Brief Guide To Capital Allowances

What are Creative Industry Tax Reliefs and how do they work?

Innovation helps bring about improvements within an existing system after developing and implementing new ideas and technology, with the aim to make processes more efficient to enhance the capacity of provisioning of goods and services within a country.

 Economies need innovation to meet their growth potential, innovation increases productivity which in result leads to greater output, which means that the scope of goods and services being provided is enhanced and as a result, the economy grows.

 Considering the significance of introducing innovation in the economy, The HM Revenue & Customs launched an initiative to help boost the entertainment and creative sector by allowing them flexibility through tax incentives. This incentive has been introduced in the form of ‘The Creative industry tax relief’ that aims to provide growth opportunities for businesses working in the creative sector, by helping them claim large deductions in their taxable profits and benefit from tax credits when they are suffering from losses to improve cash flow.

Creative industry tax relief

Creative industry tax relief is an amalgamation of 8 corporate tax reliefs that provide tax reliefs for eligible companies. While estimating taxable profits, the eligible companies may be allowed to claim a payable tax credit in some situations.

 The relief is provided by increasing the allowable expenditures and is the key method of working for these tax reliefs. Companies that are eligible may convert their proportion or all of the losses into a payable tax credit as well if the business is suffering from losses. These tax reliefs can get complicated and claiming them could become an issue if not done properly, it is always advisable to speak to a Business Accountant, a Tax Accountant or a highly competitive Accounting firm for more guidance.

Eligibility of your company

Your company is eligible to claim creative industry tax relief if your company is:

1. Accountable to corporation tax
2. The primary developer and producer of:
   1. Films
   2. Children’s TV shows
   3. Animated shows
   4. Video games
   5. Orchestral concerts
   6. Art or museum exhibitions

Special tax rules may be applicable to companies that claim creative industry tax reliefs, these rules are applicable to all:

1. Companies that are involved in film production regardless of the fact that films they make are not intended for release.
2. Companies that are directly involved in the production of TV shows and animated shows.
3. Firms that are in video games production business.
4. Orchestral and theatrical production companies that apply for relief.
5. Galleries and museums claiming relief for exhibition purposes.

The cultural test

Companies that plan to claim creative industry tax reliefs should ensure that their films, TV programs, animations or video games qualify the cultural test or fulfill the criteria of an internationally agreed co-production treaty that classifies their respective production as a British film, British program or British video game. Formal certification is necessary to qualify for the creative industry tax reliefs. On the other hand, exhibitions, theatrical and orchestral productions are not liable to apply and qualify the cultural test.

 British Film Institute (BFI) is responsible for issuing interim certificates (for incomplete production) or final certificates ( for complete production) on the behalf of the Department for Digital, Culture, Media, and Sport (DCMS). You can let your Accountants handle the testing and certification process for you to save you time and any complexities.

How to claim FTR?

Film Tax Relief (FTR) can be claimed on a film if:

1. it qualifies the cultural test or succeeds as an official co-production
2. It was produced for theatrical release
3. Activities in the UK contribute to at least 10% of its total production cost
4. Its principal photography began on or after 1st January 2017

How to claim ATR?

Animation Tax relief (ATR) can be claimed on an animated program if:

1. It qualifies the cultural test or succeeds as an official co-production.
2. It was produced for the broadcasting
3. If the animation’s total core expenditure amounts up to 51%
4. Activities in the UK contribute to at least 10% of its total production cost

Animations that are commissioned together may be treated as a single program. 

ATR cannot be claimed by a company if their program:

• Is for advertisement or promotional purposes

• Broadcasts news, current affairs or talk shows

• Is a game show, variety show, or a similar programme

• Is a competition or contest show

• Includes theatrical and arts performance or aires live events.

• Has been produced for the purpose of training or educating

 

How to claim HTR?

Your company is eligible to claim High-end Television Tax Relief (HTR) if

• Their program qualifies the cultural test and succeeds as an official co-production
• Their programme is produced for the broadcasting
• Their programme Is a drama, sitcom or documentary
• Activities in the UK contribute to at least 10% of its total production cost of their programme
• The production of the program’s cost per hour production length is greater than 1 million per hour on average
• The program’s slot length is greater than 30 minutes

Programs that are commissioned together may be treated as a single program.

Your company is unable to claim HTR if:

• The program is for advertisement or promotional purposes.

