Following consultation with the film industry, the Government yesterday announced certain changes to the proposed new tax credit. Our feeling is one of cautious optimism; cautious, because (i) only an outline of the proposals was published with details to follow on the publication of the Finance Bill 2006 and (ii) the proposed relief (and the cultural test in particular) remains subject to comment by the European Commission under state aid rules; optimism, because it appears to offer a cash benefit of up to 20% for productions of less than £20m and a cash benefit of up to 16% for productions of greater than £20m.

Transitional rules

The Government has not, at this stage at least, elected to extend the transitional provisions for section 42 and section 48 relief. Their intention is to push forward with the introduction of the new tax credit by 1st April 2006 but whether this is feasible remains to be seen. An extension may therefore still be introduced in the next few months.

Cultural test for British films

In response to the consultation with the film industry, the announcement revises the points allocated between the three sections so that:

Section A: Cultural content, now attracts 4 points (previously 5).

Section B: Cultural hubs, now attracts 15 points (previously 10).

Section C: Cultural practitioners, now attracts 13 points (previously 15).

Please click this link to access the DCMS’s paper on the new cultural test. Guidelines relating to the test are expected shortly.

A film must receive at least 16 points to pass the test and qualify for the new relief.

The change in allocation of points demonstrates a clear intention to encourage investment in infrastructure within the UK thereby achieving the government’s stated goal of creating a sustainable environment for the production of British films. It offers particular encouragement to UK studios, visual effects companies and music recording facilities.

There are a few important points to note:

  1. Pre-certification is intended to be introduced subject to regulatory assessment. If implemented simply and efficiently the process should add a level of certainty enabling producers to raise finance against the tax credit.
  2. Eligible co-productions will continue to be treated as British films and thereby count towards claiming eligibility, with points being awarded to co-production elements from both the UK and co-producing state.
  3. The cultural test may be subject to amendment as a result of the notification of the proposed new tax relief to the European Commission for comment under state aid rules.

So who qualifies for the relief?

The film production company. This is the company responsible for the principal photography and post-production stages of the film and for completion of the finished film rather than (as proposed in the July 2005 Consultation Paper) the company which incurs all production expenditure on the film and owns all rights in it on completion. This is an important change as the company eligible for relief is no longer required to hold the rights in the film at completion. The change suggests that the Government is keen to create a legal and economic environment compatible with the requirements of US studios.

What level of benefit will be available?

The Treasury press release states that the cash benefit to productions of less than £20m will be at least 20% of total spend and the cash benefit to productions of greater than £20m will be at least 16% of total spend. Making certain assumptions from the July 2005 Consultation Paper, we concur with the Treasury’s estimate of a cash benefit of 20% for smaller productions but are awaiting clarification from HMRC on the calculation of the benefit on larger productions (our calculations, based on the assumptions set out in the July 2005 Consultation Paper (which we assume will continue to apply except as otherwise stated in yesterday’s announcement), suggest a net cash benefit of 11.2%).

Film Production and Acquisition Expenditure

The Government proposes replacing sections 40A and 40B at the same time as the new relief is introduced with a new treatment applying solely to film production. Under the new rules a film production company will be deemed to be trading as soon as it receives any film-related income (ie grants, subsidies, loans etc) or incurs any film production expenditure. The new treatment will mean that relief can be claimed once trading commences (ie at the commencement of the film-making process) as opposed to the existing rules which apply only when the film is completed.

The treatment only applies to companies and specifically excludes partnerships involved in film production.


The Government has promised further crackdowns on tax avoidance schemes which seek to exploit existing film relief. Further announcements may therefore be expected shortly, particularly in relation to those schemes which make use of Generally Accepted Accounting Practice (GAAP) to create tax losses.

Contacts at Bird & Bird

To discuss further, please contact:, 020 7415 6093, 020 7905 6349, 020 7905 6258, 020 7415 6123