Supporting the creative economy - Culture, Media and Sport Committee Contents

5  Tax reliefs

96. On 10 November 2011, the Prime Minister announced the extension of film tax relief, the Government's targeted tax break for the British film industry, until the end of December 2015. The extension of this film tax credit, introduced by the previous Government, and its recent extension to other audiovisual sectors was described to us by Edward Vaizey as the most successful policy intervention in the creative industries.[179]

97. This corporation tax relief is aimed directly at film production companies for the expenses they incur on the production of a film intended for theatrical release in commercial cinemas. For a film to be eligible for relief, it must be certified as British, either by passing a cultural test or under an agreed co-production treaty, and must incur at least 25% of the total production expenditure in the UK.

98. Relief can be claimed only on production expenditure in the UK, up to a maximum of 80% of the total budget, and a higher rate of relief is available for limited-budget films (with total production expenditure of £20m or less). Companies not making a profit may be able to surrender the relief for a payable tax credit worth up to 20% of the total budget for a limited-budget film and up to 16% for other films. A higher value of support may be achieved if the relief is used to reduce company tax liabilities.[180]

99. Film studios on both sides of the Atlantic were as one in praising the tax credit without which many films would simply not have been made in the UK. In the USA, individual States have rival incentives in place and countries around the world are following suit. Competition for film production is global and highly lucrative. Even within the USA, film production is moving to cities and States that are offering more attractive tax incentives. The film tax relief has already helped raise more than £1 billion in inward investment. At Paramount Pictures we learned that, without it, Glasgow would not have been chosen ahead of Vancouver and Cape Town as a backdrop for rampaging zombies in 'World War Z', a recent film that alone brought £90 million into the UK. This is a significant fraction of the total cost to the tax payer of making available film tax relief. According to HM Treasury, 2011-12 was a record year for the scheme, with 320 films receiving over £200 million of support.[181] We do not doubt that Warner Brothers in Leavesden owe their recent success in attracting 'All You Need is Kill' to the film tax credit. Andrew Smith of Pinewood Shepperton told us: "For every £1 the Treasury spends they get £12 back."[182] This figure is widely quoted.[183] The British Film Institute told us:

    The Film Tax Relief has been an undisputed success story; supporting the UK film industry and the UK economy. Without it, we estimate that UK film production would be reduced by 70% and there would be an associated average loss of around £600 million per year of total UK film production of which £500 million would be inward investment.[184]

100. We strongly support the film tax credit. The benefits it has brought in terms of film production have spread across the country, from Glasgow to Chatham, from London to Liverpool.

101. Among the initiatives we heard about during our visit to Paramount Pictures is a proposal to include in the opening credits of films some information about the economic benefits and job opportunities a given picture created. This is likely to be an effective way of illustrating the economic value of film productions. We endorse this approach and encourage its wide adoption. Furthermore, we do not doubt that the more people see how many livelihoods depend on receiving a fair reward for intellectual property, the more copyright infringement will become socially unacceptable as well as being illegal.

102. Several witnesses in our inquiry suggested that consideration be given to extending tax reliefs to other creative industries,[185] though interest in the music industry was more mixed.[186] Vincent Scheurer of the computer games trade association, TIGA, emphasised the importance of promoting the existing tax break to aid research and development.[187]

103. The DCMS has worked with HM Treasury, HM Revenue & Customs and industry representatives on the detailed design of analogous corporation tax reliefs for animation, high-end television and video games. The tax reliefs for animation and high-end TV are going ahead, backdated to April 2013, as a result of the Finance Act 2013. Their importance was related to us by Greg Dyke:

    The Labour Government—the last Government—was very supportive by introducing the tax break for film. This Government has been equally supportive in continuing that and now expanding it to high-end television, to games and to animation. That is a significant move, which we obviously welcome. It does mean that those industries will expand; particularly, high-end television I think will expand quite far in this country. You will begin to see some of the Americans making big series over here because it is quite a significant tax break...[188]

