UK response to the draft Cinema Communication

Transcription

1 A. Introduction 1. The United Kingdom would like to thank the Commission for sharing this draft Communication and for the opportunity to comment. 2. The audio-visual sector is of great cultural importance to Europe and provides a significant number of highly skilled jobs. It is now almost ten years since the current Communication was produced and it is timely that the Commission review the rules on support for film to ensure that the sector remains dynamic but that the competition is not compromised. 3. Two-thirds of respondents to the British Film Institute s 2011 film culture survey 1 reported that film gave them new insights into other cultures and ways of life. The cultural contribution of film is embedded in the UK s way of life, influencing and inspiring the public and helping us understand not only ourselves, but also our society, our history, and our place in the world. The potential for film to make a cultural contribution is further increased by the growth of digital access, which is expanding the means and ways by which films are viewed. The UK Government is committed to supporting the cultural contribution of film and appreciates the role that the Communication plays in this process. 4. As the UK made clear at the Competitiveness Council meeting in May, we support the Commission s work in ensuring that State aid rules are fit for purpose. In particular we agree that growth can best be achieved through good aid which meets a clear market failure. We also agree with the aims of targeting Commission resource to the most effective forms of aid, simplifying procedures and ensuring effective enforcement and monitoring. This is the way forward and should result in a solid framework to the benefit of all Member States. We welcome the fact that these underlying principles are reflected in the draft Communication. 5. Aid for the audio-visual sector addresses identified market failures in production finance that can lead to the underproduction of cultural goods and hinder cultural diversity. In the UK s view this is the sort of good aid which not only produces cultural benefits, but also supports economic growth and the creation of highly skilled jobs. Whilst the UK has some comments on the draft Communication, we fully accept that there is a need to monitor aid to ensure that potential subsidy races do not undermine the lasting growth Europe needs. 6. The remainder of this letter sets out the UK Government s views on the draft Communication. Whilst we support the overall aims of what the Commission is trying to achieve, we do have some concerns about the detailed proposals that have been put forward, in particular changes to territorial spending obligations and proposals to address competition to attract foreign producers. In their current form, the changes could have a detrimental effect on the operation of existing audiovisual support schemes and on the UK and European film industries. Where possible we have included evidence to support the likely negative impacts of these changes. We would 1 Opening Our Eyes, July 2011, British Film Institute

2 welcome continued open dialogue with the Commission to ensure that the final proposals meet the desired aims and work for the industry, Member States and the Commission. B. Scope of Activities 7. We agree with the Commission s assertions in paragraphs 2.15 to 2.18 that the protection and promotion of Europe s cultural diversity can only be fully achieved if the works in question are seen by audiences; indeed, an emphasis on the importance of the audience is the primary theme of the recent independent UK Film Policy Review, which the Government and industry have warmly welcomed, and which informs the British Film Institute s 2012 future plan New Horizons for UK Film. 8. We welcome the Commission s intention to extend the scope of activities covered by the Communication to include all aspects of film production, from story concept to delivery to the audience. We also welcome acknowledgement that certain aspects of audiovisual activity will be assessed on a case by case basis. 9. The UK Government also welcome the Commission s focus on digital and future readiness in paragraph 2.19 of the draft Communication and the aim to ensure that the Communication remains fit for purpose as technological change continues to transform the creative industries at an extremely rapid pace. By giving people more of what they want, when they want, from the viewing platform of their choice, we believe that the cultural identity of Member States will thrive, and that in turn this will drive growth, create jobs and maximise intellectual property revenue for the EEA as a whole. 10. The speed of change presents both huge challenges and opportunities for the film sector, and we agree that limiting State aid support to traditional platforms of theatrical and broadcast release could prove a barrier to progress. We therefore welcome the move to define the film production component of non-traditional audiovisual projects as audiovisual works in the new Communication. Given the uncertainty as to how business models and technology will develop in the future, we suggest that the definition of these in terms of assessing aid should be flexible enough to allow for future developments. 11. The UK Government agrees that video games represent a significant opportunity for Europe in the coming years and there is increasing evidence of the need for the sector to receive State aid on cultural grounds. We note the recent successful renotification of the French video games tax relief, and the Commission is aware of the UK s intention to notify a new video games tax relief on cultural grounds shortly. We appreciate the rationale for not including video games in the Cinema Communication at this time but suggest that this may be reconsidered at a future date. C. Territorial spending obligations 12. One area where the UK Government would welcome further discussion and clarification is on the proposed changes to territorial spending obligations. As identified in the 2008 report on territorial conditions commissioned by the

