Those of a certain age may recall the episode of the television programme Yes Minister in which it is noted that 'subsidy is for art, for culture'. Recent UK governments have clearly agreed, with tax reliefs being introduced for a whole range of creative sectors: film, television, animation, theatres, orchestras, museums, galleries and video games.
These are all culturally important forms of media and entertainment; recognised globally for excellence and helping to drive the UK economy forwards.
This article focuses on the use of stand-alone companies called special purpose vehicles (SPVs). In a separate article, I look at other creative sector tax reliefs and the opportunities and pitfalls associated with them.
SPVs: opportunities and pitfalls explained
Many companies set up SPVs for each production and there are benefits in doing so. However, it is essential that any such SPV has a commercial rationale for being used, otherwise HMRC may see this as artificial and this could create issues with any tax relief claim.
We understand that this is an area that HMRC are looking at closely, especially where the SPV is only set up after production has commenced and costs are incurred.
Many companies use SPVs and this can be beneficial, for a variety of reasons.
Firstly, the SPV could pay another group entity for resource, technology, IP, etc. Such payments could be made by reference to current market value, rather than actual cost, effectively uplifting these costs. Provided these are costs of production and are on commercial terms, such payments can be included within the claim.
This may be best illustrated with an example, which will also tie-in another opportunity to maximise tax reliefs:
Company RX commissions its subsidiary, Company RY, to produce a film. RY may not have any employees so pays a market rate to second staff from RX. Although the cost to RX is £500,000, the market value may be £800,000. So - RY could pay RX £800,000 for the provision of staff and claim film tax relief on this higher amount. Assuming a benefit of 20 pence in the pound, this creates a benefit of £60,000. It is essential that documentation is in place for any intercompany agreement and that commercial rates can be justified if challenged by HMRC.
Another reason to use an SPV may be if a production closes part-way through the year, the books for the SPV can be closed early to speed up any repayment.
Read more about creative sector tax reliefs
I hope this provides some interesting food for thought; for more on this subject read my other article on the pitfalls and opportunities relating to other creative sector tax reliefs . Please also feel free to contact me to discuss your business plans.