Film Tax Relief

Companies that produce films (including television and video productions) are subject to special tax rules that determine how the taxable profits of the film-making activities are to be calculated and how any losses may be applied. These rules apply to all film production companies whether or not they are producing films intended for release in the cinema.

Some films are eligible for film tax relief. This relief can increase the amount of expenditure that is allowable as a deduction for tax purposes or can be surrendered for a payable tax credit. Films that qualify for the relief are British films that are intended to be shown commercially in cinemas and of whose total production costs at least 25% relate to activities in the UK.

Whether a film is British for these purposes is determined by a cultural test administered by the Department for Culture Media and Sport, or by virtue of an internationally agreed co-production treaty.

There can be no more than one Film Production Company for any film.

Definition of a Film

The Taxman defines a film as, "any record, however made, of a sequence of visual images that is capable of being used as a means of showing that sequence as a moving image". The definition is not limited to cinema films or, indeed, to films made using traditional film stock or video tape, and in particular includes productions made for television.

Film Production Company ("FPC"):

Conditions that Apply

In order to qualify as an FPC in relation to a film, a company must be:

• responsible for the pre-production, principal photography and post production

• responsible for the delivery of the film on completion. Whilst an FPC might also have responsibility for the development, marketing and distribution of the film, there is no requirement that it does so.

• be actively engaged in production planning and decision-making during the pre- production , principal photography and post production stages of the film; and

• directly negotiate, contract and pay for rights, goods and services relating to the film.

The three items above are also referred to as ‘Core Expenditure'. This expression excludes any expenditure incurred on development, distribution or other non -production activities.

A company may elect not to be treated as an FPC. It can make such an election when making or amending its company tax return.

Such a company would then not be an FPC. It would be outside the film tax regime introduced by the Finance Act 2006 and:

• would be taxed according to normal principles, and

• would not be eligible for Film Tax Relief.

Any such election has effect for all films starting principal photography in the period to which the return relates or in later periods. An election may be withdrawn by amending the return, within the normal time limit, but after this time limit is reached, it may not be revoked.

Qualifying for Film Tax Relief

In order to qualify for film tax relief, a film must meet three conditions. It must:

• be made to be shown commercially in cinemas.

• be certified as British either because it is an official co-production or because it satisfies a new cultural test administered by the Department for Culture Media and Sport.

• incur at least 25% of its total production expenditure on film-making activities in the United Kingdom.

British films costing £20m or less are eligible for an additional tax deduction of 100% of qualifying UK expenditure and to surrender losses in exchange for a cash payment of 25%, amounting to a benefit worth at least 20% of qualifying production costs.

Other British films will receive an additional deduction of 80% of qualifying UK expenditure and will be able to surrender losses in exchange for a cash payment of 20%, amounting to a benefit worth typically 16% of qualifying production costs.

UK expenditure on a film is defined as expenditure on goods or services that are used or consumed in the United Kingdom. If expenditure has to be apportioned between UK and non-UK elements then it must be apportioned on a fair and reasonable basis.

Limited-Budget Films

Limited-budget films are entitled to receive higher rates of both additional deduction and payable tax credit. A limited-budget film is one whose total core expenditure is £20m or less. Core expenditure is identified above.

Surrenderable Losses and Film Tax Credit

A FPC has the option of claiming Film Tax Relief as a payable tax credit. It can do so in any period in which it has a surrenderable loss.

The company may surrender all or part of its surrenderable loss. The amount of this loss for any accounting period is the lesser of:

1. the amount of the trading loss in the period (including the additional deduction); and,

2. the enhanceable expenditure for that period (i.e. the lesser of core UK expenditure or 80% of total core expenditure) less any amount surrendered in previous periods. The payable credit rate is dependent of the size of the film's budget.

The rate for Limited-Budget Films is 25% and for other Films it is 20%

contact Will Smith if you would like to know more.

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