3 Commission and cited in the draft Communication, the evidence on the economic and cultural impact of territorial conditions is inconclusive. It is the UK s position that any changes to the Communication should only be made on the basis of solid evidence and taking into account the views of all stakeholders. 13. The draft Communication includes two fundamental changes to existing rules which the UK Government believes could have a detrimental effect on the operation of existing audiovisual support schemes and on the UK and European film industries. The first is that Member States can only require up to 100% of the aid awarded to the production of a film is spent in the territory offering the aid. The second is that any production expenditure within the EEA must be eligible for aid rather than expenditure within a particular territory. 14. It is understood that the Commission is looking to address a situation where some Member States currently impose that up to 80% of an entire film budget has to be spent in their territory, regardless of the amount of support given. The UK Government agrees that a situation where a relatively small amount of aid ties significant amounts of production expenditure to a particular territory is not a desirable outcome. This could potentially affect competition and trading conditions to an extent contrary to the common interest. However, the proposals put forward to address this would produce unexpected consequences that would restrict the willingness and ability of Member States to provide aid to promote culture in a way that is consistent with the common interest, and could hinder growth and employment in these sectors. 15. Of particular concern to the UK Government is the effect of the Commission s proposals on the UK s film tax relief, the primary mechanism for providing support for UK film production (Annex A provides further details about how this scheme works). It should be noted at the outset that UK film tax relief does not require that 80% of a qualifying film budget is spent in the UK regardless of the amount of support given. The aid amount is calculated on the basis of the amount of UK qualifying production expenditure. In addition, the film tax relief defines UK qualifying expenditure as expenditure on goods and services which are used or consumed in the United Kingdom. The nationality of those providing the goods and services has no bearing on whether the expenditure qualifies. The used or consumed test does not focus on the supplier of goods and services, but instead concentrates on the recipient or customer as the means of determining UK qualifying expenditure. For example, if a UK film production company commissions a designer based in France to design and make costumes for a film in which all principal photography is filmed in the UK, the expenditure on the costumes will qualify as the customer uses or consumes them in the UK. 16. The proposals as currently drafted risk undermining the primary cultural aim of audio-visual incentives such as the UK film tax relief, making them less effective at ensuring that the UK s national and regional cultures are expressed in film. Territorial requirements are based on Member States desire for the benefits of support provided to the film industry to be enjoyed by those who provide it. Support provided to the British film industry ensures that UK audiences are able to enjoy a diverse set of high-quality films that are a relevant expression of the British culture. UK film policy allows for local and regional industries to build a critical mass of infrastructure,

4 expertise and facilities whilst ensuring that cultural perspectives unique to an area are able to influence the product. 17. Given the mobile nature of the film industry, one of the main aims of film support measures has to be the generation of a critical mass of activity within the Member State or region granting the aid in order to stimulate the development and consolidation of the necessary skills and infrastructure. The UK welcomes the Commission s endorsement of this position, which is a central policy aim of the UK film tax relief that has been highly successful in developing skills and infrastructure in the UK s film sector since its introduction in 2007, supporting over 1 billion of investment into UK films in 2010/11. However, limiting territorial conditions to 100% of the aid amount given will undermine this progress as the UK may not be able to attract the necessary additional investment from producers to maintain this critical mass. 18. Contrary to the Commission s implicit aims, these changes could lead to a situation where production companies are able to access a much larger amount of aid across a number of Member States without any corresponding increase in activity or investment into the European film sector. As such, the result of limiting the ability for Member States to impose territorial conditions in the way proposed is that Member States are likely to reduce funding or even close schemes, which would result in fewer films being made in the UK and in Europe. 19. By way of example, using the UK film tax relief, it is possible to see how the changes put forward could create perverse incentives for production companies in a way that works against the Commission s aims to support the long-term sustainability and diversity of the European film sector. These changes could lead to a situation where production companies are able to engage in subsidy shopping, accessing higher incentive amounts across a number of Member States without a compensatory increase in the overall level of European film production. In contrast to the Commission s aims, these changes could therefore encourage the fragmentation of the European film sector and result in a loss of skills, infrastructure and production activity. It should be noted that as an automatic tax incentive, there is no facility, such as a selection panel, within the UK film tax relief to prevent an eligible production company that passes the cultural test from accessing the aid available. 20. As the following scenario demonstrates, under the new set of rules it is possible for a film producer to cover their production costs up to the 50% cumulation limit using tax incentives provided by Member States. Not only has the producer not provided any additional investment of their own into Europe, but there is also an incentive to shift remaining production outside of Europe, for example to Canada, Australia or the US, in order to qualify for non-eea support over the remaining 50m. No such incentive exists under the current UK film tax relief rules. To qualify for maximum aid intensity (20% for a limited budget film and 16% for a large budget film) a production company would need to spend at least 80% of its budget on qualifying goods and services that are used or consumed in the UK.

