Film Finance

Could U.S. Trade War Could Jeopardise Hollywood's Film Deal With China?

For anyone who’s been closely following the news, it comes as no surprise that President Trump’s determination to drastically reduce America’s trade deficit has led him to turn his attention to China. In a bid to restore the balance between the two economic superpowers, President Trump recently approved $60 billion worth of trade sanctions against the Middle Kingdom. It’s believed that imposing such tough sanctions will help to level the playing field for U.S. manufacturing companies who have been struggling to compete with their international rivals. The Chinese response has so far has been relatively most with just $3 billion of tariffs imposed on U.S. goods, most of which come from the agricultural sector. However, should the trade war intensify then one unexpected casualty could be Hollywood.

China is the most heavily regulated and controlled film market in the world. Currently only 34 foreign films are permitted to be imported into China each year and are distributed on a revenue-sharing basis. In most cases the films are distributed by either China Film Co. or Huaxia Distribution, both state-owned companies. Each film is entitled to 25% of the gross revenues, with the Chinese firms covering all P&A costs plus local taxes. An additional 30 to 40 films are permitted under a flat-fee basis, in which Chinese companies provide a license fee but the studios do not receive a cut of the box office. Understandably competition is fierce for each of these slots as they present a significant windfall of cash and crucially allows Hollywood access to what is fast becoming the world’s largest film territory. Since 2011, China’s box office has grown from just over $2 billion to a staggering $8.6 billion at the end of last year. The explosive growth has been fuelled by the urbanisation of China and growing middle class who are keen to pursue their newfound wealth with an array of leisure activities. This growth shows little sign of abating in the near future and could pivotally help Hollywood offset a declining domestic box office.

So, the question remains, how does President Trump’s trade sanctions affect Hollywood?

Negotiations between U.S. and Chinese trade officials have been taking place since early 2017 in an attempt to increase both the number of foreign films permitted under the revenue-sharing basis and the share of gross revenue available. Hollywood was initially optimistic that a new deal would bolster the number of revenue-sharing films jump from 34 to almost 50 titles. There is also talk that such a deal may lead to the abolition of “blackout” periods in China. A practice where only Chinese-made films may be screened in cinemas during set periods of the year. Most notably around key holiday and festive periods. In turn, this could lead to the Hollywood studios having a greater involvement in when their films are released in China. Currently, they only receive four to six weeks’ notice before their films are given a release slot and little say in when that slot is dated.

The negotiations are now at risk of becoming a high-profile casualty of the looming trade war. If the Chinese regulators decide to delay the negotiations, or even cancel them, then it would represent a major setback for Hollywood. Whilst Hollywood would be able to continue releasing films through the current agreement, it would deny the studios a much-needed source of new revenue and access to an increasingly significant market at a time where Chinese companies are heavily investing in entertainment companies across the globe. Such a situation could ultimately jeopardise Hollywood’s claim as the entertainment capital of the world.

 

The Unsung Hero of the British Creative Industry

The Creative Tax Credit… Ok. Ok. I can hear you silently cursing me for what seems like a clickbait title, but let me explain.

As storytellers we all know how hard it is to get our work funded. In fact, most of us have built entire dinner party routines out of the most outlandish requests we’ve had forced upon us by would-be financiers (Mine’s that 70 year old character ought to celebrate his youthful mind-set by becoming a nu-metal singer. Thanks for asking). What many people don’t realise is that in 2007 the UK Film Tax Relief (FTR) was introduced and the revolutionary effect it’s since had on our industry, for better and worse.

The FTR is a cash rebate paid to companies based on the amount of money spent on productions in the UK. It has been responsible for attracting numerous major Hollywood blockbusters to our shores, whilst also supporting local independent films. In 2016, a record £1.6bn was spent on film production alone as British studios and locations played host to Star Wars Rogue One, Fantastic Beasts and Where To Find Them and Dunkirk. The success of the Tax Relief in supporting new investment and talent led to its expansion to also cover High End Television, Animation, Children’s Television and Video Games. All of which have contributed to the UK’s continued reputation as a world leader in the creative industries and allowed us to punch above our weight.

Quite often when I talk to new filmmakers it becomes quickly apparent that there’s a lot of confusion over how the FTR works and whether it’s applicable to their own work. Let’s be honest being able to claim 25% of 80% of your UK core qualifying expenditure isn’t the most straightforward of descriptions. So let’s break it down into what it actually means.