• The program broadcasts news, current affairs or talk shows.

• The program broadcasts a game show, a variety show or a similar program.

• The program is a competition or a contest show.

• The program includes theatrical and arts performance or aires live events.

• The program has been produced for the purpose of training or educating.

 

How to claim CTR?

Children’s television tax relief (CTR) can be claimed by the producers of Children’s television programs:

Your company is eligible to claim CTR if:

• Their programme qualifies the cultural test and succeeds as an official co-production.
• Their program is produced for broadcasting.
• The primary audience watching the program are children under the age of 15.
• Activities in the UK contribute to at least 10% of its total production cost of their program.

 Programs exhibiting competition or contest shows may be eligible for relief if the total prize money they offer does not exceed 1000 pounds.

 The million pounds per program hour threshold or the 30-minute slot length requirement is not necessary to claim CTR.

Programs that are commissioned together may be treated as a single program.

Your company is unable to claim CTR if:

• The program is for advertisement or promotional purposes.

• The program broadcasts news, current affairs or talk shows.

• The program broadcasts panel show, variety show or similar program.

• The program includes theatrical and arts performance or aires live events.

• The program has been produced for the purpose of training or educating.

How to claim VGTR?

Your company is eligible to claim Video games tax relief (VGTR) if:

• The video game they produce is British
• The production of a video game is intended for supply.
• Core expenditure of the video game incurred on goods and services provided within the European economic area constitute at least 25%.

If your company becomes successful in claiming VGTR, then your company is liable to:

• Additional deduction whilst estimating taxable profits.
• Surrender losses for a payable tax credit if an additional deduction leads to a loss.

The video games company estimated the additional deduction and the payable tax credit up to a maximum of 80% of the total core expenditure on the basis of EEA core expenditure. Core expenditure is the expenses incurred on designing, testing and producing the game.

 

Research and development tax relief for video games production companies: 

Video games production companies may have claimed Research and development (R&D) tax relief for research and development purposes in the past

 Small or medium-sized enterprises are not liable to claim any other state aid reliefs (including VGTR and grants) for their project if R&D tax relief has already been claimed on that project. This implies that under the small and medium-sized enterprise scheme if the video games production company decides to claim VGTR then research and development within their project would not qualify for Research and development tax relief (R&D)

 Different rules are applicable to large companies carrying out research and development under the large scheme. Large companies claiming R&D tax relief under the large scheme do not qualify for state aid and hence their project may be eligible for R&D tax relief within the areas of research and development

 The R&D expenditure credit scheme varies from the large scheme and the video games production company under this scheme does not have choices.

How to claim TTR?

Your company is eligible to claim Theatre tax relief (TTR) if:

• The company is involved in the theatrical production
• The company comes up with a qualifying theatrical production
• If the theatre is for educational purposes or if it’s played before an audience of the general public that has paid to see it.
• The company has spent 25% of expenditures within EEA

The cultural test is not necessarily required

The tax relief comprises of 2 rates of payable credit:

-Touring productions (25%)

-Others (20%)

The criteria and the methodology to claim these reliefs can get complicated which increases the chances of mistakes and rejected claims. It is always wise to locate an online accountant, a suitable accounting firm nearby or a firm of qualified tax accountants to handle complicated tax and accounting matters.

How to claim OTR?

Your company is eligible to claim Orchestra Tax Relief (OTR) if it’s recognized as a qualifying orchestra production company working on putting qualifying Orchestral Concert.

An orchestral concert would be considered as qualifying if:

• It has instrumentalists that perform in an orchestra, ensemble, group or band.
• The orchestra or group has at least 12 instrumentalists
• All or most of the instruments used to perform are not electronically amplified
• The concert’s primary focus is towards the instrumentalists
• It is performed in front of a paying audience or is performed for educational purposes
• 25% of the expenses on goods and services arose within the EEA

The cultural test is not necessarily required

How to claim MGETR?

Your company can claim Museum and galleries exhibition tax relief (MGETR) if you are able to put on a qualifying exhibition. A qualifying exhibition is a display of work and objects that are scientific, cultural, historic or artistic in nature. The exhibition may just revolve around a single object.

The cultural test is not necessarily required.

Entry charges for the general public are not required.