104. The new creative sector reliefs require State aid approval from the European Commission on cultural grounds and so to qualify for one of the new reliefs, a production will need to pass a cultural test. In relation to video games, the European Commission announced in April 2013 that it would investigate whether the tax break was necessary in the absence of an obvious market failure. This has resulted in yet further delays to a tax credit, which was originally planned by the previous Government, but which was postponed after the general election. As a result, and because of the incentives offered elsewhere (notably Canada) the UK video games sector continued to decline, with production retreating by 10% from 2008-2011 according to evidence from the UK games industry's trade association, TIGA.[189] Written evidence from TIGA quantifies a number of negative trends that a well-designed tax relief could reverse: a high studio mortality rate; competitive disadvantages arising from the fact that some overseas competitors already offer fiscal incentives; declining employment in the games sector; falling investment by studios; a UK brain drain, mostly to Canada which offers "massive tax breaks for games production." TIGA told us that 41% of the jobs lost to the UK games development sector between 2009 and 2011 relocated overseas, mostly to Canada.[190] TIGA further points to the French experience where Government receipts from the video games tax credit were €63.4m versus the cost of the tax credit of €38m. On 5 September 2013, the Minister, Edward Vaizey, told the House of Commons that the European Commission had concluded its consultation on video games tax relief and that a decision was expected "in the very near future."[191] We deeply regret the European Commission's decision to investigate the validity of the proposed tax relief for video games. Introduction of the credit is long overdue, following its postponement by the Government after the election in 2010. There is clear evidence that such a tax credit would be of great benefit and delays in introducing it are greatly harmful to the industry. We urge the Government to make this point forcefully in its efforts to ensure the video games tax relief gets the go-ahead from the European Commission.

105. On high end TV tax relief, the current provision[192] includes a condition that the average core expenditure per hour of slot length in relation to the programme is not less than £1 million—a condition that some high-end dramas but few documentaries will match.[193] Discovery notes that "the main barrier to documentary productions qualifying for support is the proposed cost per hour threshold of £1m, which does capture the very top end of drama productions but not factual programmes, where average costs per hour are significantly lower."[194] In order to keep pace with competitors, Discovery proposes that the UK incentive scheme should include a cost per hour threshold of £650,000 to a "very narrowly defined genre of 'documentary' productions."[195] A few amendments to the cultural test are also suggested. With these changes the UK might avert threats to its position as a leading documentary centre, a reputation it owes much to the commissioning power of the BBC with which Discovery has had a "strong and successful co-production relationship".[196]

106. We recommend that the Government closely monitor the operation of the new tax reliefs for animation, high-end television and video games. Consideration should be given to applying a lower core expenditure cost to documentaries if it becomes evident, as we believe likely, that they will fail to qualify for relief on a significant scale.

107. The freelance nature of some creative sector workers can give rise to problems which the traditional income tax system is ill-suited to address. Sandie Shaw referred to this within the context of the typically short life cycle and atypical working hours of artists.[197] Andrew Chowns, chief executive of Directors UK, outlined problems encountered by freelance film directors because of the "nine-month rule".[198] Written evidence from Directors UK provides further background to this:

    This rule, set out in the HMRC Film Industry Tax Guidelines whereby any freelance worker in the film and TV industries whose contract extends beyond 9 months is deemed to have PAYE tax status, causes producers and broadcasters to limit contracts to nine months maximum, even if the project has a natural life of one year.


    This measure was originally introduced, we believe, to prevent the avoidance of PAYE by workers who claimed to be self-employed, but in practice now it is having the effect of an additional and unfair penalty on workers who are clearly freelance and have no claim to employed status.[199]

108. We do not doubt that some aspects of the income tax system adversely affect creative individuals. These arise from the intrinsically freelance nature of the vast majority of creators and authors. The personal tax system could better allow for periods when individuals are not being paid, but are nonetheless creatively engaged.

109. The income tax system needs to better recognise the freelance nature of employment in much of the creative sector, and the Government should demonstrate how it will effectively acknowledge and respond to this.

179   Q 821 Back

180 Back

181   HM Treasury, Creative sector tax reliefs: response to consultation, December 2012 Back

182   Q 26 Back

183   Q 36 Back

184   Ev 302 Back

185   Qq 207, 533, 740, 745 Back

186   Qq 260, 320, 805 Back

187   Q 556 Back

188   Q 521 Back

189   Q 577 Back

190   Ev 315 Back

191   HC Deb 5 September 2013 c456 Back

192   Schedule 16, Finance Act 2013. Back

193   Qq 702-703, Ev w172 Back

194   Ev w171 Back

195   Ev w172 Back

196   Ev w170 Back

197   Q 725 Back

198   Q 535 Back

199   Ev 308 Back

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Prepared 26 September 2013