UK Film Tax Credit - A limited shelf life?
UK TAX CREDIT – A LIMITED SHELF LIFE?In November 2011, the UK government announced that the EU had granted state aid approval for the UK film tax credit until 31 December 2015[1]. This is a good
UK TAX CREDIT – A LIMITED SHELF LIFE?
In November 2011, the UK government announced that the EU had granted state aid approval for the UK film tax credit until 31 December 2015[1]. This is a good thing.
But the state aid rules applying to the film tax credit will change with effect from next year if the EU Commission gets its way.
EU COMMISSION CONSULTATION – TAX INCENTIVES IN JEOPARDY?
The EU Commission is currently consulting about changing the requirements which film incentives must meet in order to obtain state aid approval. The consultation document[2] is not a comfortable read. There are two key issues of concern for those involved in the UK film industry:
(a) Territoriality
(b) Inward (generally US) investment.
TERRITORIALITY – SIGNIFICANT RESTRICTION?
In the context of the UK tax credit (for a big budget production) with a budget of 100:
(a) under the current rules, the UK effectively requires 80 to be spent in the UK to maximise the film tax credit.
(b) on the face of it, if the EU Commission proposal is implemented, the UK could only require 16 to be spent in theUK.
In other words, on the face of it the EU Commission wants the UK to implement a new film incentive under which a film could qualify for maximum UK film tax credit if 16 is spent in the UK, and 64 of the remaining 84 is spent anywhere in the EEA.
The question is why any jurisdiction would introduce a film incentive on this basis – film incentives generally work because the cost to the state is outweighed by the additional tax income received by the state. The EU Commission destroys this "win-win" position.
OR IS "USED AND CONSUMED" OKAY?
The Draft Cinema Communication talks about where money is "spent".
The UK rules define "UKexpenditure" as expenditure on goods or services which are "used or consumed" in theUK. The place where goods or services are "used or consumed" is not always the same as where the money is "spent".
For example, a script could be written by a script-writer based in Italy, who is paid in Italy. However, if the script is used to make a film in the UK, the script is "used or consumed" in theUK.
A film could have a cast made up entirely of non-UK nationals, all of whom are paid outside the UK (subject of course to the UK tax rules for foreign entertainers), but if the film production takes place in the UK then the expenditure is on services which are used and consumed in the UK.
We hear that the EU Commission is currently suggesting that a "used or consumed" requirement is compatible with the EU treaty. More cynical commentators have suggested that this might be a divide and conquer approach, intended to take the UK's voice out of the general chorus of complaint which the Draft Cinema Communication has created.
US INWARD INVESTMENT
Under the EU Commission proposal, the full UK tax credit would only be available for culturally British (or European) films which are "European films", and any film which is not a European film must be subjected to a reducing scale of "aid intensity" (i.e. credit):
Budget up to €10m: 50%
Budget up to €20m: 30%
Budget over €20m: 10%
The current maximum level UK tax credit for a big budget film is 16% of the total eligible expenditure (20% ofUKexpenditure, up to 80% of total eligible expenditure).
What is a European film? The drafting is not clear, but it looks as if:
(a) the current standard structure under which a UK company acts as the film production company but the rights in the film are owned in theUSwould not qualify as a European film. Instead, some sort of rights ownership or meaningful profit participation would need to be retained in the UK production company. which would need to be credited as producer.
(b) Any production involving inward (US) investment would have to jump through two sets of points systems – firstly is it culturally [British][European] and secondly, does it meet the points requirements (included in the consultation document Annex) to be a European film.
ARE THE EU COMMISSION MISSING THE POINT?
What is the point of having an academic set of requirements for state aid for the audio-visual sector if those requirements effectively preclude any member state from offering the state aid in the first place?
The current state of the global film production industry is such that without incentives, the production of culturally [British][European] films would be significantly reduced.
This would be a bad thing.
WHAT NEXT?
The final form Cinema Communication is scheduled to be published "in the second half of 2012". Member states then have 12 months to bring their film incentive rules into line with the new Cinema Communication requirements.
We will be checking in with the UK DCMS to see how they are responding to the EU Commission consultation, and to try to get a feel for what other member states are doing. At the moment, this is only a consultation. There is still time to change the EU Commission's direction. Fingers crossed, and watch this space.
