In the UK the creative sector is worth an estimated £36bn per year according to a report published by the Institute of Directors. It is hoped that some of these businesses will benefit from the new rules and new business opportunities will be encouraged by the new cultural relief corporation tax deduction. From April 2013, certain high-end television productions[i], video game makers and animation producers will receive corporation tax deductions of up to 25% provided they can pass defined “cultural tests” as discussed below. This is good news for the UK creative sector, as the UK’s pre-eminence in this area has been undermined recently by incentive schemes in other countries and incentives targeted in the UK at different sectors.
Tax breaks for films have been long established in the UK. In fact, the film tax relief was used as the basis for the television, video game and animation reliefs (although films can also qualify by meeting the requirements of one of the UKs bilateral treaties regarding co-productions or a European Convention). Under the new tax legislation the rates of deduction from UK corporation tax vary according to the cost of the production. Relief of 25% is available for productions costing over £20 million, but for works costing less than £20 million corporation tax relief is restricted to 20%.
The tax relief can increase the amount of expenditure that is allowable as a deduction for corporation tax purposes or, if the relevant company makes a loss, can be surrendered for a payable tax credit. http://www.hmrc.gov.uk/news/creative-ind-txcrd.htm
The cultural test sets out certain thresholds that these producers must meet in order to qualify for the tax breaks.
Each television programme, film, video game or animation project must qualify for 16 of a possible 31 points to pass the cultural test.
The points awarded are slightly different for each industry, but fall within four categories:
- Cultural content (subject to certain restrictions, points are awarded if the production set in the UK or the lead characters British. If the production based on British subject matter and the dialogue is mainly British further points can be obtained)
- Cultural contribution (generally, if the production represents or promotes British culture, heritage or creativity, points can be obtained in this category)
- Cultural hubs (this awards points for categories of actual work undertaken in the UK)
There were initially justified grumblings from UK interactive entertainment (UKIE), the trade body for the video game industry. Their understandable argument is that basing the cultural test on that for the film industry is not appropriate for the video game industry. Games do not necessarily have traditional narrative or involve characters that are from a recognisable species. This was reflected in the final legislation, which awards points for video games and lead characters from “an undetermined location”.
It is expected that this will encourage outsourcing of aspects of games to the UK but it may also lead to an increase in British themes and characters in video games. Angry Liver Birds anyone?
It may be possible to obtain the benefits of this tax relief even if a film is not set or made in the UK, provided that the 16 points are made up by other work undertake in the UK. However, to benefit from the tax breaks a UK company would need to be incorporated.
The lawyers at Gannons have extensive commercial law experience and work with corporate clients looking to structure their business in the most tax efficient way. Contact us if you would like to discuss this further http://www.gannons.co.uk/expertise/tax-law/corporate-tax/
[i] High-end TV covers documentaries, drama and comedy productions intended for broadcast with a slot hour of programme and direct production costs of over £1 million.