Policy paper

Explanatory note (accessible version)

Updated 18 July 2023

Clause 1: Reform of audio-visual creative tax reliefs

Summary

1. Schedule 1 introduces the following Parts to include a new tax relief regime for films, television programmes and video games:

• Part 1: A new tax relief for films, television programmes and video games
• Part 2: Consequential amendments on Part 1
• Part 3: Repeal of existing regimes for films, television programmes and video games
• Part 4: Amendments consequential on Part 3
• Part 5: Commencement and transitional provisions relating to Parts 1-4

Details of the Schedule

Part 1: New Regime for Films, Television Programmes and Video Games

2. Subsection (1) introduces new Part 14A to the Corporation Tax Act (CTA) 2009. It also explains that there are 5 chapters in Part 1 covering how activities are taxed and specific provisions applying to films, television programmes and video games.

Chapter 1 — Introduction and Interpretation

3. Chapter 1 contains new sections 1179A to 1179AD, which set out the overview of new Part 14A and interpretation.

4. New section 1179AA sets out the conditions for qualifying companies and productions and where the terms are further defined.

5. New section 1179AA(8) provides that once a qualifying company has made an election to treat a qualifying production as a separate trade no other company can subsequently be the qualifying company for that production.

6. New section 1179AB explains that ‘UK expenditure’ means expenditure on goods or services that are used or consumed in the UK. The nationality of those providing the goods and services has no bearing on whether the expenditure qualifies. The ‘used or consumed’ rule does not focus on the supplier of the goods or services but instead concentrates on the location of the recipient or customer as the means of determining UK qualifying expenditure. For example, expenditure on costumes bought and shipped from Germany and used in a qualifying high-end television production filmed in the UK, would be considered UK expenditure Any apportionment between non-UK expenditure and UK expenditure must made on a just and reasonable basis.

7. New section 1179AC sets out that any amendment to a company tax return may be made for the purposes of this Part despite any limitation on the time within which an amendment or assessment may normally be made. For example, see new section 1179CI(3) on the requirement to amend a return if a company is party to disqualifying arrangements.

Chapter 2 — Special rules about taxation

8. Chapter 2 contains new sections 1179B to 1179BG which set out the rules regarding the production trade and taxation.

9. New section 1179B explains that activities for each qualifying production are treated as a separate trade from the other activities of the production company. A company must have a separate trade for each of its productions. The income and costs of each separate trade are calculated separately for corporation tax purposes. It is up to companies to elect to implement the separate trade rules in relation to a production, but they must do so to be eligible for relief.

10. New section 1179BA contains the rules concerning the duration of the separate trade for a production.

11. If a company first elects to implement the separate trade in a period after it is deemed to have begun to carry on that trade, new section 1179BA(2) requires the company to amend its tax returns for earlier periods to retrospectively implement the separate trade rules.

12. New sections 1179BA(3) and 1179BA(4) ensure that, once a company has elected to implement the separate trade rules in relation to a production, it must continue to do so even if the production ceases to qualify for relief or the company ceases to be the production company. This applies even if, as a result of later events, the production ceases to qualify for the period in which the company elected to implement the separate trade rules.

13. New section 1179BB(2) sets out that during the first period of account for a trade the costs of the qualifying production must be brought in as a debit. The proportion of the income as calculated by the formula set out in new section 1179BB(4) is brought in as a credit.

14. New section 1179BB(3) explains how the calculation of profits and losses works for subsequent periods of account. It brings in as a debit the difference between the costs incurred to date and the corresponding amount for the previous period and, as a credit, the difference between the proportion of total estimated income treated as earned at the end of that period and the corresponding amount for the previous period.

15. New section 1179BB(4) sets out the formula for calculating the proportion of the estimated total income that is treated as earned at the end of the period of account.

16. New section 1179BB(5) sets out what counts as costs of, and income from, the qualifying production company. This points to new section 1179DX for television programmes and, new section 1179FP for video games (see those references below for more detail).

17. New sections 1179BB(6) to (9) provide the basic rules for when estimates may be made, and any apportionments between accounting periods.

18. New sections 1179BC(1) to (2) provides the rules that costs are incurred when they are represented in the state of completion of the work in progress. Payments in advance are ignored until the work is done and deferred payments are only to be recognised to the extent that the work is represented in the state of completion.

