UK film tax relief, 1992 to 2008
In order to boost investment in the British film industry the Conservative government introduced new tax measures in 1992 in order to ease the cash flow difficulties of producers. Section 42 of the Finance (No.2) Act 1992 introduced tax relief for preliminary expenditure incurred ‘for the purpose of enabling a decision to be taken as to whether or not to make a film,’ and applied only to those films that were qualified, or were likely to qualify, as ‘British’ under Schedule 1 of the Films Act 1985. Section 42 provided for the accelerated write-off of production expenditure over a three-year period for a qualifying film once the film has been completed. Under section 42 it was expected that film producers could generate an immediate cash sum of between four and eight per cent of a film’s budget .
However, the Advisory Committee on Film Finance, chaired by Sir Peter Middleton, reported in 1996 that the tax arrangements and definition of a British film were a deterrent to potential investors. The Committee noted that it was widely believed in the British film industry that tax incentives needed to be at least ten per cent of a film’s budget before they had an impact on investment decisions, and, therefore, the relief available under the Finance (No.2) Act 1992 was inadequate . The Committee also cited poor communication between the film and financial sectors as a contributing factor to the limited growth of investment in the film industry after 1992. The Committee proposed that the most effective means of stimulating investment was to introduce a 100 per-cent write-off of production costs in the year that they were incurred, and the establishment of a film finance forum. These recommendations were intended to reduce the risk-reward ratio for investors, and were introduced by the 1997 Labour government.
Section 48 of the Finance (No. 2) Act 1997 introduced a 100 per cent write-off against taxable profits once a film is completed for production and acquisition expenditure on films certified as British that cost £15 million or less to produce. The one-third relief system was retained for films with budgets over £15 million. The 100 per cent write-off was initially introduced for three years, but was extended to July 2005 by Section 72 of the Finance Act 2001. Anne Creigh-Tyte and Barry Thomas suggest that ‘nearly 200 certificates of nationality were issued in the three years since the concession in order for films to qualify as “British,” compared to under 20 per annum in the years from 1993 to 1996’ . In 1999 to 2000 alone, the Department of Culture, Media, and Sport (DCMS) issued certificates to seventy-six ‘British qualifying’ films costing less than £15 million, at an estimated cost of tax relief of £85 million, which, it was claimed, represents ‘over double the amount that would have been available under the previous arrangement’ . HM Treasury’s figures for tax relief for the British film industry in the New Labour puts the total cost at £2 billion (see Table 1).
Table 1 Film tax relief in the United Kingdom, 1997-1998 to 2005-2006 (£ million)
Data from the UK Film Council puts the total number of certifications of British films under Schedule 1 of the Films Act 1985 for the period 1998 to 2006 at 658 with a total expenditure of film production in the UK of £3583.4 million . The £2000 million in tax relief therefore represents approximately 55 per cent of the total UK expenditure on film production. This data does not include co-productions. Over the period 1995 to 2005, goverment subsidies for film production administered through the National Lottery (by the Arts Council from 1995 to 2001 and the UK Film Council between 2000 and 2005) and the British Screen Finance Group from 1996-2000 totalled £448 million . Subisidies have long been a significant part of British film policy, but it is clear that over the past decade it is the tax regime that has become the more significant policy. In 2007, Oxford Economics estimated that without tax relief for films, production in the UK would be 75 per cent smaller .
In reporting the figures in Table 1, it was noted that they included the costs of ‘substantial mis-use’ of the tax relief introduced in 1992 and 1997, and these measures were judged to be a failure in a report published by HM Treasury in July2005. This report defined the core objective of film tax relief as being ‘to promote the sustainable production of culturally British films;’ and that underpinning this was the encouragement of the production of films that might otherwise not be made, the promotion of sustainability in British film production, and the maintenance of a ‘critical mass’ of production infrastructure and of creative and technical expertise in the UK to facilitate the production of culturally British films . Section 42 and section 48 did not contribute to this core objective for four reasons. First, producers were unable to predict future income with any certainty and so were unable to anticipate tax benefits in decisions relating to the budget of a film and the location of filming. This led to the development of sale-and-leaseback deals in which producers sold a completed film to a third party and then leased the film back over a fixed period. The third party claimed the tax relief against income from other non-filmmaking activities, while the producer received an upfront payment that could used for production financing. Consequently, the tax relief was shared by the producer and the third party, reducing the benefit to the producer and restricting the level of investment in film production. Second, sale-and-leaseback deals were linked with high levels of tax avoidance. Third, the end of the tax year came to determine production schedules as the number of sale-and-leaseback deals peaked at this time of year as third party investors sought to gain a tax benefit before this deadline expired. Fourth, tax relief under section 42 and section 48 applied to all eligible expenditure on a film and not just expenditure incurred in the UK providing the qualifying criteria were met. ‘Relief tourism’ became an issue as producers would meet only the minimum requirements for certification before moving on to access incentives elsewhere. The UK’s tax relief measures became a disincentive to produce films in the UK and the level of investment in UK-based productions was low . These problems led to a flurry of corrective legislation between 2000 and 2006 aimed primarily at eliminating the use of sale-and-leaseback deals for tax avoidance. The constant revision of tax incentives by the government destabilised the UK production sector; and in 2006 Lord Northbrook, commented that:
The continual cycle of change has produced huge uncertainty in the film industry and has jeopardised some important projects. For instance, I understand that the filming of the latest James Bond film [Casino Royale] has moved to the Czech Republic, so even the Government’s most famous civil servant has moved offshore, partly as a result of the instability caused by changes in the film tax regime .
These issues were dealt with in the Finance Act 2006 (sections 31 to 48), which replaced section 42 and section 48, introduced a minimum level of 25 per cent of core expenditure to be incurred in the UK for both certified British films and qualifying co-productions, and ensured that tax benefits were only available to the production company involved in making the film. For films with a budget under £20 million, up to 25 per cent of the total UK expenditure may be claimed as cash rebate; while films with a budget greater than £20 million can claim a rebate of up to 20 per cent. Additionally, tax relief can be claimed on up to 80 per cent of the total qualifying UK spend. The first figures of the tax relief under the 2006 regulations were published by HM Treasury in October 2008, and showed that £104 million of relief for the production of around 100 films from January 2007 to March 2008 .
- Anne Creigh-Tyte and Barry Thomas, ‘Taxation,’ in Sara Selwood (ed.) The UK Cultural Sector: Profile and Policy Issues. London: Policy Studies Institute, 2001: 131.
- Advisory Committee on Film Finance, Report to the Secretary of State for National Heritage, July 1996. London: Department of National Heritage, 1996: 33.
- Creigh-Tyte and Thomas, ‘Taxation:’ 133.
- Hansard, HC vol. 377, 8 January 2002, cols. 806w-807w.
- UK Film Council, UK Certification Data Q1 1998 to Q4 2008, http://www.ukfilmcouncil.org.uk/media/excel/h/a/British_film_certification__Jan98_-_Dec08__public_version.xls, accessed 21 May 2009.
- Hansard, HC vol. 433, 27 February 2006, col. 328w.
- Oxford Economics, The Economic Impact of the UK Film Industry. Oxford: Oxford Economics, 2007: 6.
- HM Treasury, Reform of Film Tax Incentives: Promoting the Sustainable Production of Culturally British Films. London: HM Treasury, 2005.
- For a more detailed discussion of these issues see HM Treasury, Reform of Film Tax Incentives: 12-15.
- Hansard, HL vol. 684, 17 July 2006: col. 1065.
- HM Treasury, Film tax relief supporting UK film industry, http://www.hm-treasury.gov.uk/press_109_08.htm, accessed 20 May 2009.