Films - Frequently Asked Questions
- Which films are eligible for the new relief?
- How are films treated which started principal photography before 1 April 2006?
- Which film-making costs are eligible for the new tax relief for film production?
- Does the definition of core expenditure include the cost of buying pre-existing rights?
- What is the distinction between development and pre-production?
- Which types of film-making costs are considered qualifying UK expenditure?
- Are international travel costs included in the definition of qualifying UK expenditure?
- Can costs charged through third parties be included in production costs?
- What tax relief is available on the costs of film development?
- In what ways can losses arising from film production be used?
- What is the current position with the notification to the European Commission of the new relief as a State aid?
- What impact does the legislation have on television production?
- What impact does the legislation have on the sound recording industry?
- What are the transfer pricing implications of the new film tax relief?
- How are co-productions treated under the new tax relief?
Q. Which films are eligible for the new relief?
A. All qualifying films that start principal photography on or after 1 April 2006 are eligible for the new tax relief. Films that start principal photography before that date are also eligible for the new relief if they are not completed by 1 January 2007.
Q. How are films treated which started principal photography before 1 April 2006?
A. Films which started principal photography before 1 April 2006 are eligible for relief under sections 42 or 48, provided production is completed by 1 January 2007. Where the production of such films is not completed by that date, they are eligible for the new tax relief.
Q. Which film-making costs are eligible for the new tax relief for film production?
A. The special film tax relief is available on core production expenditure which is defined in Clause 34 of the Finance Bill as that incurred on pre-production, principal photography and post-production. It excludes expenditure on development and distribution which instead is subject to the normal rules for tax relief.
Q. Does the definition of core expenditure include the cost of buying pre-existing rights?
A. The cost of buying rights owned by another person, such as the rights in a book or story, forms part of initial development expenditure and therefore does not attract the special tax relief which is only available on core production expenditure.
Q. What is the distinction between development and pre-production?
A. Development, pre-production, along with principal photography and post production, are familiar terms which are well understood within the film industry and take their normal meaning for the purposes of the legislation.
Q. Which types of film-making costs are considered qualifying UK expenditure?
A. Clause 35 defines UK expenditure as that which is incurred on services which are physically performed within the UK. It includes, for instance, all costs paid to directors and actors where they relate to film-making within the UK, and excludes such costs relating to film-making overseas. The nationality or residence of such personnel has no bearing on this definition.
Q. Are international travel costs included in the definition of qualifying UK expenditure?
A. The international travel costs relating to film personnel are included in qualifying UK expenditure where the journey starts in the UK and excluded where the journey starts overseas.
Q. Can costs charged through third parties be included in production costs?
A. The recharging of costs to a subsidiary by its parent company is standard practice in the film industry and elsewhere. Where such costs relate to qualifying production expenditure, they can be included for the purposes of the film tax relief, provided they are recharged on a commercial basis and are not designed to inflate the amount of film tax relief that can be claimed.
Q. What tax relief is available on the costs of film development?
A. Tax relief for film development costs is currently provided by section 41 of Finance (No 2) Act 1992. Clause 46(2) of the Finance Bill 2006 withdraws this relief for development expenditure incurred after the Bill receives Royal Assent later this year.
Development expenditure incurred after that date will be dealt with in the same way as other film production expenditure, but will not be eligible for the special film tax relief.
Q. In what ways can losses arising from film production be used?
A. The way in which a Film Production Company (FPC) can use losses arising from film making activity is set out in Clauses 43 to 45 of the proposed legislation.
While the film is in production, a FPC can only carry forward losses, both ordinary losses and those which are created by the special relief, to set against income which arises from exploiting the film. When the film is completed the accumulated ordinary losses can be used the same way as in any other trade, but the special losses can still only be carried forward. On cessation of the trade, such as when the film is sold, however, any losses which remain can only be transferred to another qualifying film being made by the same film production company or by another company in the same group.
Q.What is the current position with the notification to the European Commission of the new relief as a State aid?
A. The new relief has been notified as a State aid and the Government is currently in discussion with the European Commission to secure formal approval.
Q. What impact does the legislation have on television production?
A. The underlying tax treatment of film expenditure described in Schedule 4 of the Bill applies to all types of film production, including films made for television. However, expenditure on such films does not attract the special relief which is only available for the production of culturally British films intended for theatrical release.
Q. What impact does the legislation have on the sound recording industry?
A.The sound recording industry is not affected by the proposed legislation. Clauses 48 to 50 put on a statutory basis the tax treatment currently in place for expenditure on sound recordings which is provided by extra statutory concession (ESC B54).
Q. What are the transfer pricing implications of the new film tax relief?
A. None. Transfer pricing rules continue to apply in relation to all transactions between a Film Production Company and a connected party, such as a parent company. The rules are only engaged where such transactions are made other than on an arm’s length basis.
Q. How are co-productions treated under the new tax relief?
A. A company which is a co-producer under the terms of one of the UK’s international agreements is treated as the Film Production Company for the purposes of the new tax relief where it makes an effective creative, technical and artistic contribution to the production of the film.
This ensures that a co-production is eligible for the same tax treatment in the same way as other films which meet the qualifying criteria for the tests for the new relief.
