There are a number of special tax rules that determine how the taxable profits of a film production can be calculated and how loses can be applied.
Certain films are eligible for Film Tax Relief (FTR). FTR can increase the amount of expenditure that is allowable as a deduction for tax purposes or, if the film production company makes a loss, can be surrendered for a payable tax credit. This can provide a 25% subsidy towards the cost of making a film.
Main features of Film Tax Relief
· Applies to British Films that are intended to be shown commercially in cinemas
· In order to be eligible, at least 10% of the total production costs of the film must relate to activities in the UK.
· Only applies to UK companies or overseas companies with a UK branch or tax presence. Partnerships or individuals are not eligible to claim the relief.
Criteria for a film to qualify for FTR
· Theatrical Release- For a film to qualify for Film tax relief for any particular accounting period, the film must be intended for theatrical release at the end of that period.
o ‘Theatrical Release’ is defined as for exhibition to the paying public at the commercial cinema. A film does not need to be given a theatrical release to access the relief.
o In order to establish if a film is intended for theatrical release or not, the HMRC have provided the following factors to consider:
§ The film is a full-length or feature film of a type commonly shown in a cinema.
§ The film is a suitable format for theatrical showing at a commercial cinema
§ Evidence can be given at the end of the relevant accounting period, that there was an intention to seek a contract to present the film in the cinema.
o Where a television company commissions a theatrical release, this condition may not be met if the film didn’t show at a cinema.
The Cultural test
· The film must be formally certified as British to qualify for Film Tax Relief.
· A theatrical release is regarded as ‘British’ if it passes the cultural test or if it qualifies by virtue of an internationally agreed co-production treaty.
· A film passes the cultural test if it is awarded at least 18 of the possible 35 points. Cultural test points broken down:
o Cultural content (up to 18 points)
o Cultural Contribution (Up to 4 points
o Cultural hubs (up to 5 points)
o Cultural Practitioners (Up to 8 points)
Minimum UK expenditure requirements
In order to be eligible for Film Tax relief, a minimum of 10% of core expenditure can be UK expenditure.
Film Production companies can claim FTR on the lower of either 80% of total core expenditure; or the actual UK core expenditure incurred.
Core expenditure is expenditure on the activities involved pre and post-production of the theatrical release. However, this excludes expenditure on development and distribution, and all costs incurred while raising and servicing finance.
UK expenditure on services or goods ‘used or consumed’ in the UK. The used or consumed test is identifying the type of expense and focuses on the recipient or customer as the means of determining whether the expense falls into UK expenditure.
How the relief is given
Costs of production for a qualifying theatrical release are deductible from the total estimated income from the film in order to calculate profits and losses.
· The film production company will be eligible for an enhanced deduction. The value of the enhancement is a 100% additional deduction.
· The total losses of the film production company can be used to either be set against the income of the company for tax purposes; or be surrendered to the HMRC for a payable tax credit.
o The losses surrendered for any accounting period must be the lesser of: the amount of the trading loss in the period; or the enhanceable expenditure for that period less any amount in previous periods.
o Payable tax credit is currently set at 25%