High-End TV/Animation Tax Credit – Draft Legislation Published Today

December 11, 2012

Today the Government published draft legislation for tax relief for high end television production and animation.

This draft legislation has been published only 15 months after Charles Moore, Film & TV Partner at Wiggin LLP, along with Stephen Bristow of Saffery Champness (ex-RSM Tenon), initiated the campaign for the introduction of the TV Tax Credit.

There will now be a 12-week consultation period on this draft legislation, ending on February 6, 2013.  As members of the TV Coalition, we will be feeding industry responses on today’s draft legislation back to Government during the consultation period.

Here are the key points of the draft legislation:

What programmes are eligible?

(a)     Drama (which includes comedy) and documentaries which in each case have a slot length greater than 30 minutes (note that, as this legislation is currently drafted, this means that 30 minute programmes would not be eligible) with average “core expenditure” per hour of slot length of not less than £1,000,000.

(b)     Animation.  Note a drama or documentary will be treated as animation if expenditure on the animation is at least 51% of the total “core expenditure”.

Programmes commissioned together under one agreement will be treated as a single programme.  If this remains the case in the legislation when enacted, this means that single episodes of a series will only be eligible if commissioned separately from the rest of the episodes in a series.

The draft legislation applies to programmes produced for traditional television broadcasting but also programmes made to be seen on the internet.  This is a welcome acceptance of the new world of television.

What programmes are not eligible?

Advertisements, news or current affairs and discussion shows, quiz, game, panel, variety and chat shows and other similar entertainment, competitions and results of competition shows, live event and performances given (otherwise than for the purpose of being filmed) and training programmes.

Who can claim?

Only a “television production company” can claim the relief for a programme.

The definition of “television production company” (“TPC”) used is the same as for the film tax relief regime: there are different definitions depending on whether the programme is a co-production or not.  In both cases, the TPC must (a) be a company, and (b) be within the charge to UK corporation tax (which could be through a UK permanent establishment instead of being incorporated as an English company).

As with the film tax relief, a TPC may sub-contract and need not be the owner of the programme nor of its distribution rights.

Key  Requirements

The following three key requirements must be satisfied in order for the TPC to claim TV tax relief:

(i)                   The programme must be “intended for broadcast to the general public”: the test is one of intention and, importantly, only a test of intention when the television production activities begin.  Note that this is different from the equivalent for the film tax relief.

(ii)                 The programme must also be certified as British: this is possible by one of two routes:

• it passes the Cultural Test (on which, see further below); or
• it is a qualifying co-production.  This means programmes co-produced under a relevant co-production treaty.  Currently, the UK has treaties which apply to television programmes with (i) Australia, (ii) Canada, (iii) France, (iv) Israel, (v) New Zealand, and (vi) the Occupied Palestinian Territories.  There may be new treaties from time to time and indications from Government are that some of the existing treaties will be amended to apply to television co-productions as well as to film co-productions.

(iii)               Minimum expenditure thresholds are met: at least 25% of the total “core expenditure” must be “UK expenditure”.  This minimum threshold must be incurred by the TPC or, in the case of a qualifying co-production, by the co-producers.  This is the same test as with the film tax relief regime.

“Core expenditure” is expenditure on pre-production, principal photography and post-production of the Programme.  This means, for example, certain development costs, distribution costs and costs of finance will not attract the tax relief.

“UK expenditure” is expenditure on goods or services “used or consumed” in the UK.

Cultural Test

The two new draft Cultural Tests for drama and documentaries and for animation programmes are substantially the same as the existing Cultural Test for films.  16 points will be required out of a possible 31 points in order to qualify as a British programme.

The key difference to the film Cultural Test is the expansion of the so-called “Cultural Content” section to include the EEA, as well as the UK.  Points will now be awarded for programmes: (i) set in the UK or another EEA state; (ii) with lead characters from the UK or another EEA state; and (iii) depicting a British story or a story which relates to an EEA state (including where the underlying material is British or relates to an EEA state).

Note also that there is no modification to the so-called “Cultural Practitioners” test, which remains the same as the Cultural Test for films.  This means that there is no additional flexibility given in respect of the hiring of non-EEA key talent, which some producers believe to be important for long-running TV series.

Value of the tax credit

As with the film tax relief, TPCs can claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, surrender those losses for a payable tax credit.

Both the additional deduction and payable credit are calculated on the basis of UK core expenditure up to a maximum of 80% of the total core expenditure by the TPC. The additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered.

Therefore, a TPC will be able to claim a tax credit equal to 25% of UK core expenditure up to a cap of 80% of total core expenditure. This means that for a production where 80% or more of the total core expenditure is incurred in the UK, the payable tax credit will be 20% (25% of 80%) of the total core expenditure.

When will the tax relief be available?

It is expected that the tax relief will be in effect and will apply to qualifying expenditure incurred on or after April 1, 2013, subject to EU state aid approval.