19. New section 1179BC(3) makes it clear that if an amount has not been paid then it is not an incurred cost until there is an unconditional obligation to pay it.

20. New section 1179BC(4) ensures that where this obligation in 1179BC(3) is linked to income being earned, then the cost can only be included when an appropriate amount of income is or has been brought into account.

21. New section 1179BD addresses the situation where a company incurs expenditure on the development of a qualifying production and this expenditure predates the separate production trade. In this circumstance development expenditure is treated as if it were expenditure incurred immediately after the company began to carry on the trade.

22. New section 1179BD(3) requires that if the expenditure has been previously taken into account for other tax purposes then the company must amend any relevant company tax return accordingly.

23. New section 1179BE addresses the situation where expenditure is incurred on making a qualifying production which would be treated as a capital asset then that expenditure is treated as being of a revenue nature. This also applies to receipts which count as income and would be regarded as of a capital nature, these are to be treated as receipts of a revenue nature. However, this treatment only applies in the specific circumstances of section 1179BE and does not apply to all other capital expenditure and expenditure which would not generally be allowed as a deduction in calculating the profits of a trade for corporation tax purposes (see sections 53 and section 1179BB(6)).

24. New section 1179BF explains the treatment of losses arising in the separate production trade for pre-completion periods (periods before the production is ready for public release). New sections 1179BF(2) and 1179BF(3) make it so that losses may only be carried forward in pre-completion periods. They are not available for other kinds of loss relief.

25. New section 1179BF(5) explains that losses carried forward from pre-completion periods can, in the completion period and any later periods, be treated as losses made in that period. They can be used to relieve total profits of the company, or for surrender to other group companies.

26. New section 1179BG explains the treatment of losses carried forward from pre-completion periods when the separate production trade ceases. A loss of this kind is the ‘terminal loss’. Terminal losses may be transferred to another separate trade of the same company, or to a separate trade of a company in the same group.

27. New section 1179BG(1) sets out the conditions under which a company may transfer a terminal loss. The company must cease the separate trade and be carrying a loss in that trade that would, if not for cessation, be carried forward to later periods. The company itself, or another company in the same group, must be carrying on a separate trade in relation to another production for the loss to be transferred to (the ‘other trade’).

28. The other trade must relate to a production which qualifies under the same Chapter as the production with a surrenderable loss. This means that a terminal loss from a film’s separate trade may be transferred to the separate trade for a TV programme, and vice versa. A terminal loss arising in the separate trade for a video game may only be transferred to the separate trade for another video game.

29. New section 1179BG(2) allows for the transfer of a terminal loss to another separate trade of the same company. New section 1179BG(3) allows for the transfer of a terminal loss to the separate trade of a fellow group company. In both cases, new section 1179BG(4) requires that the loss is transferred to the first accounting period of the recipient trade after cessation occurs.

30. New section 1179BG(5) sets out cases in which the transfer is treated as not having been made. Those are: if the other trade receiving the loss is no longer carried on; if the company carrying on the other trade is not entitled to an expenditure credit; or if the fellow group company does not elect to receive the loss.

Chapter 3 – Expenditure credit

31. Chapter 3 contains new sections 1179C to 1179CI which set out the rules for the expenditure credit.

32. New section 1179C sets out the basic rules covering a company’s entitlement to an expenditure credit for a production.

33. New section 1179C(1) states that, provided the production meets the qualifying criteria, and the company is the qualifying company in relation to the production, the company is entitled to a credit. If those conditions are not met in an accounting period, the company is not entitled to a credit for that period, but it may be entitled to a credit in later periods if the conditions are met again. That is set out in new sections 1179C(2) and 1179C(3).

34. New section 1179C(4) explains what happens if a company is initially entitled to a credit for an accounting period, but later loses that entitlement as a result of events after the end of the period. In these cases, any tax return affected by the loss of entitlement must be amended to give effect to the change. The company must repay any overpaid credit to HM Revenue and Customs.

35. New section 1179CA explains how a qualifying company calculates the amount of expenditure credit to which it is entitled. If a company has more than one separate production trade, the calculation applies to each trade separately.

36. New section 1179CA(1) sets out the 5 steps of the calculation.

1. Step 1 is to add together the company’s ‘relevant global expenditure’ (defined in section 1179CA(2)) for the separate trade for the current accounting period and all prior periods.

