Kids and animation get attention from the Chancellor

CMF Executive Group Member Gregory Boardman explains what we know so far about the Chancellor's new tax credit system for the screen industries.

Following the budget announcements on 15th March, HMRC published information on its response to the consultation on audio-visual tax reliefs.  Ahead of the announcement, there had been much talk about simplification of the tax relief process and a combining of the multiple categories. It's fair to say that everyone in children's and animation was delighted to hear about the recognition being given to the sectors and grateful for the lobbying form industry organisations and sharing of information that led up to the decision.

The Film and High-end TV tax reliefs have been combined with a headline rate of 34%. Children's and Animation TV programmes will benefit from a higher headline rate of 39%. However, there is no easy comparison with the previous schemes and the new headline figures will be offset by the adoption of a new mechanism for calculating relief which will be based on the Research and Development tax process (RDEC). The new process will be based on an expenditure credit model. The government will set out full details of the expenditure credits, including the design of all steps of the calculation, as part of the draft legislation at 'L-Day 2023' when the draft proposals become law during the summer.

Companies will be able to claim expenditure credits from accounting periods on or after 1st January 2024.  From 1st April 2025, claims for new productions must be made under the expenditure credits system, but a transition period is being offered.  Film and TV productions that have begun but not concluded principal photography on 1 April 2025 may continue to claim under the current system until the end of March 2027. Then any expenditure from 1 April 2027 must be claimed under the new expenditure credit rules.

Without the further guidance it is hard to provide accurate detail but, based on conversations since the announcement, the net benefit of the revisions for the Children's & Animation sectors looks like an additional 4.25% of relief. The value of the relief will be dependent on a company's main Corporation Tax rate. 

The government will maintain the 80% cap on qualifying expenditure, though this will be kept under review. The government acknowledges industry concerns that the maintenance of the 80% cap leads to companies placing more ‘portable’ expenditure such as visual effects and animation outside the UK.

One area for caution relates to PAYE but hopefully this will be ironed out during the further consultation. Existing R&D tax credits (RDEC), upon which the new system will be based, have encouraged companies to focus on PAYE staff. The government publication on 15th March makes reference to tax credits being linked to PAYE and National Insurance spending (see Chapter 3 of the Government response). This is clearly not ideal for small production companies, or production in general, where a significant number of short-term contracts and freelancers make the production process function. We therefore await further information with interest.

Ultimately, a relatively early resolution to the tax issue consultation is potentially great news for wider debates around the kids' and animation sector. We can now put the tax issue to one side and focus on the biggest issue - the lack of investment in UK children's media production. Without investment and without broadcasters, or distributors, committing funds to making content then tax credits are less relevant.