Reforming the creative sector tax reliefs. The best of times or the worst of times?
01 August 2023
There are currently eight creative sector reliefs covering films, high-end TV, animations, children’s TV, video games, theatres, orchestras and museums and galleries. These targeted incentives have been very successful in nurturing and supporting a thriving audio-visual sector in the UK and in supporting the arts and cultural sectors to invest in new productions. Various changes have been announced to ‘modernise’ the reliefs, especially in view of the Pillar 2 global minimum tax rate rules that start to take effect this year; however, the changes would appear to go much further than this.
A key change is required to amend the audio-visual reliefs in response to the forthcoming global minimum tax rate. To address this, the audio-visual reliefs (those in respect of film, TV and video games) will change to an expenditure credit regime (similar to the R&D expenditure credit). This will enable recognition of credits ‘above the tax line’, decouple relief from the tax position of the production/development company, and remove the impact on a company’s effective tax rate.
The audio-visual expenditure credit (AVEC) and video games expenditure credit (VGEC) have previously been consulted on and will have a phased introduction from 1 January 2024. Although the headline effective rates of benefit will be slightly more generous than the existing reliefs, claimants will need to carefully consider the pros and cons of switching from the current rules before they are ‘switched off’ in 2027 due to other changes announced in the draft legislation.
The most significant such change is the proposed exclusion of ‘connected party profits’ across all eight of the creative sector reliefs. This will impact the current approach to claims and particularly the widespread model of setting up production companies to ringfence productions of games, TV shows and films. The new legislation effectively disapplies transfer pricing rules between group companies so that qualifying expenditure is limited to the original cost incurred by connected parties. Claimants that have production companies within their group will need to review existing arrangements and this is likely to lead to a reduction in the level of government support, especially for claimants of the new AVEC and VGEC. Crucially these changes were not part of the consultation process, so came as somewhat of a (nasty) surprise to the industry.
In addition, across all reliefs qualifying expenditure will now be limited to UK expenditure. Whilst this was anticipated by many following the UK’s departure from the EU, it will have an impact on those who have cross-border workforces and productions. We expect to see this particularly impact larger video games developers where workforces have been more mobile.
Additional administrative requirements will also be introduced for all claimants. Although details are limited, we expect additional forms will need to be submitted alongside tax returns which will increase the administrative burden for many, and likely adversely impact on smaller claimants particularly within the cultural and arts sector.
The stated aim of the reforms was to simplify and modernise these reliefs, however these significant changes could negatively impact all claimants and reduce the competitiveness of the UK creative reliefs regime. Feedback from the sector to government is expected, but all claimants should be planning now to assess the impact on their future claims.
A key change is required to amend the audio-visual reliefs in response to the forthcoming global minimum tax rate. To address this, the audio-visual reliefs (those in respect of film, TV and video games) will change to an expenditure credit regime (similar to the R&D expenditure credit). This will enable recognition of credits ‘above the tax line’, decouple relief from the tax position of the production/development company, and remove the impact on a company’s effective tax rate.
The audio-visual expenditure credit (AVEC) and video games expenditure credit (VGEC) have previously been consulted on and will have a phased introduction from 1 January 2024. Although the headline effective rates of benefit will be slightly more generous than the existing reliefs, claimants will need to carefully consider the pros and cons of switching from the current rules before they are ‘switched off’ in 2027 due to other changes announced in the draft legislation.
The most significant such change is the proposed exclusion of ‘connected party profits’ across all eight of the creative sector reliefs. This will impact the current approach to claims and particularly the widespread model of setting up production companies to ringfence productions of games, TV shows and films. The new legislation effectively disapplies transfer pricing rules between group companies so that qualifying expenditure is limited to the original cost incurred by connected parties. Claimants that have production companies within their group will need to review existing arrangements and this is likely to lead to a reduction in the level of government support, especially for claimants of the new AVEC and VGEC. Crucially these changes were not part of the consultation process, so came as somewhat of a (nasty) surprise to the industry.
In addition, across all reliefs qualifying expenditure will now be limited to UK expenditure. Whilst this was anticipated by many following the UK’s departure from the EU, it will have an impact on those who have cross-border workforces and productions. We expect to see this particularly impact larger video games developers where workforces have been more mobile.
Additional administrative requirements will also be introduced for all claimants. Although details are limited, we expect additional forms will need to be submitted alongside tax returns which will increase the administrative burden for many, and likely adversely impact on smaller claimants particularly within the cultural and arts sector.
The stated aim of the reforms was to simplify and modernise these reliefs, however these significant changes could negatively impact all claimants and reduce the competitiveness of the UK creative reliefs regime. Feedback from the sector to government is expected, but all claimants should be planning now to assess the impact on their future claims.