5 Example 1: (assuming a 20% tax incentive in each EEA and non-eea country) Country Production expenditure Value of tax incentive UK 10m 10m Member State 2 10m 10m Member State 3 10m 10m Member State 4 10m 10m Member State 5 10m 10m Non-EEA country 50m 10m TOTAL 100m 60m 21. This example may be extreme as commercial factors other than government support (e.g. administrative costs, time constraints and infrastructure requirements) will also influence production decisions. However, the proposed changes would remove Member States ability to require additional investment, which would call into question the continued financial viability of existing support schemes, such as the UK film tax relief, where the required policy outcomes cannot be guaranteed. It would not be worthwhile for Member States to offer support if for every 1 of aid provided only 1 of investment benefited that Member State directly as this would not produce the necessary overall investment to support domestic sectors Notwithstanding these points, which relate directly to the contents of the draft Communication published for consultation, the UK Government welcomes the positive response it has received from the Commission on these points over recent weeks. In particular, we welcome the clarification made in the FAQs published on the Commission website that aid conditions which are based on the place of use or consumption of the goods or services, irrespective of their origin, are not considered to be territorial spending obligations. The UK film tax relief definition of UK qualifying expenditure refers to goods or services used or consumed in the UK, and therefore allows for eligible expenditure within the EEA. 23. Based on these clarifications, we do not expect the UK film tax relief to be impacted by the proposals in respect of territorial spending obligations. Nevertheless, we have taken this opportunity to voice our concerns over the potential impact of requiring all EEA expenditure to qualify for support regardless of whether such expenditure benefits the Member State providing the aid in question. In order to avoid legal uncertainty, the UK Government would welcome formal clarification of the points raised in the FAQs by way of suitable inclusion in the Communication itself. D. Competition to attract foreign producers 24. The UK Government agrees with the Commission s understanding of the potential benefits that large scale productions can have on domestic industries. As

6 outlined earlier, a core aim of the UK film tax relief is to attract investment into the UK industry, helping to create and maintain a critical mass of infrastructure and skills to enable and support the sustainable production of culturally British films, including regional films. This in turn ensures that smaller-scale producers with limited budgets have access to the resources they need to make films that are of significant cultural value, but would otherwise not be made. Over 90% of films that have qualified for the UK film tax relief since its introduction in 2007 had limited budgets of 20m or less. 25. We note that the Commission, while accepting that aid for foreign productions is also likely to fulfil the aim of promoting culture, nevertheless proposes to set a cap on the maximum aid intensity for non-european films. This will hinder the creation of production hubs capable of producing large budget films, which are an essential element for ensuring the development and consolidation of the UK and European film industry. A critical mass of activity is necessary and this is only possible through large scale investment by more profitable sections of the film industry, which often takes the form of inward investment from non-eea sources. Aid intensity 26. The draft Communication proposes changes to aid intensity rules that would limit the total amount of support available from Member States to film producers as a percentage of the production budget. These changes would limit the total amount of support available to productions classified as non-european by the Commission. It is understood that currently any film may receive up to 50% of its budget from combined Member State support an important criterion in the deterrence of unfair competition between Member States but the draft Communication proposes the introduction of regressive banded aid intensity limits. We would be interested to understand how these proposed production expenditure bands and aid intensity limits were determined. Under the UK film tax relief a film with a production budget of 20m ( 25m) or less is considered a limited budget production. This threshold was determined in consultation with the industry and the Commission and recognises the size of film budgets both within the UK and internationally. We believe that any restrictions of aid intensities should not affect limited budget productions. 27. The draft Communication states that many of the films which are considered to be major third country projects are in fact co-productions involving also European producers. Thereby these subsidies would contribute also to the promotion of European audiovisual works and to sustaining facilities for national productions. This position does not take account of the significant positive effect that films made by non-eea producers in one Member State can have on the wider European film sector. For example, three large budget films backed by US studios qualified for UK film tax relief and brought 328 million ( 405 million) of production expenditure to Europe. Of this, 108 million ( 134 million) a third was spent on non-uk goods and services, benefiting the film industries of other EEA countries. This is in addition to any European production expenditure that qualified as used or consumed in the UK. Of the films qualifying for the UK film tax relief, on average only 75% of production expenditure has been used or consumed in the UK, meaning that at least a quarter of production expenditure is taking place outside the UK. The UK, along with other Member States with the capacity to host large productions, therefore acts as a hub from which production expenditure is spread across Europe.