2. Step 2 is to deduct from the Step 1 total any expenditure that is not UK expenditure, from both the current period and all prior periods.

3. Step 3 is to compare the Step 1 and Step 2 amounts. If the Step 2 amount is more than 80% of the Step 1 amount, the company must deduct the excess to reach its ‘qualifying expenditure to date’. In other words, the company’s qualifying expenditure to date will be the Step 2 amount or 80% of the Step 1 amount, whichever is less.

4. Step 4 is to deduct the company’s qualifying expenditure to date from the last period in which the company was entitled to and claimed an expenditure credit (if applicable) from the qualifying expenditure to date for the current period. This gives the company’s ‘qualifying expenditure for the year’. Step 4 ensures that relief is given on a cumulative basis.

5. Step 5 is to apply the relevant percentage rate of relief for the production to the qualifying expenditure for the year. For example, a video game will get relief on 34% of its qualifying expenditure for the year.

37. New section 1179CA(2) defines relevant global expenditure as expenditure brought into account as part of the separate trade for an accounting period, which meets the criteria set out in section 1179DT (for films and TV programmes) or section 1179FL (for video games).

38. New section 1179CB requires qualifying companies to include the amount of credit to which they are entitled for a separate production trade as a receipt in calculating the profits of that trade. This is to make sure that the credit itself counts as taxable income.

39. New section 1179CC explains how qualifying companies redeem the tax credit to which they are entitled under sections 1179C and 1179CA. The credit is dealt with in 6 steps, to be followed in order.

1. Step 1 is to apply the credit to discharge any liability of the qualifying company to corporation tax in the current accounting period. This covers the liability of the company as a whole, not the liability of the separate production trade alone.

2. Step 2 is to apply a notional tax charge to the full amount of the tax credit before any Step 1 offset. This notional tax charge is charged at the main rate of corporation tax (25% as of 18 July 2023). The amount to be carried forward to Step 3 is:
   
   • the remaining amount of credit after applying the notional tax charge in Step 2, or
   • the remaining amount of credit after applying the discharge at Step 1,
   
   whichever is less. Any amount withheld at this Step can be relieved under section 1179CD.

3. Step 3 is to apply the amount brought forward from Step 2 to discharge any outstanding liability of the qualifying company to corporation tax for any other accounting period. Again, this covers the liability of the company as a whole as opposed to the liability of the separate trade alone.

4. Step 4 is to surrender some or all of the amount brought forward from Step 3 to a fellow group company. This step is optional. Companies may choose how much credit to surrender, if any.

5. Step 5 is to apply the amount brought forward from Step 4 to discharge any outstanding liability of the qualifying company as a whole to HM Revenue and Customs.

6. At Step 6, any amount remaining after Step 5 is to be paid to the qualifying company by HM Revenue and Customs.

40. New section 1179CD explains how to treat amounts of credit withheld at Step 2 of section 1179CC. Such an amount arises where the amount of credit after Step 1 exceeds the amount of credit given by Step 2, and is equal to the difference between the two.

41. New section 1179CD(2) allows the qualifying company to surrender some or all of the amount to a fellow group company in the current period (P). New section 1179CD(3) explains that if the company chooses not to do this, the amount is carried forward to the next accounting period (P+1).

42. New sections 1179CD(4) and 1179CD(5) explain how to treat amounts withheld at Step 2 in the next accounting period (P+1). A company may choose to surrender some or all of the carried-forward amount to a fellow group company. If the company chooses not to do this, the carried-forward amount is to be applied to discharge any liability of the company as a whole to corporation tax in that period.

43. New section 1179CD(6) allows for sections 1179CD(4)-(5) to apply in the following accounting periods (P+2 onwards) if there is any amount remaining after those sections were applied in P+1. Amounts withheld at Step 2 are to be carried forward indefinitely until they have been surrendered to a group member or used to discharge the qualifying company’s liability to corporation tax.

44. New section 1179CE explains how to treat amounts surrendered to other group companies under sections 1179CC and 1179CD.

