Update on the UK Tax Credit for Animation

05 March 2013 // News

Many thanks to Harbottle & Lewis for allowing us to reproduce their latest report on the UK tax credit for animation:

Following several months of consultations the Government has now published draft legislation for the much heralded tax relief for animation (“the Relief“) which will come into effect in the Budget in April 2013.

The Benefits of the Relief

The Relief will provide animation producers with either an enhanced tax relief (achieved via an additional deduction in its corporation tax calculation) or a payable tax credit. The payable tax credit will be 25% of qualifying expenditure, subject to a cap of 80% of such expenditure (giving an effective rebate of 20% of relevant spend) or an additional deduction from their corporation tax calculation of 100% of enhanceable expenditure. This is on a par with the existing film tax relief and amongst the most generous in the world.

Animation Tax Relief

In order for a programme to qualify for the tax relief, the following criteria will need to be met:

The programme must be an “animated” programme, though it may be mixed content.
- The Government has decided to leave the definition of “animation” to its ordinary meaning and has not introduced specific wording. The aim is to be flexible. Only 51% of the programmes’ production costs need to be spent on animation allowing more mixed content productions.
- Animation that is produced for advertising, news, current affairs programmes, competitions or training programmes are excluded. A specific exclusion for animation with a pornographic content is not provided for in the draft legislation as the Government thinks that there are sufficient existing safeguards to exclude such programmes.
The programme must be intended for broadcast. The Government has determined that there needs to be a distinction between early stage development costs with no end product and costs where there will be an end product. Accordingly early stage development costs will be eligible for relief, but only once a programme has passed the cultural test and is clearly intended for broadcast. Detailed guidance on the workings of this test will be published in due course by HM Revenue & Customs.
The programme must satisfy a cultural test.
- The cultural test is included as part of the draft legislation. Detailed guidance on the application of the test will be published in due course but to be eligible for relief a production must either score at least 16 points out of a possible 31 or be made under a co’production treaty.
- The Government has helpfully allowed programmes to score points not only where they are set in the UK/EEA, but also when they are set in an “undetermined location”. Animations with characters from “undetermined locations” can also score points. Given the invented settings of many animation programmes this is likely to be particularly useful. Full guidance is still waited on the test and this will be important as there are certain remaining issues that need to be clarified. For example the draft test states that points are to be allocated for programmes depicting “a British/EEA story”, which is narrower than the expected position outlined in the Government’s consultation paper where points were also available if the underlying material for the story was conceived by a UK/EEA resident or citizen. Likewise the potential to receive up to two points for “artistic costs” accounting for more than 50% of the budget has been removed.
The entity seeking relief must be either a UK company or an overseas company within the charge to UK corporation tax.
- The company must be responsible for actually producing the content and actively involved in the decision making process relating to delivering the programme.
- This is clearly intended to preclude financiers from claiming the tax relief, but it may also affect rights owners who engage a third party production company to undertake some or all of the production activities on their behalf.
Qualifying Expenditure. The tax relief only applies to qualifying expenditure, being production expenditure on pre’ production, principal photography and post production of the programme. Detailed guidance will be published in due course and it is expected that genuine re’charges of costs incurred internally by the production company (e.g. on personnel, overheads, etc.) will be allowable, as well as a production fee of up to 10% of the budget.
Minimum Expenditure. At least 25% of core expenditure must relate to goods/services used or consumed in the UK. There is still some lobbying by the post production community to bring this down to 10%
Co’productions. The Government has also confirmed that co<productions will be eligible for the relief by virtue of being made under one of the UK’s international co<production treaties (Australia, Canada, France, Israel, New Zealand, Palestine).

Cultural Test Criteria

Cultural Content (16 points) or an undetermined location

Up to 4 points depending on the percentage of the programme that is set in the UK, another EEA state or an undetermined location:
- (i) 4 points if at least 75% is set in the UK or another EEA State;
- (ii) 3 points if at least 66% is set in the UK, another EEA State or an undetermined location;
- (iii) 2 points if at least 50% is set in the UK, another EEA State or an undetermined location;
- (iv) 1 point if at least 25% is set in the UK, another EEA State or an undetermined location;
Up to 4 points depending on the number of the characters depicted in the programme that are from the UK, another EEA state or an undetermined location:
- (i) if there are more than three characters depicted in the programme, 4 points if two or three of the three lead characters are; or, if only one of the three lead characters is from the UK, another EEA state or an undetermined location, 2 points if that character is the first or second lead, 1 point if that character is the third lead;
- (ii) if there are only three characters depicted in the programme, 4 points if two or three of them are; or, if only one of them is from the UK, another EEA state or an undetermined location, 2 points if that character is the first or second lead, 1 point if that character is the third lead;
- (iii) if there are only two characters depicted in the programme, 4 points if both of them are from the UK, another EEA state or an undetermined location, 2 points if one of them is;
- (iv) if there is only one character depicted in the programme, 4 points if that character is from the UK or another EEA state or an undetermined location;
4 points if the programme depicts a British story or a story which relates to an EEA state;
Up to 4 points depending on the percentage of the original dialogue that is recorded in the English language or in a recognised regional or minority language as follows:
- (i) 4 points for at least 75%;
- (ii) 3 points for at least 66%;
- (iii) 2 points for at least 50%;
- (iv) 1 point for at least 25%.

Cultural Contribution (4 points)

Up to 4 points may be awarded in respect of the contribution of the programme to the promotion, development and enhancement of British culture.

Cultural Hubs (3 points)

Up to 3 points shall be awarded in respect of work carried out in the making of the programme as follows:
- a) 2 points if at least 50% of the work carried out on any of the following is carried out in the UK:
  - shooting;
  - visual design;
  - layout and storyboarding;
  - visual effects;
  - special effects.
- 1 point if at least 50% of the work carried out on any of the following is carried out in the UK:
  - performing and recording the music score created for the programme;
  - voice recording;
  - audio post production;
  - picture post productions.

Cultural Practitioners (8 points)

Up to 8 points shall be awarded in respect of ‘qualifying persons’ (i.e. a citizen or someone ordinarily resident in UK or another EEA state) involved in the making of the programme as follows:
- 1 point if the director (or, if there is more than one, the lead director) is a qualifying person;
- 1 point if at least one of the scriptwriters (or, if there are more than three, one of the three lead scriptwriters) is a qualifying person;
- 1 point if at least one of the producers (or, if there are more than three, one of the three lead producers) is a qualifying person;
- 1 point if the composer (or, if there is more than one, the lead composer) is a qualifying person;
- 1 point if at least one of the actors (or, if there are more than three, one of the three lead actors) is a qualifying person;
- 1 point if at least 50% of the cast are qualifying persons;
- 1 point if at least one of the heads of department is a qualifying person;
- 1 point if at least 50% of the production’s crew are qualifying persons;

You can download the Tax Credit for TV Animation – Jan 2013 report as a PDF by clicking the link.