7 28. The UK Government believes that allowing all productions the same access to support is the most effective way of ensuring that we have the required skills and infrastructure in the UK. Alternative mechanisms for encouraging skills and infrastructure for example through direct subsidies would be less effective and potentially more distortive than the current mechanism. 29. Indeed, the UK film tax relief has been highly successful in developing skills and infrastructure in recent years. A 2010 study 2 into the economic impact of the UK film industry found that despite the economic downturn the number of people employed directly in film production increased by 7 per cent since the introduction of the film tax relief in This reversed a previous trend where the size of the film production workforce declined by almost 25 per cent between 2003 and This growth in the size of the production workforce has taken place in response to a significant increase in the number of independent productions taking place in recent years. The resulting skills and talent produced has attracted inward investment from large scale productions that have in turn invested in key infrastructure. This includes a number of well-publicised investments by international producers into UK studio space and post-production facilities that has benefited the domestic industry who are now able to access these resources. European work test 30. The UK Government is concerned about the potential implications of introducing a regressive aid intensity scale for those productions classed as foreign productions according to the criteria set out in the annex of the draft Communication, particularly given that the proposed definition of a European film is not focused on the cultural content of the product. Indeed, the proposed introduction of a new and separate test for what constitutes a European work could restrict Member States ability to define culture as they see fit, which risks undermining the subsidiarity principle (see paragraphs 45 to 46 for further detail on this point). 31. We have assumed that any new requirement to pass a European work test would be in addition to any cultural tests that are currently administered by Member States, but would welcome clarification on this point. Having, in effect, a dual definition of a cultural work would be extremely complex to implement and monitor for Member States, and the Commission. This could deter investment in the EEA and drive business towards other non-european destinations, and it also conflicts with the Commission s desire to encourage and support the production of cultural works. 32. The proposals as currently drafted risk not only introducing considerable administrative burden for producers looking to make films in Europe and Government agencies trying to administer support, but could also lead to a number of peculiar and undesirable outcomes. For example, there may be a situation where 2 The Economic Impact of the UK Film Industry, June 2010, Oxford Economics ( 3 BFI Statistical Yearbook 2011, August 2011, British Film Institute (

8 a film qualifies as culturally British under the UK film tax relief cultural test, but fails the European work test. Not only do these proposals create uncertainty in the short term, potentially driving away investment at a time where investment and growth are paramount, but they would also create longer term uncertainty and potential inconsistency in the treatment of different producers. 33. We would therefore welcome the opportunity to discuss with the Commission how to mitigate the effects outlined above in order to safeguard the positive cultural benefits that accrue to a number of Member States as a result of non-european works being made in the EEA. Impact of proposals in a global context 34. As stated in our response to the Issues Paper last year, the UK Government believes that we must not put at risk the global competitiveness of the European film industry. The Commission s concerns regarding a potential subsidy race between Member States must be put in the context of a global industry. The introduction of any measures to ensure Member States are not engaging in a European wide subsidy race must be developed in a way that does not compromise the international competitiveness of European and national film sectors. 35. The regressive aid intensity scale presented in the draft Communication would mean that a 100m film classified as non-european would have a maximum aid intensity of 16%. After this threshold the total amount of aid available would decline steadily, with a 150m film receiving a maximum of 14% support from Member States and a 200m film receiving only 13%. This could impact on the investment and benefits provided to the UK and Europe from large foreign investors, such as US studios. 36. These changes risk setting the European film sector at a competitive disadvantage when compared to support available in third-country competitors. Notably: Country Maximum aid intensity 4 Canada United States 25% (Quebec and Ontario) 30% (New York), 25% (N Carolina), Ohio (25%) South Africa 20% Singapore 40% Australia 16.5% 37. It is understood that the Commission feels that State support should be limited for films that would, in all likelihood, be made whether or not they access State 4 Based on most recent publically available international data.