In order to claim the Creative Tax Credit, your project has to pass a number of conditions.

Film Tax Relief:

  • The film must either
    • Pass the BFI’s Cultural Test. To achieve this you must score at least 18 points out of a possible 35. Full details on what this involves can be found here.
    • Qualify as an official co-production.
  •  Be intended for theatrical release.
  • Made by a UK limited company registered for corporation tax.
  • At least 10% of the Core Expenditure must be spent in the UK. This can cover any stage of pre-production, production and post-production, but excludes costs incurred on development, sales, distribution or other non-production activities. (Personally, I believe that development ought be eligible under this as it’s hard to conceive of anything more fundamental to a project than developing the idea, but hey I don’t write the rules.)
  • There’s no cap on the amount that can be claimed. This is why the FTR has proven so popular with Hollywood. The FTR provides a substantial portion of their budgets.

High-End Television (HETV) Tax Relief:

  • The HETV must either
    • Pass the HETV Cultural Test.
    • Qualify as an official co-production (with treaty partners that allow for television).
  • The programme must be intended for broadcast (this includes the internet)
  • The programme is a drama, comedy or documentary.
  • At least 10% of the core expenditure must take place in the UK.
  • The average qualifying production cost per hour is at least £1m.
  • The programme must have a run time of more than 30 minutes.
  • The production company must be registered for UK corporation tax.

Animation Tax Relief:

  • It must either
    • Qualify as British by passing the Animation Cultural Test
    • Be an official Co-Production (with treaty partners that allow for television).
  • The programme must be intended for broadcast (this includes the internet).
  • At least 51% of the total core expenditure is on animation.
  • At least 10% of the core expenditure must be UK expenditure.
  • The production company must be registered for UK corporation tax.

Children’s Tax Relief:

  • It must either
    • Qualify as British by passing the Children's Cultural Test
    • Be an official Co-Production (with treaty partners that allow for television)
  • The programme must be intended for broadcast (this includes the internet)
  • At least 51% of the total core expenditure is on live action.
  • At least 10% of the core expenditure must be UK expenditure.
  • The production company must be registered for UK corporation tax.
  • The target audience is under 15 years old.

Video Games Tax Relief:

  • It must qualify as British under the Video Games Cultural Test
  • Must be intended for release.
  • At least 25% of the core expenditure must take place in the UK/EEA.
  • The production company is registered for UK corporation tax.

When the Creative Tax Credit was introduced it was initially intended to help support producers by providing them with a cash rebate once their project was completed. However, the industry quickly realised that since the money never has to be repaid it could effectively be used as part of a films financing, thereby reducing other financiers risk on a project. Whether you agree with this or not, in practice it means that by following these steps any project effectively has almost 20% of its budget already in place. The real challenge is finding someone to cash flow this, and making sure you budget accordingly. HMRC only provide the cash rebate once the project is complete, which means you need to find a way of paying for the services that you’ll be claiming back on. There are a few specialist financiers who’ll advance you the value of the FTR for a fee such as Headgear Films, Coutts, and Barclays. Like anything finance related, it’s always best to shop around for the best rates.

Since Brexit was announced, it’s been debated whether the government should look at boosting the rebate offered by the FTR to help ensure Britain remains a competitive destination for international productions. Similarly PACT proposed raising the amount offered to independent film to 40% to help bolster the sector following a decline in the value of Pre-Sales, which has traditionally underpinned how indie films are financed. Whilst it remains to be seen whether either of these proposals will be enacted, one thing that remains certain is that the Creative Tax Credit has proven a tremendous success and will remain a cornerstone of the creative industries.

For anyone interested, Stephen Follows has an excellent article on whether the FTR can be applied to short films. The FTR never specified a run time for films, so theoretically it is possible for a short film to conform to all the criteria.

A little known fact is that the HMRC actually has a unit dedicated to assisting with queries about the Creative Tax Credit. I’ve always found them to be incredibly helpful and generous. You can get in touch with them at:

Creative Industries Unit
Local Compliance SO717
PO Box 3900
Glasgow
G70 6AA

Tel: 03000 510 191
Email: creative.industries@hmrc.gsi.gov.uk

Important disclaimer – I’m not an accountant, and would always recommend you speak to a qualified accountant or lawyer when working on a project. Let’s face it, not only are they far more knowledgeable about the subject than we’ll ever hope to be, but leaving them to deal with their speciality frees us up to focus on the creative aspect of filmmaking. Everybody wins, right?