an arrangement does not fall foul of this particular rule.
Certain creative sector reliefs require a 'cultural test' to be satisfied. It may be that, at the start of production, this seems achievable. However, changes during production (or, for video games, new downloadable content) may mean that the required number of points are not obtained and relief is no longer available.
There would be a similar consideration for animation where, in order to qualify, 51 per cent of production costs must relate to animation. If there were non-animation over-runs towards the end of the production, for example, the whole claim could be scuppered.
Certain qualifying costs are often overlooked. For example, travel and accommodation relating to rehearsal time are invariably excluded from claims.
Another example stems from R&D activity, for which there is a separate tax relief:
If Company A spends £1m on film production including development of a new camera (cost £200,000), then it may be that film tax relief is claimed on £1m. However, if an R&D subsidiary (B) is set up to undertake the R&D and A pays B say £250,000 to license this technology, then A can claim film tax relief on £1,050,000 (being £800,000 costs net of camera development cost, plus commercial rate for camera license), with Company B able to claim R&D relief on its costs of £200,000.
Bear in mind also that creative sector reliefs are not just open to companies; there may be scope for charities to claim too.
Impact of coronavirus on creative sector tax reliefs
Assistance is available to help with the impact of coronavirus. Some of this assistance may be Notified State Aid and, as a company can only claim one Notified State Aid on any given project, this could result in creative sector tax reliefs not being available. However, with careful planning, it may be possible to overcome this hurdle and advice should be sought as early as possible.
This article, and my other article on SPVs, sets out some of the opportunities and pitfalls of using creative sector tax reliefs. However there are often a number of other factors to consider, both from a tax and a wider legal and commercial perspective.
These articles do not constitute advice, but advice should be sought when planning or claiming these reliefs. Contact me to discuss your plans.