9 support. However, the reality is that film support schemes are available in a great many countries outside the EEA and accessing such support is now considered part of a standard funding model by most producers working with moderate sized budgets and above. Limiting support for non-eea films will simply lead to these films being made outside of Europe. The effect would be that the European film industry loses out not only in terms of net investment, but also in terms of culture as large budget films that would otherwise be made with European cultural content are made elsewhere without any European content. 38. A situation where the European film sector is struggling to compete for large budget films is undesirable. There is also a precedent within State aid to take account of the competitive advantage enjoyed by third-country competitors, for example in the case of State aid for Research and Development and Innovation. The UK Government therefore asks the Commission to reconsider the European work test and regressive scale included in the draft Communication to ensure that any changes do not put the European film sector at a competitive disadvantage or block legitimate cultural products. In an increasingly competitive world, and given the priority for growth across Europe, it would be counterproductive to enact proposals that make Europe a less attractive location for investment compared to the rest of the world. E. Improving Circulation of European Films and Audience Choice 39. Digital technologies and changing viewer behaviour and expectations are rapidly changing the way in which audiovisual content is produced, marketed, and distributed to consumers. As noted in at paragraph 9, we welcome the Commission s focus on digital and future readiness and the potential positive impact this has in improving public access to a wider range of audiovisual products on an everincreasing variety of platforms. 40. We note the Commission s wish to ensure that there are no unnecessary limitations imposed on the distribution and marketing of audiovisual works as a condition for supporting it, but it should be for individual Member States to determine what is necessary in this context. 41. We have responded separately to the Green Paper on the online distribution of audiovisual works, and welcome the Commission s positive move to open up a discussion and debate on issues that are important to stakeholders in the audiovisual sector. Alongside the Green Paper and the Cinema Communication, we note the crossover with the current proposal on an Orphan Works directive and the planned Framework Directive on Collective Rights Management. We are pleased to see the Green Paper referenced here and would continue to encourage a joined up approach in order to eliminate any inconsistencies between these initiatives. 42. On the Cinema Communication in particular, we welcome the Commission s intention to promote the international availability of films online. However, we believe that it is for the market to decide the appropriate approach to pursue this and therefore it should not be a condition of the aid. We welcome the general intention that aid could be used to increase distribution and believe that the public sector should be free to align with commercial activities in this sphere. Whatever mechanism is put in place to achieve wider distribution, we believe it is only right that

10 creators benefit from the proposals and any remuneration available is not subsumed by complicated administrative and licensing agreements. Furthermore, we would welcome clarification on the likely nature of possible adaptations to the regulatory framework in this area. 43. We recognise the importance of collecting, preserving and making accessible audiovisual works for future generations on cultural grounds, and believe that it should be up to individual Member States to determine whether a copy of the aided film is deposited with the appropriate film heritage organisation should be a requirement or encouraged as best practice. F. Assessing the Compatibility of the Aid 44. The UK scheme is consistent with the general legality principle and complies with the examples given by the Commission in section 42 of the Communication, although we have raised concerns elsewhere in our response about the proposed changes to territorial spending requirements. 45. Under the cultural derogation set out in Article 107(3) (d) of the Treaty on the Functioning of the European Union (TFEU), it is for individual Member States to determine a definition of culture appropriate at a national level. According to the subsidiarity principle, every film support scheme pursues a specific objective and has its own selection criteria, and we note that this is acknowledged by the Commission in paragraph 6.2 (44) (1). 46. We believe that the proposed introduction of a new and separate test for what constitutes a European work risks undermining that principle. Such a measure, as currently defined, would determine the amount of aid intensity available to a cultural work, and could have the effect of restricting the definition of culture which Member States set. 47. We welcome the higher aid intensity limit for cross-border productions funded by more than one Member State and involving producers from more than one Member State, as set out in paragraph 44 (2), and the confirmation that films in the language of regions with a limited territory, population and language area can be regarded as difficult audiovisual works and are therefore excluded from these limits. Even so, we believe that language is only one of several factors that may determine whether a film is difficult, and that the subsidiarity principle applies, given that it may not be appropriate to include such criteria within the definition for all territories. In the footnote to paragraph 44(2) the Commission appears to introduce a new definition of difficult audiovisual works, but we believe that this should be for individual Member States to determine in their territory. The UK introduced an appropriate test which was passed by the Commission and is currently working well in providing certainty for the indigenous industry. 48. We note the points made in 44 (3) (4) and (6). In relation to (4), while the UK only offers the minimum aid necessary to meet the objective, we believe that the different elements of the value chain should be considered separately and aid intensity levels evaluated on the basis of that analysis, as the Commission acknowledges by indicating that certain elements of audiovisual activity will be assessed on a case by case basis.