You can see the current 2001 Cinema Communication here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52001DC0534:EN:NOT
You can see the Commission's press release on the 2009 extension of the 2001 Cinema Communication, which anticipates a change in 2012, here: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/138&format=HTML&aged=0&language=EN&guiLanguage=en
In November 2011, the UK government announced that the EU had granted state aid approval for the UK film tax credit until 31 December 2015[1]. This is a good thing.
But the state aid rules applying to the film tax credit will change with effect from next year if the EU Commission gets its way.
EU COMMISSION CONSULTATION – TAX INCENTIVES IN JEOPARDY?
The EU Commission is currently consulting about changing the requirements which film incentives must meet in order to obtain state aid approval. The consultation document[2] is not a comfortable read. There are two key issues of concern for those involved in the UK film industry:
(a) Territoriality
(b) Inward (generally US) investment.
TERRITORIALITY – SIGNIFICANT RESTRICTION?
In the context of the UK tax credit (for a big budget production) with a budget of 100:
(a) under the current rules, the UK effectively requires 80 to be spent in the UK to maximise the film tax credit.
(b) on the face of it, if the EU Commission proposal is implemented, the UK could only require 16 to be spent in theUK.
In other words, on the face of it the EU Commission wants the UK to implement a new film incentive under which a film could qualify for maximum UK film tax credit if 16 is spent in the UK, and 64 of the remaining 84 is spent anywhere in the EEA.
The question is why any jurisdiction would introduce a film incentive on this basis – film incentives generally work because the cost to the state is outweighed by the additional tax income received by the state. The EU Commission destroys this "win-win" position.
OR IS "USED AND CONSUMED" OKAY?
The Draft Cinema Communication talks about where money is "spent".
The UK rules define "UKexpenditure" as expenditure on goods or services which are "used or consumed" in theUK. The place where goods or services are "used or consumed" is not always the same as where the money is "spent".
For example, a script could be written by a script-writer based in Italy, who is paid in Italy. However, if the script is used to make a film in the UK, the script is "used or consumed" in theUK.
A film could have a cast made up entirely of non-UK nationals, all of whom are paid outside the UK (subject of course to the UK tax rules for foreign entertainers), but if the film production takes place in the UK then the expenditure is on services which are used and consumed in the UK.
We hear that the EU Commission is currently suggesting that a "used or consumed" requirement is compatible with the EU treaty. More cynical commentators have suggested that this might be a divide and conquer approach, intended to take the UK's voice out of the general chorus of complaint which the Draft Cinema Communication has created.
US INWARD INVESTMENT
Under the EU Commission proposal, the full UK tax credit would only be available for culturally British (or European) films which are "European films", and any film which is not a European film must be subjected to a reducing scale of "aid intensity" (i.e. credit):
Budget up to €10m: 50%
Budget up to €20m: 30%
Budget over €20m: 10%
The current maximum level UK tax credit for a big budget film is 16% of the total eligible expenditure (20% ofUKexpenditure, up to 80% of total eligible expenditure).
What is a European film? The drafting is not clear, but it looks as if:
(a) the current standard structure under which a UK company acts as the film production company but the rights in the film are owned in theUSwould not qualify as a European film. Instead, some sort of rights ownership or meaningful profit participation would need to be retained in the UK production company. which would need to be credited as producer.
(b) Any production involving inward (US) investment would have to jump through two sets of points systems – firstly is it culturally [British][European] and secondly, does it meet the points requirements (included in the consultation document Annex) to be a European film.
ARE THE EU COMMISSION MISSING THE POINT?
What is the point of having an academic set of requirements for state aid for the audio-visual sector if those requirements effectively preclude any member state from offering the state aid in the first place?
The current state of the global film production industry is such that without incentives, the production of culturally [British][European] films would be significantly reduced.
This would be a bad thing.
WHAT NEXT?
The final form Cinema Communication is scheduled to be published "in the second half of 2012". Member states then have 12 months to bring their film incentive rules into line with the new Cinema Communication requirements.
We will be checking in with the UK DCMS to see how they are responding to the EU Commission consultation, and to try to get a feel for what other member states are doing. At the moment, this is only a consultation. There is still time to change the EU Commission's direction. Fingers crossed, and watch this space.
You can see the current 2001 Cinema Communication here: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52001DC0534:EN:NOT
You can see the Commission's press release on the 2009 extension of the 2001 Cinema Communication, which anticipates a change in 2012, here: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/138&format=HTML&aged=0&language=EN&guiLanguage=en