Certain exhibitions do not qualify for MGETR, those:

• That is organized relating to a competition

• Where the primary or secondary reason for displaying  objects or work is for sale purpose

• Which includes a person performing live, however, it may qualify if it was accidental or an incidental part

• Exhibitions, where objects displayed, are up for sale purposes

• Exhibitions displaying anything that is alive

 

A company may qualify as a charitable company if:

• It runs and maintains a museum or gallery
• If it is owned by a charity
• It maintains a museum or gallery as a local authority

The company that qualifies for the relief must ensure that it is responsible for production at a venue, is the primary decision-maker, and responsible in accounts of dealing, contracting and paying for rights, goods, and services.

 Touring exhibitions may be subject to a higher rate of payable credit of 25% if the touring exhibitions additionally meet the following conditions:

• The exhibition is held at multiple venues
• Every subsequent venue must hold 25% of the objects displayed in the first venue
• Deinstallation at one venue and installation at the next venue should not prolong than 6 months
• The exhibition must have a primary production company that is accountable for corporation tax.
• The primary production must have a plan that was made during the planning stage to organize the touring exhibition.

 The primary production company holds the responsibility for the exhibition at a single venue or if the exhibition is touring then at least the first venue. It is also responsible for adding creative, technical and artistic elements to the exhibition.

 A secondary production company, unlike the primary production company, holds responsibility for the exhibition at a subsequent venue. Exhibition may be looked after by more than one secondary production company.

 The primary and secondary production companies are eligible to claim reliefs to up to 80% of their total core expenditure on the basis of EEA with at least 25% of the expenditure must be within the EEA. Expenses incurred on the production, deinstallation, and packing up of the exhibition at a relevant venue, fall under the core expenditures.

Our review suggests that personal tax accountants or chartered accountants normally make finding and applying for reliefs easier and quicker, compared to if a business tries to apply for these by themselves.

State Aid and the tax reliefs:

State Aid comprises up of the following tax reliefs:

• Film Tax Relief
• Children’s Television Tax Relief
• Theatre Tax Relief
• Orchestra Tax Relief
• Animation Tax Relief
• High-end Television Tax Relief
• Video Games Tax Relief
• Museums and Galleries Exhibition Tax ReliefDetails are posted on the European Commission website annually if your company receives more than €500,000 per year in state aid for all of these reliefs. HM Revenue & Customs may contact you if any additional information is required.

Estimate the relief:

Enhanced deduction or payable tax credit constitutes of:

-Core expenditure is the total expenses spent on the costs of producing a game, film, program, etc.

-The expenditures that qualify for relief are those spent on goods and services used or consumed in the UK for HTR, FTR, CTR, and ATR or the goods and services used or consumed within the EEA for VGTR, TTR, OTR and MGETR

The level of total core expenditure incurred is a determinant of the rates of enhanced deductions and payable tax credit.

Film tax relief

Films are liable to:

An Additional enhanced tax deduction constituting to 100% of enhanceable expenditure that is 80% of total qualifying expenditure in the UK or lesser)
The loss that amounts up to 25% of enhanceable expenditure in case losses are surrendered

Video games tax relief:

Qualifying companies are allowed additional deductions on the qualifying expenditures spent on the game, this additional deduction is estimated on the basis of the EEA expenditure or 80% of the total expenditure.

A company may surrender its loss for a payable video games tax credit during any accounting period. The surrenderable loss is equal to the qualifying expenditures that are incurred effectively in the period of loss. This loss is paid at a rate of 25%.

Estimating tax reliefs for theatre/orchestra/exhibition:

When estimating the taxable profits or losses of the separate theatrical/orchestral/exhibition trade, relief can be enjoyed by way of an additional deduction. This will either decrease the taxable profits or increase the losses, the part of which can be surrendered for a tax credit.

The additional deduction is the lesser of:

• 80% of the total core expenses spent on the production or exhibition
• The EEA core expenditure

How and when to claim

You are liable to claim relief for your company on its tax return. You must ensure that your company receives a certificate from the BFI if a cultural test is required. Your company must apply for a final certificate after the film, television program or video game has completed its final stage or you will have to repay the interim relief that was paid on your company’s interim certificate before the production was completed. Remember to attach the certificates when sending the returns.

Your company is eligible to make, amend or withdraw the creative industry tax relief up to one year after it’s filing date.

Late claims may be accepted by HMRC in certain circumstances.

Tax Relief – Deposit Photos

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