11 G. Other issues 49. The UK believes that the condition that Member States must update notified aid within 12 months of the publication of the new Communication may not provide sufficient time for Member States to meet their own policy-making and legislative requirements. In particular, the UK Government has committed to making changes to government policy following public consultation on the proposed changes with interested parties. We would welcome the Commission s views on how to accommodate Member States policy-making and legislative processes and, more generally, confirmation of when the new Communication is likely to be introduced and the process for updating existing State aid schemes. 50. The UK Government announced at Budget 2012 that it will introduce corporation tax reliefs for the animation, high-end television sectors in April The animation and high-end television will be notified under the Cinema Communication and, though we envisage that the video games tax relief will be notified as a separate case, there will be a strong read-across to the Cinema Communication. We are keen to gain State aid approval for these reliefs in a way that does not create uncertainty for these sectors and welcome the opportunity to work with the Commission to secure approval for these new schemes in a timely manner. Conclusion 51. Overall the UK Government supports the Commission s aims set out in this draft Communication to ensure the diversity and long term sustainability of European sector for audiovisual works. However, we are concerned that the specific proposals put forward in relation to territoriality obligations and State aid intensities for non-eea films risk undermining the economic viability of existing support schemes. Films are a valuable cultural product and Europe must remain competitive with the rest of the world in order to ensure that we do not lose out on the cultural benefits that a vibrant and diverse film sector can produce. We would welcome continued discussion with the Commission on the points raised in this consultation response.

12 Annex A UK Film Tax relief a brief guide Introduction 1. The UK s film tax relief ( FTR ) was introduced by Finance Act with a commencement date for films commencing principal photography on or after 1 January It replaced the previous tax reliefs relating to film-making. 2. The FTR is aimed at film production companies (FPC). Those FPCs that are entitled to FTR can claim an additional deduction in computing their taxable profits and where that additional deduction results in a loss, that loss may be surrendered for a payable tax credit. 3. Both the additional deduction and the payable credit are calculated on the basis of UK core expenditure (that is expenditure on pre production, principal photography and post-production) up to a maximum of 80% of the total core expenditure by the FPC. 4. The levels of the additional deduction and payable credit are dependent of the size of the film s budget. For a limited-budget film (one whose core expenditure is 20m or less) the additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. For other films, the rates are 80% and 20%. Film Production Company 5. A FPC is a company that is responsible for the pre-production, principal photography, and post-production of a film. It must also be engaged actively in production planning and decision-making during those stages as well as having responsibility for delivery of the completed film, negotiations, contracts and payments for rights, goods and services in relation to the film. The definition of a FPC is tightly drawn to ensure that only the actual producers of a film (rather than investors) fall within the tax rules. 6. For corporation tax purposes, the FPC s activities in relation to a film are treated as a trade separate from any other activities of the company, including any activities in relation to any other film. For example, if a FPC makes more than one film, each film would be considered to be a separate trade, with profits and losses calculated separately for each film that the FPC produces. The FPC separately identifies the income receivable and expenditure incurred on film-making activities in connection with each film. This is only for tax purposes and does not affect the company s financial statements. Official co-productions and the FTR 7. A film that falls to be treated as a national film in the UK by virtue of an agreement between the Her Majesty s Government in the UK and any other government, international organisation or authority is an official co-production for the purposes of FTR. A co-producer can be treated as a FPC if it makes an effective creative, 5 Now at Part 15 of the Corporation Tax Act 2009.

