filmmaking

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?

The Brexit Factor

Over the past year we’ve all become accustomed to hearing continual arguments about Brexit and whether it’s the right decision for the long term prosperity of the country. Rather than wade in with my own views, which quite frankly none of you care about anyways, I think we’re missing the real question about what steps now need to be taken.

The creative industries have been amongst the fastest growing sector of the British economy over the past few decades, in part due to our involvement in the European Convention on Cinematographic Co-Production and the free movement principle. These have allowed us access to the best talent and funding opportunities which we could not have competed with on our own. In fact, most independent films and several major television series such as Game of Thrones are reliant on these two principles.  Our withdrawal from the European Union raises the question of how this will affect our status as a world leader in the creative industries. I’m not going to pretend I have all the answers, but it’s worth breaking down three key challenges Brexit poses and possible solutions to them.

1)      Free Movement

The Free Movement doctrine has long been a pillar of the EU membership. It’s allowed us to bring in highly skilled crew and cast with the minimum fuss. In fact, our VFX industry is heavily reliant on attracting top European artists. This has long been touted as one of the most contentious issues facing the Brexit negotiations, and in all honesty I think it’s too close to call which way the decision on whether Britain retains this principle will go.

Should we decide against it, then there’s 2 probable outcomes. The first is that productions will lose out on being able to use top European talent as easily. In most cases they’ll no doubt fight to get them the relevant VISA’s so they can be involved, but this will be felt most sharply amongst the smaller independents who won’t have the time or resources to be able to do this.

The second outcome that I suggest most likely to happen is that more and more work will become cloud based, particularly in Post Production, with companies setting up satellite offices across Europe to retain access to talent. Whilst this will allow the companies to remain competitive it ultimately means a loss of jobs and tax for the UK economy.

Many Hollywood productions choose to film in the UK because of our status as global leaders in VFX. It’s a position that we must fight to retain, otherwise there’s a genuine danger that the next major franchise may be shot elsewhere.

2)      Funding

Securing funding has always been tough, but one ray of sunshine has been the European funding bodies. Not only have they provided financing for films, TV and games, but they also crucially support the exhibition sector. Our loss of EU membership for example will have a detrimental effect on films being shown across member states as they’ll no longer qualify for the Europa Cinemas initiative which supports independent films to be shown across Europe.

Again, I suspect that we’ll negotiate to remain a part of the MEDIA program. Its benefits have so far proven to be beneficial for both Britain and the EU as a whole. One area that could see a radical change is how the UK Film Tax Relief is applied. Previously it’s been limited by EU state aid rules which attempt to maintain a parity between members. In the future, we could actually amend the rules. I am personally in favour of revamping the Tax Credit to offer a more generous rate to British independent film. PACT have previously raised the possibility that it should increase from 25% to 40% for independent films with a budget between £2 to 10m. If this were to happen, then it would help to alleviate the pressures on producers and financiers in the face of a collapsing pre-sale market. I personally believe this could help to spark a boom in the independent sector, boosting the number of jobs and helping production companies to plan effectively for the future rather than being forced into reactionary decisions.

3)      Digital Single Market

The Digital Single Market is one of the most controversial policies being debated within the EU. Financing a film or television series has historically been achieved through selling the rights on a territory by territory basis. The DSM threatens this as it works on the basis that once a film or television show is available digitally in one member European country, it would be available everywhere else too. This would be catastrophic for not just the British industry, but every EU member. Distributors would no longer be willing to pre-buy as they’d lose their exclusive rights. In turn, this would make financing a film or television series near impossible, unless you were getting your money from just one source like a Hollywood studio or the major SVOD platforms.

One of the flaws with the DSM is that it’s assumption about “availability” is the same thing as demand. The proposals assume that by making all content available simultaneously it’ll fuel demand. In reality, it takes time, infrastructure and money for a distributor to build demand for each film in order to attract an audience. Each film requires a unique distribution and marketing plan to help it find an audience. Something which can vary tremendously from country to country. In some territories a film may receive a large theatrical release, whilst in others it may be a straight to VOD title. The DSM seriously risks undermining the decades of experience that distributors have built up, by promoting the idea that a product can simply be released across all territories in a quick easy fashion.

I suspect there will also be an unexpected consequence in that certain minority languages could face oblivion. As minority languages they have a limited audience, which means finding the audience in territory takes considerable skill and expertise. The DSM will remove any pre-sale value from such films and television series.