BN 04: Reform of Film Tax Relief
Who is likely to be affected?
1. Companies within the charge to UK taxation incurring expenditure on the production of British films intended for cinema exhibition.
General description of the measure
2. The measure introduces a new tax relief for the production of British films.
Operative date
3. The new relief will be available to films intended for theatrical release which commence principal photography on or after 1 April 2006.
4. The existing tax relief will continue to apply to the production of films commencing principal photography on or before 31 March 2006, provided the film is completed before 1 January 2007 and to the acquisition of films where acquisition takes place before 1 October 2007.
Current law and proposed revisions
5. The basic tax treatment of expenditure on the production and acquisition of films is governed by sections 40A and 40B of the Finance (No 2) Act 1992 and, for individuals, section 134 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005).
6. Tax relief is provided by section 42 of the Finance (No 2) Act 1992 and sections 138 to 144 of ITTOIA 2005 which allow expenditure on the production or acquisition of British films to be matched against income from the film or written off over three years. Section 48 of the Finance (No 2) Act 1997 allows such expenditure on low budget British films to be written off immediately. Such relief is only available to films intended for cinema exhibition.
7. A British film is one certified as such under the Films Act 1985. These
provisions allow the expenditure on producing or buying a film to be treated
as revenue, rather than capital, expenditure. The same basic treatment also
applies to expenditure on British films intended for
broadcast on television.
8. The new film tax relief will be underpinned by a new treatment for film production companies (FPCs) that ensures that, for tax purposes a FPC will be defined as a company responsible for principal photography, postproduction and for delivering the completed film. Each film will be treated as a separate trade for tax purposes.
9. The current tax reliefs will be replaced with a new regime available
to the production of British films by a FPC and will be provided on a maximum
of 80% of total qualifying UK expenditure. To be eligible for the new relief,
qualifying UK expenditure must be at least 25% of total production
expenditure on the film.
10. A British film will be defined as one which meets the conditions of a test to be introduced by revisions to the Films Act 1985. Qualifying UK expenditure will be defined as that directly incurred in relation to preproduction, principal photography and post production activities which take place within the UK. Expenditure on other film-related activities, such as development, distribution and marketing, will be subject to normal tax rules.
11. The new incentive will provide an additional tax deduction for UK
production expenditure. The rate of the deduction will be 100 per cent for
films with total qualifying production expenditure of £20m or less
and 80 per cent for all other films. Where this additional deduction gives
rise to a
tax loss, the FPC will be entitled to surrender that loss, up to the amount
of its qualifying UK expenditure, for a payable tax credit. This tax credit
will be calculated at a rate of 25 per cent of the loss surrendered for
films with qualifying production expenditure of £20m or less and 20
per cent for all other qualifying films.
12. Alternatively, a FPC will be able to carry forward the additional
deduction and set it against future income from the film in the same way
as other losses. When the trade ceases, for example when the film is sold
or ceases to be exploited, the FPC will be able to transfer its unused
additional deduction to another trade of producing a British film carried
on either within the same FPC or in another FPC within the group.
Further advice
13. If you have any questions about this change, please contact Craig Mason (020 7147 2599), David Harris (020 7147 2562) or George Rowing (020 7147 2550). Information about Budget measures is now available.