13 technical and artistic contribution to the film. As with other films a co-production must be a certified British film to be legible for FTR. Conditions for claiming FTR 8. The FPC may be eligible for Film Tax Relief (FTR) if all four of the following conditions are met: There must be a film. A film includes any record, however made, of a sequence of visual images that is capable of being used as a means of showing that sequence as a moving picture. References to a film include the film soundtrack. The film must be intended for theatrical release. This means exhibition to the paying public at the commercial cinema, and it is intended that a significant proportion of the earnings from the film should be obtained by such exhibition. At least 25 per cent of the core expenditure on the film incurred by the FPC must be UK qualifying expenditure. Core expenditure means production expenditure on pre-production, principal photography and post-production. Production expenditure means expenditure on film-making activities in connection with the film. UK qualifying expenditure means expenditure on goods or services that are used or consumed in the UK. The used or consumed test does not focus on the supplier of goods and services but instead concentrates on the recipient or customer as the means of determining UK qualifying expenditure irrespective of nationality. For example: a UK film production company commissions a designer based in France to design and make costumes for a film in which all principal photography is filmed in the UK. The costumes will thus qualify as UK spend as the customer uses or consumes those in the UK. The film must be certified as a British film by the Secretary of State for Culture, Media and Sport. Calculating the FTR 9. To arrive at the amount of profits that are subject to corporation tax, a company deducts certain allowable expenditure from its taxable income. The FTR increases the amount of expenditure that is allowable as a deduction for corporation tax purposes which is called an additional deduction. The additional deduction reduces the taxable profits of a FPC, or turns a taxable profit situation into a loss situation or increases the losses of a FPC. 10. The additional deduction is based on enhanceable expenditure. Enhanceable expenditure is the lower of: UK core expenditure (see above for definition) or 80% of total core expenditure (see above for definition of core expenditure). 11. Where the additional deduction creates a loss, the FPC can surrender the loss for a payable tax credit. A stated in the introduction the levels of the additional deduction and payable tax credit are dependent on the size of the film s budget.

14 Example of how FTR is calculated (using the example of a limited-budget film). An FPC produces a film with total expenditure of 11m, 10m of which is core expenditure and it is all UK qualifying expenditure. The film was commissioned by an unrelated distributor which pays 9m for it. Total income 6 9m Total expenditure ( 11m) Pre-FTR profit/ (loss) ( 2m) Enhanceable expenditure 8m (core expenditure of 10m x 80%) Additional deduction ( 8m) (100% rate of enhancement) Post-FTR profit/ (loss) ( 10m) The surrenderable loss is the lesser of: The post-ftr trading loss of 10m; and The enhanceable expenditure of 8m. The FPC can surrender any amount up to 8m (out of 10m) of losses. The amount of credit due is the payable credit rate for a limited-budget film of 25% multiplied by the loss surrendered. So assuming the maximum of 8m is surrendered: 25% x 8m = 2m So the FPC can claim a payment of 2m from HMRC. This is equal to 20% of the core expenditure and covers the 2m gap between total income and total expenditure ( 9m less 11m). The other 2m loss ( 10m less 8m) can be group relieved or carried forward against subsequent profits of the same film trade. If the FPC does not surrender the 8m of losses for a payable credit, these are losses attributable to film tax relief and can only be offset against profits of the same film trade of a future accounting period. These losses cannot be relieved sideways (against profits of a different trade), group relieved or carried back. 6 Income from the film is any receipts by the FPC in connection with making or exploiting the film including: receipts from the sale of the film or rights in it; royalties or other payments for use of the film or characters or music or other aspects of the film; payments for rights to produce games or other merchandise; and receipts by way of a profit share agreement.

15 How companies claim the FTR 12. A claim for FTR must be included in a company tax return for an accounting period. It can be made in respect of any accounting period that the FPC continues the film trade. 13. Before an application is made, the film must be certified by the Secretary of State that the film is a British film. An interim certificate as well as a final certificate can be obtained. Interim claims are made on the assumption that the required conditions have been met. If any of the conditions are not actually met on completion of the film, the position is adjusted to reflect the outcome, including if appropriate repayment of the film tax credit to HMRC with interest. Interim claims cannot be made outside of the corporation tax company return process. Further information For further information please see HMRC s Film Production Company Manual. The legislation is at Part 15 of the Corporation Tax Act 2009.