Creative sector tax relief during coronavirus: maximising cash returns

The coronavirus pandemic has made it more important than ever to make the most of every opportunity to maximise cash returns.  

One way that businesses in the creative sector can generate inward cash is to claim creative sector tax relief. This is available to those producing qualifying:

  • films;
  • TV programmes (‘high end’ such as drama/documentary, as well as for children);
  • animation;
  • video games;
  • theatrical and orchestral productions; and
  • museum/gallery exhibitions.

The rate depends on a number of factors but is broadly worth around 20 pence in the pound. So if an animation costs you £100k to produce, you may receive a cash benefit of £20k.  

With this in mind, here are a few practical ways to maximise claims – and some potential pitfalls to watch out for.

Use of special purpose vehicles (SPVs)

It has been the case ever since these reliefs were introduced that SPVs have been set up for production. Often, these SPVs need resource and rather than transferring staff to this entity, they pay for group staff to be loaned.

Provided the recharge is on commercial terms, this can be included within the creative sector tax relief claim, even if this is more than the underlying staff cost. This could apply to other intercompany charges, such as paying a licence to group company for IP or the technology used in the production of a video game. This can be included provided the recharged amount reflects market rate.

Commercial rationale

If you’re using an SPV, you must have a commercial rationale. You need to ask yourself, ’Why was this entity set up?’ If it was purely for tax reasons, it is likely to be challenged.

One example of where the tax authorities are likely to challenge would be if the SPV is incurring costs, recharged staff costs for example, but never receives any income.  

Four months rule

All costs included within the claim must be paid within four months of the year end. Otherwise, relief is only granted in the period paid.

One issue we see is where the amounts are payable within a group. It could potentially be overlooked given that all are in the same group anyhow. Or it may be that the amount is not actually settled (what constitutes ‘settled’ needs to be carefully considered) and therefore subject to challenge by the tax authorities.

The key is to ensure that the amount is not outstanding at four months after year end, and to know that this does not mean it needs to be physically paid - for example, an amount owing may be offset with an amount owed.

Suspension or cessation?

Normally, losses arising from production trades that cannot be surrendered for cash credits are carried forward until the final period of production. However, we often see productions being paused indefinitely and we may well see more in the current climate.

You should consider if this is a pause or, in all actuality, a cessation. If it is a cessation, there may be more flexibility as to how to use the losses.

Estimations

Creative sector tax reliefs are cumulative. You estimate your total income, and this impacts the claim year on year. In reality, where you cannot estimate income with accuracy (for example, you do not have contracts with definitive stage payments), this is difficult to do. However where you have made estimates on expected sales in the past, it is worthwhile reviewing year on year as new circumstances could have an impact.

Speed is of the essence

Finally, get your claim in as quickly as possible and ensure that all aspects of the production are considered – as well as all productions. There are many opportunities to maximise your claim but, also, many pitfalls.

The sooner your claim is submitted, the sooner it can be reviewed and any cash benefit released. To make your claim, you will need:

  • your signed accounts;
  • to make the claim in your tax return; and
  • a certificate from the British Film Institute (for certain claims).

So, make sure that these considerations are all in hand and don’t leave it to the last minute.

For expert advice on your eligibility for creative sector tax relief and for help making and maximising your claim, please contact Matt Appleton.

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