New Tax Credit Consultation - meet the new tax credit, same as the old tax credit?
On 18th June the Treasury published the eagerly awaited consultation document in relation to the new tax credits for high-end television production, animation and video games. The consultation
On 18th June the Treasury published the eagerly awaited consultation document in relation to the new tax credits for high-end television production, animation and video games.
The consultation document can be accessed here: http://www.hm-treasury.gov.uk/consult_creative_sector_tax_reliefs.htm
The consultation closes on 10 September 2012, and the new tax credit legislation is expected to apply from April 2013 (subject to EU state aid approval). There is time to prepare. The consultation appears to be a genuine attempt to engage with the industry. That said, expect the new tax credits to look and feel very familiar.
What have we learned? Are there any surprises?
The Film Tax Credit forms the template (no surprises there)
The tax credits for high-end television production and animation should be the same as the existing film tax credit.
The tax credit for video games will probably be the same as the existing film tax credit, but a couple of alternative structures are mooted (one based on the existing R&D credit and one based on the French model).
There is a nice summary of the application of the film tax credit rules at Annex A of the consultation document.
State Aid approval is required (no surprises there)
Everything is still subject to EU state aid approval. We know that in the film context the EU is currently looking at territoriality and inward investment (see our previous blog post on 24 May 2012). We hear that the UK's "used and consumed" method for identifying UK expenditure is currently receiving favourable noises from the EU Commission in relation to territoriality. The same state aid considerations can be expected to apply to the new TV, animation and video games credits.
It's always worth remembering that the film tax credit and the new tax credits are all prima facie illegal state aid. Their justification hangs on a very short provision in the EU Treaty (Article 107(3) TFEU), which requires the tax credits to be "aid to promote culture ... where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest."
So the Cultural Tests will be important (no surprises there)
A separate consultation on the cultural tests will be launched over the Summer. For high-end TV and animation, the cultural tests will presumably be very similar to the film cultural tests. The end product is objectively similar. If you need a refresher, information on the film cultural tests is available on the BFI website, here: http://industry.bfi.org.uk/culturaltest
The cultural test for video games could potentially be rather different – when is a video game culturally British? Is it the experience, the story, the setting or the underlying software which is important? The film context suggests a mixture of these elements.
UK incorporated companies only? (this would be a surprise but we doubt it will happen)
There is a comment in the animation section (paragraph 3.14) which suggests that only an "incorporated company", meaning a UK incorporated company registered at Companies House, can claim the tax credit. The concept of "incorporated company" pops up again in relation to the high-end TV credit (paragraph 4.8) and the video games credit (paragraph 5.13). This seems like the sort of provision which will needlessly get the EU Commission excited in the context of state aid approval, and my prediction would be that this provision will disappear from the final proposal. In principle it should not matter where the production company is incorporated, what matters is where its expenditure is used and consumed (and indirectly, where the production company and its personnel are taxable).
What is "high-end"?
As expected, "high-end" has been defined as productions with a spend of at least £1m per programme hour. For those who questioned what "programme hour" meant, it has been clarified as running time EXCLUDING advert breaks. There are some examples of when a production meets this requirement at paragraph 4.14 of the consultation document.
No cheating! (No surprise there)
The film tax credit rules contain a provision to preclude artificially inflated claims for relief and also to punish wrongful disclosure of confidential information. The consultation document asks whether similar rules should be included. It would be surprising if they are not?
Summing up
To a large extent the consultation document says what everyone thought it would say – we will get new tax credits which look a lot like the existing tax credits. That's a good thing, let's have a consistent set of rules which are already well understood and proven to work in practice.
What should you be doing?
An important element in structuring deals to meet the requirements of the tax credit is:
(i) who owns the underlying rights relating to the production before it is made; and
(ii) who owns the copyright in the finished production; and
(iii) who is paying the talent.
There are established structures which ensure that the full amount of the tax credit is available to your production.
We'd be very happy to share our experience with you – get in touch!
The consultation document can be accessed here: http://www.hm-treasury.gov.uk/consult_creative_sector_tax_reliefs.htm
The consultation closes on 10 September 2012, and the new tax credit legislation is expected to apply from April 2013 (subject to EU state aid approval). There is time to prepare. The consultation appears to be a genuine attempt to engage with the industry. That said, expect the new tax credits to look and feel very familiar.
What have we learned? Are there any surprises?
The Film Tax Credit forms the template (no surprises there)
The tax credits for high-end television production and animation should be the same as the existing film tax credit.
The tax credit for video games will probably be the same as the existing film tax credit, but a couple of alternative structures are mooted (one based on the existing R&D credit and one based on the French model).
There is a nice summary of the application of the film tax credit rules at Annex A of the consultation document.
State Aid approval is required (no surprises there)
Everything is still subject to EU state aid approval. We know that in the film context the EU is currently looking at territoriality and inward investment (see our previous blog post on 24 May 2012). We hear that the UK's "used and consumed" method for identifying UK expenditure is currently receiving favourable noises from the EU Commission in relation to territoriality. The same state aid considerations can be expected to apply to the new TV, animation and video games credits.
It's always worth remembering that the film tax credit and the new tax credits are all prima facie illegal state aid. Their justification hangs on a very short provision in the EU Treaty (Article 107(3) TFEU), which requires the tax credits to be "aid to promote culture ... where such aid does not affect trading conditions and competition in the Union to an extent that is contrary to the common interest."
So the Cultural Tests will be important (no surprises there)
A separate consultation on the cultural tests will be launched over the Summer. For high-end TV and animation, the cultural tests will presumably be very similar to the film cultural tests. The end product is objectively similar. If you need a refresher, information on the film cultural tests is available on the BFI website, here: http://industry.bfi.org.uk/culturaltest
The cultural test for video games could potentially be rather different – when is a video game culturally British? Is it the experience, the story, the setting or the underlying software which is important? The film context suggests a mixture of these elements.
UK incorporated companies only? (this would be a surprise but we doubt it will happen)
There is a comment in the animation section (paragraph 3.14) which suggests that only an "incorporated company", meaning a UK incorporated company registered at Companies House, can claim the tax credit. The concept of "incorporated company" pops up again in relation to the high-end TV credit (paragraph 4.8) and the video games credit (paragraph 5.13). This seems like the sort of provision which will needlessly get the EU Commission excited in the context of state aid approval, and my prediction would be that this provision will disappear from the final proposal. In principle it should not matter where the production company is incorporated, what matters is where its expenditure is used and consumed (and indirectly, where the production company and its personnel are taxable).
What is "high-end"?
As expected, "high-end" has been defined as productions with a spend of at least £1m per programme hour. For those who questioned what "programme hour" meant, it has been clarified as running time EXCLUDING advert breaks. There are some examples of when a production meets this requirement at paragraph 4.14 of the consultation document.
No cheating! (No surprise there)
The film tax credit rules contain a provision to preclude artificially inflated claims for relief and also to punish wrongful disclosure of confidential information. The consultation document asks whether similar rules should be included. It would be surprising if they are not?
Summing up
To a large extent the consultation document says what everyone thought it would say – we will get new tax credits which look a lot like the existing tax credits. That's a good thing, let's have a consistent set of rules which are already well understood and proven to work in practice.
What should you be doing?
An important element in structuring deals to meet the requirements of the tax credit is:
(i) who owns the underlying rights relating to the production before it is made; and
(ii) who owns the copyright in the finished production; and
(iii) who is paying the talent.
There are established structures which ensure that the full amount of the tax credit is available to your production.
We'd be very happy to share our experience with you – get in touch!