Out-Law News 2 min. read

Government consults on creative industry tax break proposals


A new tax relief aimed at the producers of high-end television shows, animation and video games will prevent valuable productions moving overseas, the Government has said.

It is seeking feedback on its proposals (58-page / 406KB PDF) to extend corporation tax reliefs currently available for certain "culturally British" film productions to other creative industries. The proposal, announced as part of the 2012 Budget, is "among the most generous in the world", the Government said.

"I want the UK to remain a world leader in the creative industries, that's why I am announcing tax reliefs that will be among the most generous available anywhere," said Chancellor of the Exchequer George Osborne. "High-end TV, animation and video games production are exactly the kind of innovative, high-tech industries at which this country excels, and the Government is determined to support them as part of our efforts to grow this economy."

Draft legislation will be produced later this year and the new relief is due to be introduced from April 2013, subject to state aid approval.

The consultation proposes slightly different rules for each of the three new reliefs but each includes a cultural test, a requirement for 25% of 'core expenditure' to be incurred in the UK and the option of receiving a cash tax credit. The Government has not specified the proposed rate of relief but states that it is expected to be of "similar generosity" to the existing film tax relief, which it says has led to £1 billion additional investment in the UK film industry.

Under the film tax scheme, available since 2007, the production company of a film with core expenditure of more than £20 million can claim an additional deduction of 80% and a payable cash rebate of up to 20% of UK qualifying film production expenditure. Films with a core expenditure of £20m or less are entitled to an additional deduction of 100% and a payable cash rebate of up to 25% of UK qualifying film production expenditure. To qualify, a film must be certified as '"culturally British" by the Culture Secretary on the advice of the British Film Institute.

Tax law expert Matthew Rowbotham of Pinsent Masons, the law firm behind Out-Law.com, said that the Government would be looking to learn from its experience of film tax reliefs as it developed its criteria. However, the new relief would satisfy a "long-standing demand" of creative businesses outside of the film industry, he said.

"Inevitably, given the history of film tax reliefs, the Government will want to ensure that these new reliefs are tightly targeted," he said. "It will be interesting to see whether these industries see the film tax relief model as a good 'fit'. The video game industry in particular is experiencing an explosion of innovation, with lots of different types of content producer emerging, so may not easily fit within a relief model designed for a more established industry like film."

Colleague Eloise Walker sounded an additional note of caution for the video games industry.

"The proposed tax credit looks good on paper," she said. "However, the complexities in its planned execution – especially around the definition of core expenditure – are not in step with how the industry is developing in the modern world."

The Government's general definition of 'core expenditure' relates to production costs that are integral to the production process itself, including relevant pre- and post-production, but not including the costs of financing or advertising. The consultation proposes that the relief be provided for the costs of "developing" video games but not for the costs of code 'debugging' or ongoing maintenance once the game has reached a certain stage in its development process. It has also proposed excluding "speculative expenditure" on a project before there is an "identifiable end product". It is seeking further views on these definitions from the video games industry,

"One approach would be for early stage production costs associated with a specific project to become eligible for relief once the video game has been formally commissioned by a publisher," the consultation said. "Alternatively, only costs incurred in producing a video game with the potential to be approved for commercial release could qualify."

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