Under current rules, the film, high end TV, animation, video game, children’s TV, theatre, orchestra, museums and art gallery industries are permitted to claim tax reliefs by way of a deduction from profits, or surrender of a loss for a tax credit. The reliefs are seen as a way of driving investment, creativity and employment across the UK. A total of £1.66 billion of relief was paid across all the qualifying industries during the year ending March 2022, an increase from £1.06 billion over the previous year.

In November 2022, the UK government launched a consultation to overhaul the way that the current audio-visual creative tax reliefs are calculated. In March 2023,  it was announced that the reliefs would be replaced by a system of expenditure tax credits. The new Audio-Visual Expenditure Credit (AVEC) will replace the current film, high-end TV, animation and children’s TV tax reliefs. The Video Games Expenditure Credit (VGEC) will replace the Video Games Tax Relief (VGTR). Instead of receiving relief by way of an additional deduction from profits or surrendering a loss for a tax credit, under AVEC and VGEC, companies will receive an above the line tax credit based on qualifying expenditure which will be taxable. In practice this means that:

• Film, high-end TV and video games will be eligible for a credit rate of 34% (which broadly equates to an after tax credit of 25.5%) and
• Animation and children’s TV will be eligible for a rate of 39% (which broadly equates to an after tax credit of 29.25%).

Most of the qualifying criteria and other rules for the current audio-visual reliefs will be carried across into AVEC and VGEC, including the 80% cap on qualifying expenditure. However, there are some important changes to flag:

• Qualifying expenditure for both AVEC and VGEC will be the definition used in the current film and TV reliefs, i.e., expenditure that is ‘used or consumed in the UK’. This is a significant departure from the current VGTR rules, under which video games companies can include EEA expenditure in their qualifying costs.
• The subcontractor limit under VGTR (which limits subcontracted costs to £1m for any one game) will be removed for VGEC.
• AVEC will introduce a new minimum slot length for high-end TV programmes of 20 minutes, on an episode-by-episode basis, and a definition for documentary programmes that follows the BFI definition.
• Supplementary information forms will now be required to be submitted to HMRC before a tax return is submitted.

Importantly, in its Autumn Statement made on 22 November 2023, the government announced that it has taken on board industry feedback on the draft legislation for AVEC and VGEC (published in July 2023) and a number of key amendments were announced:

• Connected party transactions: Plans to restrict claims relating to qualifying expenditure between connected parties to the cost of providing those services have been scrapped and companies will now be able to claim the arm’s length cost of intercompany services and are just required to disclose these connected party transactions to HMRC.
• Documentary definition: The proposed definition of a documentary has been amended to align with the British Film Institute’s guidance; i.e.  a factual or realistic programme based on real events, places or circumstances and intended primarily to record or inform.
• ‘Going concern’ rule: Industry concerns about the impact of the draft legislation on productions that use single purpose vehicles has been listened to and the government has amended the legislation to restrict AVEC and VGEC from being given to companies in administration or liquidation only.

Implementation:

The proposed changes will be legislated for in the Autumn Finance Bill 2023 and we expect HMRC guidance shortly thereafter.

For accounting periods beginning on or after 1 January 2024, AVEC and VGEC will be available to companies alongside the existing tax reliefs. Broadly speaking, from 1 April 2025, all new productions and games must claim under the AVEC and VGEC regimes. On 1 April 2027, the existing will film, TV and video games tax reliefs will cease and all productions and games must claim under the AVEC and VGEC regimes.

HM Treasury’s call for evidence on the visual effects industry:

The government has published a call for evidence on recent trends in the visual effects industry. This will inform the design of additional tax relief for expenditure on visual effects, which the government intends to deliver through the Audio-Visual Expenditure Credit. The government intends to consult on the detailed policy design of further support and intends to implement changes to the expenditure credit from April 2025. The call for evidence will close on 3 January 2024 with a view to implementing additional tax relief for expenditure on visual effects as part of AVEC by April 2025.

For more information, click here. For more information on the Call for Evidence on the visual effects industry, click here, and to respond to the Call, which closes on 3 January 2024, send responses to: VFXcfe@hmtreasury.gov.uk