Treasury tax credit changes risk 'serious harm' to screen sector
ScreenPower: where the screen industries meet politics and power
Hello and welcome to ScreenPower: a newsletter from the intersection of the UK’s screen industries, with Westminster and Whitehall. Here is a short post on why I’ve started ScreenPower.
In today’s edition…serious concern about the Government’s proposed changes to film and TV tax reliefs, and industry fears over attempts to define a documentary in law.
If it ain’t broke…
Background: The UK is one of the best places in the world to produce big budget films and high end TV (HETV). Successive UK governments have played a big part in that growth, having created a generous set of tax incentives to attract record inward investment in recent years. There’s a reason why Barbie - the highest grossing global release in Warner Bros. 100 year history - was mostly filmed in the UK (in fact there are number of reasons - but the tax incentive is a key driver).
HMT: From time to time, HM Treasury (HMT) will - very reasonably - kick the tyres on these tax incentives, ensuring they represent value for money. I was a part of this when I was at HMT. Internally, there’s a recognition that they generate a return on investment - both economic and fiscal - in multiples of the initial cost (see the BFI’s 2021 Screen Business report for stats that were endorsed by Rishi Sunak when he was Chancellor). But any tax incentive with a ~£1bn annual price tag is always going to attract attention. So, in November last year, HMT launched a consultation into the reliefs.
How did it go? The consultation was a mixture of housekeeping, some necessary technical changes - e.g. moving from a relief to the Audio-Visual Expenditure Credit (AVEC) - but also some seriously eyebrow-raising proposals that rang alarm bells across the sector.
I have huge respect for HMT officials - and perhaps some of this was Treasury pitch-rolling (no bad thing) - but it certainly spooked a lot of people. The process itself - aside from the eventual outcome - probably dented confidence to some extent. Maybe that was unavoidable - and again, it’s entirely right to interrogate the value of these reliefs. But when there is a premium on stability - as there is with any incentive designed to attract long-term inward investment - then uncertainty comes with a cost.
So what happened? To their credit, HMT engaged with the sector to understand the concerns - and by this year’s Spring Budget, it was in a better place. However, two major concerns remain: Government’s attempt to define a documentary in law; and a seemingly innocuous sounding measure that experts warn could seriously harm investment into the sector:
Industry concern #1
On that innocuous sounding measure…
The Government’s Draft Finance Bill contains most of the changes HMT wants to make to film, HETV, animation, children’s TV, and gaming tax reliefs - as it transitions them to the new expenditure credit. As currently drafted, the Bill contains a particularly problematic line for the industry: ‘Expenditure is excluded expenditure to the extent that it represents connected party profit’ - it then goes on to define ‘connected party profit’ (p27, clause 1179DU).
Why is this so tricky? This might not sound like much, but it effectively restricts what can be claimed under the expenditure credit, by imposing blanket anti-avoidance measures that don’t recognise the fact that the TV and film industries (including animation and children’s TV) work in ways that are different to pretty much any other UK sector.
Who would be affected? Some of the biggest players in the UK film and TV sector would find this highly problematic, because it would penalise transactions with production businesses they’ve set up in the UK, or brought over here.
I spoke to Stephen Bristow - a Partner at accountants Saffery: “It’s really concerning. If this clause stays in the Bill as currently drafted, it will undoubtedly make the UK less attractive as a destination for film and TV investment - and it goes against HMT’s promise in the original consultation to maintain the generosity of the existing regime.” Which creates more uncertainty/instability.
Far reaching consequences: It has knock-on consequences for the VFX and post-production sector too. Neil Hatton, Chief Executive of the UK Screen Alliance told me he’s “deeply worried” about the potential impact, coming just as the VFX sector begins to really feel the pinch of the US writers’ and actors’ strikes: “it has the potential to remove an important source of investment from the VFX sector at the worst possible time, by disincentivising global producers who have invested in British companies in their supply chain from using the very companies they’ve built. The connected party clauses will drive investment away from the UK rather than attracting it. “
So why are they doing it? Bristow told me “it’s not clear what problem HMT officials are trying to tackle with this measure - but if their concern is inflated production fees, then they already have powerful anti-avoidance tools that they could use. This is a really blunt instrument that will do serious harm”.
A New Hope? Bristow remains positive: “The good news is the whole of the industry have raised concerns regarding connected parties - so I’m optimistic that HMT officials are listening to our concerns”.
Industry concern #2
The second big issue is around a simple question: what is a documentary? That’s a question HM Treasury are trying to answer. Why?
Current rules: Currently, for a production to qualify for HETV relief, it has to be either a drama, a comedy or a documentary (while also meeting certain conditions). HMT want to tighten up the rules around what qualifies as ‘a documentary’ by defining it in law - and they’ve had a first stab in the draft legislation (p19, C. 1179DF).
Why? In the original consultation, HMT mentioned ‘boundary pushing’: “the government has seen an increasing number of HETV tax relief applications from programmes that are borderline reality television.” But who decides what is and what isn’t ‘reality television’ - and where does HMT draw the line? They’ve tried to flesh some of this out in their definition - which goes much further than the BFI definition they pledged to use as a starting point.
What’s the issue with the new definition? It potentially excludes some common practices and production methods - e.g. the use of celebrities in fronting documentaries - and anything that happens in the show that has “to any significant degree, been arranged for the purposes of the programme” - a pretty broad definition, and again, who decides what ‘to any significant degree’ means in practice? HMRC?
The UK’s unscripted sector (already not having the best time) are understandably concerned. Production methods used in documentaries have thankfully come on in the past few decades to ensure the genre remains accessible - and that it can bring important issues to as wide an audience as possible.
Fair? You might think ‘well if you write the cheques then you can write the rules’, but this is a powerful lever that could have a significant impact in two ways: 1) through influencing what British content gets made and what we see on our screens; and 2) more importantly for HMT, it could mean that shows previously qualifying for HETV relief as documentaries simply go overseas to be produced - an economic and cultural net loss.
It’s worth saying that many in industry welcome - in principle - the idea of a definition that brings clarity and maintains the integrity of the relief regime. But if HMT (and/or HMRC) are going to wade into Reithian territory, they need to fully consider the cultural and economic consequences of landing on a definition that is both narrow and antiquated.
Answers on a postcard: HMT is welcoming views on the above issues - or anything else in the draft legislation - until 12th September.
Final thought…
HM Treasury has a fascinating and unusual relationship with the screen sector. Having made a significant contribution to its growth over the past decade and a half, HMT now has powerful economic and cultural levers over large parts of a sector that is a British success story - but also vulnerable to flight risk. A few % points off the headline rate of film or HETV tax relief (or AVEC equivalent) could see big studios up sticks almost overnight and head to one of the many other countries with attractive tax incentives.
Aside from some of the highly targeted support seen during the pandemic, it’s hard to think of other examples of HMT having such direct, specific and powerful levers over a single sector. Financial services is one for sure – and possibly some of the sectors particularly exposed to duties - but there aren’t many. I wonder if that point has really sunken in at HMT yet.
Let’s see how the issues above pan out over the coming weeks - I have faith in former colleagues at 1 Horse Guards Road.
Reminder
In addition to the HMT deadline on 12th September, the House of Commons Culture, Media & Sport Select Committee are inviting views on a range of issues relating to film and HETV by 19th September.
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