Legislation has been included in Finance Act 2013 to provide tax incentives for expenditure incurred by companies within the creative sector on or after 1 April 2013.

The creative sector reliefs offer tax advantages for companies engaged in high-end TV programme production, animation production and video games development. The Government wants to build on the success of film tax relief and on the experience of other countries offering similar targeted relief.

To qualify for the relief, animation and high-end TV programmes and video games will need to be certified as a British cultural product to satisfy EU state aid requirements.

State aid approval has now been received for high-end TV and animation reliefs however the European Commission has requested further information before granting approval to the relief for video games. It is hoped that the Commission will recognise the importance of the new relief and state aid approval for the video games sector will follow in due course.

A commitment to consult on further relief for the visual effects industry was also announced at Budget 2013. The relief proposed is also based on the film tax relief potentially offering a 25% tax credit for large budget films (production budget of £20m or more) where 80% of qualifying visual effects expenditure is UK expenditure (with terms yet to be defined).

Overview of the reliefs

The creative sector relief enables a qualifying company to obtain an enhanced deduction in computing their taxable profits, and where that additional deduction results in a loss, the company can surrender that loss for a repayable tax credit.

Only companies liable to UK corporation tax are eligible for relief. The enhanced deduction is limited to the lower of the qualifying expenditure that is UK core expenditure and 80% of total core expenditure incurred to date.

If the business is loss-making, any resultant loss may be surrendered for a payable tax credit of 25%. The amount of the loss that can be surrendered is restricted to a cap of the lower of UK core expenditure and 80% of total core expenditure. There are special rules for the treatment of any losses incurred in the business (including the enhanced element) which have not been surrendered for a tax credit.

Where a creative sector tax relief is claimed, it will not be possible to claim other reliefs such as research and development tax relief

Conditions for the reliefs

TV and animation

The relief is available to television production companies, and applies to drama, documentary and animation programmes. Drama for this purpose includes comedy, but excludes programmes such as advertisements, live performances and quiz shows, news broadcasts or current affairs and training programmes.

In the case of TV programmes that are not animation, the programme must have a slot length of more than 30 minutes, and average core expenditure per hour of slot length of at least £1m. A drama or documentary that includes animation is treated as animation if the core expenditure on completed animation is at least 51% of total core expenditure.

For the programme to be classified as qualifying for these purposes:

  • it must be intended for broadcast to the general public;
  • it must meet the cultural test by being certified by the Secretary of State as a British programme (see below); and
  • at least 25% of the core expenditure incurred by the company on the relevant programme must be UK expenditure.

High-end TV, animation and video games tax reliefs are subject to cultural tests similar to that of the UK film tax incentives. The cultural tests pass mark is 16 points from a possible total of 31 (30 for video games). Points are awarded in the following four areas: cultural content, cultural contribution, use of UK cultural hubs and use of UK/EEA cultural practitioners. Tax relief is only available for core expenditure. This is a narrower definition than production expenditure.

Production expenditure means all expenditure on television production activities in connection with the programme, including the development, pre-production, principal photography and post production of the programme. If images are generated by computer, references to principal photography mean the generation of those images. Core expenditure means the pre-production, principal photography and post production costs of the programme. UK core expenditure refers to goods or services that are used or consumed in the UK.

The relief is available for core expenditure incurred on or after 1 April 2013 (with the requirement that it be paid within four months of the end of the accounting period).

Video games

The relief can be claimed by a video games development company provided the video game (video game takes its ordinary meaning) meets the following conditions:

  • it must be intended for supply to the general public, as determined when video production activities begin;
  • it must meet the cultural test by being certified by the Secretary of State as a British video game; and
  • at least 25% of the core expenditure incurred by the company must be UK expenditure.

Core expenditure in relation to video games means expenditure on designing, producing and testing. It does not, however, include expenditure on designing the initial concept for the game or expenditure on debugging a completed video game or carrying out maintenance in connection with the game.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.