New film tax relief receives EU state aid approval

23 November 2006

Mathew Oliver

On 22 November the UK's new film tax relief rules, as announced in the 2006 Budget, received formal state aid approval from the European Commission.

There will now be a new set of rules for the taxation treatment of film production companies which determine how their profits are determined for tax purposes and a new enhanced relief for certain expenditure incurred by film productions companies in respect of films which meet certain tests, including a new test for “culturally British films”.

In order to obtain State Aid approval, the Government had to amend the “cultural test” which identifies culturally British films. The effect of the changes from the previously published test is as follows: the Cultural Content test has been increased from a potential 4 to 16 points; the Cultural Hubs test has been reduced from a potential 15 to 3 points; the Cultural Practitioners test has been reduced from a potential 13 to 8 points; and a new Cultural Contribution test has been added which carries a maximum of 4 points. The total number of points available is now 31 but the required minimum of 16 remains the same. A summary of the revised cultural test is set out below. Further guidelines are expected from the DCMS shortly.

The new test will be submitted before Parliament for approval before the year end and should come into force for films commencing principal photography on or after 1 January 2007. The new films tax incentives, along with the revised cultural test, should therefore apply from 1 January 2007.

Under transitional rules, films which commenced principal photography before 1 January 2007 and are complete by that date will not be covered by the new rules. They will instead fall within s42 F(No.2)A 1992, provided they satisfy the relevant conditions.

Where a film commenced principal photography before 1 January 2007 and is still uncompleted by that date then:

  • the film will fall within the new rules if it is a qualifying co-production (and relief will be available if the other conditions are met);

  • if the film is not a qualifying co-production:

    • it will fall within the new rules if it satisfies the new cultural test (and obtain relief if the other conditions are met); or

    • if it does not satisfy the cultural test, it will continue to be within s42 F(No 2) A 1992 provided the conditions under that section are met.

HMRC are currently silent on the application of section 48 relief for low budget films during the transitional period.

TV productions commencing principal photography on or after 1 January 2007 will be within the new tax regime for film production companies (although not eligible for enhanced relief). Other TV productions will still be covered by s40A and 40B F(No. 2)A 1992.

If you wish to discuss any element of the new film tax regime please contact:

peter.dally@twobirds.com, 020 7415 6093
mathew.oliver@twobirds.com, 020 7905 6258

Revised Cultural Test





























































































































Revised Cultural Test


Revised points





A


Cultural Content



A1


Film set in the UK


4


A2


Lead characters British citizens or residents


4


A3


Film based on British subject matter or underlying material


4


A4


Original dialogue recorded mainly in English language


4



Total Section A


16





B


Cultural Contribution




Films contributes to the promotion, development or enhancement of British culture in the areas of cultural diversity, cultural heritage and creativity


4



Total Section B


4





C


Cultural Hubs



C1


Studio and/or location shooting/ Visual Effects/ Special Effects


2


C2


Music Recording/Audio Post Production/Picture Post Production


1



Total Section C


3





D


Cultural Practitioners



D1


Director


1


D2


Scriptwriter


1


D3


Producer


1


D4


Composer


1


D5


Lead Actors


1


D6


Majority of Cast


1


D7


Key Staff (lead cinematographer, lead production designer, lead costume designer, lead editor, lead sound designer, lead visual effects supervisor, lead hair and makeup supervisor)


1


D8


Majority of Crew


1



Total Section D


8






TOTAL ALL SECTIONS (pass mark 16)


31



Authors