Understanding the latest UK creative sector tax credits

The UK government has released draft legislation to overhaul tax reliefs in the creative sector. Broadly, the proposal will bring the four existing audio-visual tax reliefs into a single scheme, being the Audio-Visual Expenditure Credit (AVEC). The AVEC will combine the following existing cultural sector tax reliefs:

• Film Tax Relief (FTR)
• High-End Television Tax Relief (HETV)
• Animation Tax Relief (ATR)
• Children’s TV Tax Relief (CTR)

A similar, but separate scheme video games tax relief will also be introduced, being the Video Games Expenditure Credit (VGEC), which will replace the current video games tax credit.  

Operating Mechanism

The operation of the relief will be slightly different to the existing tax reliefs. Under the existing rules, the relief is calculated as an additional deduction from taxable profits or surrendering a loss for a tax credit.

Under the new legislation the relief will be calculated directly from qualifying expenditure, in a similar way to R&D relief for large companies, and companies will receive an above the line tax credit based on qualifying expenditure, with the credit itself being taxable.

Rates of relief

The new AVEC scheme will attract tax relief for each sector as follows:

• Films, high-end TV programmes and video games will attract a headline rate of credit of 34% of qualifying expenditure. This equates to 25.5% after corporation tax at 25%.
• Animations and children’s TV programmes will attract a headline rate of credit of 39% of qualifying expenditure. This equates to 29.25% after corporation tax at 25%.

Transitional rules

The expenditure credits will be available to claim for all eligible companies from 1 January 2024. Productions that have claimed relief under the current system will be able to opt into the new regime.

The existing tax reliefs will close to new productions from 1 April 2025 and after this date any new claim must be made under the new AVEC regime.

Productions that have started before 1 April 2025 will be able to continue using the existing regime until 31 March 2027, following which the current tax reliefs will end and all productions must claim under the new scheme.

Qualifying conditions

The criteria for the tax credit mostly remain unchanged and include the following:

• At least 10% of core costs must be incurred in the UK.
• Qualifying expenditure is capped at 80% of total expenditure.
• Must be an incorporated UK company.
• The UK company is responsible for engaging all goods and services related to production.

However, there are some additional changes as follows:

• For High End TV, the minimum slot length will be reduced to 20 minutes from 30 minutes. This applies on an episode-by-episode basis.
• The new legislation will include a new definition of ‘documentary’ based on guidance by the British Film Institute – ‘a factual or realistic programme based on real events, place or circumstances and intended to record or inform’. This new definition is likely to prove more restrictive than the current regime for certain programme formats.
• EEA expenditure will be excluded from the qualifying costs of the VGEC. Instead, expenditure will qualify for relief only if incurred on goods and services used or consumed in the UK. The eligibility criteria for the VGEC will require a minimum of 10% of expenditure to be on goods or services used or consumed in the UK bringing the relief in line with the rules for Film and TV tax reliefs.
• The existing £1 million per game subcontracting limit will be removed for the VGEC.

Administrative updates

The government will introduce an anti-abuse measure regarding payments between connected parties. This will restrict qualifying expenditure to the costs incurred by the group as a whole.

The government will also legislate to prevent any tax credits being paid to companies that don’t meet the financial health requirement, where it would be reasonable to assume that it was ‘in difficulty’. The guidelines set out that an undertaking is considered to be in difficulty when, without intervention by the State, will almost certainly be condemned to going out of business in the short or medium term. 

All claims, under both the existing reliefs and new expenditure credit system will be required to be made digitally, and more detailed information is expected to be generally, as part of the claim.

How can we help?

It’s vital to understand the implications of the newly reformed Audio-Visual Expenditure Credit (AVEC) and Video Games Expenditure Credit (VGEC) systems. If you’re in the entertainment or creative industry and would like to have a confidential discussion, please reach out to Director, Robert Hoad (roberthoad@lubbockfine.co.uk).