45. New section 1179CE(3) sets out the process by which amounts are surrendered, over 6 Steps. A worked example follows:

1. Company 1 has £100 of credit to surrender to Company 2, which is in the same group. Company 1’s ‘surrender AP’ is the 12-month period from 1 January 2025 to 31 December 2025

2. Company 2 has two ‘overlapping APs’: 1 April 2024 to 31 March 2025 (OAP 1), and 1 April 2025 to 31 March 2026 (OAP 2). Company 2’s corporation tax liability in OAP 1 is £200, and £80 in OAP 2

3. Step 1: Company 1 chooses OAP 1 as the first overlapping AP.

4. Step 2: For OAP 1, the proportion that overlaps with the surrender AP is ¼ (3 months of a 12-month AP). Apply this proportion to the corporation tax liability for OAP 1: ¼ of £200 = £50.

5. Step 3: The proportion of the surrender AP that overlaps with OAP 1 is also ¼. Apply this proportion to the surrendered credit amount: ¼ of £100 = £25.

6. Step 4: The £25 from Step 3 is used to discharge the £50 from Step 2. There is £75 of Company 1’s credit left to surrender.

7. Step 5: Company 1 chooses OAP 2 as the next overlapping AP.

8. The proportion that overlaps with the surrender AP is ¾ (9 months of a 12-month AP). Apply this proportion to the corporation tax liability of OAP 2: ¾ of £80 = £60.

9. The proportion of the surrender AP that overlaps with OAP 2 is also ¾. Apply this proportion to the surrendered credit amount: ¾ of £100 = £75.

10. The £75 is used to discharge the £60. Company 1 still has £15 credit left.

11. Step 6: There are no more overlapping APs. The unused £15 is treated as if it were not surrendered, and the company should carry it forward to the later steps in section 1179CC or section 1179CD (depending on how it was originally surrendered).

46. New section 1179CF establishes the order of priority when there are multiple amounts that can be used to discharge the liability of a company to corporation tax (be that the qualifying company or a group company). The general rule is that amounts withheld at Step 2 are to be used to discharge corporation tax liabilities ahead of amounts arising from the other Steps in section 1179CC.

47. New section 1179CG introduces a new criterion for companies claiming relief: a company may only claim relief when it is a going concern. A company is a going concern if it prepares its financial accounts on a going concern basis, unless the going concern basis is used only to remain eligible for relief. A company that is in administration or liquidation cannot make a claim. A company which does not prepare its accounts on a going concern basis can still claim relief if the only reason that the accounts are not prepared in that way is because the company transfers the separate production trade to a fellow group company.

48. New section 1179CH covers certain situations in which no credit is payable under Step 6 of section 1179CC.

49. New sections 1179CH(1) and 1179CH(2) explain that, if HM Revenue and Customs opens an enquiry into a company’s tax return, HM Revenue and Customs does not automatically have to pay the company any amount due under Step 6. HM Revenue and Customs may make a payment of some or all of the amount on a provisional basis, if appropriate.

50. New sections 1179CH(3)-(5) explain that HM Revenue and Customs does not automatically have to pay the company any amount due under Step 6 for an accounting period if the company has unpaid PAYE or NIC bills for any payment periods falling in that accounting period. HM Revenue and Customs may make a payment of some or all of the amount, if appropriate.

51. New section 1179CI is an anti-abuse rule that restricts relief for companies which enter into tax avoidance arrangements or transactions which are not made for genuine commercial reasons.

52. New sections 1179CI(1) to (3) explain that a company which is party to disqualifying arrangements in relation to a production is not able to claim relief for the accounting period in which the arrangements fall, or any subsequent period. If applicable, the company’s tax returns for previous periods in which relief was claimed on the production are amended to withdraw eligibility for relief, and the company must repay any resulting overpaid credits to HM Revenue and Customs.

53. Disqualifying arrangements are defined in new section 1179CI(7) to (9). They include any arrangements the main purpose or one of the main purposes of which is to obtain a relevant advantage. A relevant advantage occurs where a company obtains relief to which it would not otherwise be entitled, or a greater amount of relief than to which it would otherwise be entitled. New section 1179CI(8) clarifies that disqualifying arrangements do not include arrangements which obtain a relevant advantage which is in keeping with the principles and policy objectives of the relief.

54. Any transaction which is attributable to arrangements that are not made for genuine commercial reasons (but not disqualifying arrangements) is to be ignored in determining a company’s entitlement to relief. This is done by counteracting the effect of the transaction on the company’s entitlement to relief, by making just and reasonable adjustments. This is set out in new sections 1179CI(4) to (6). The company will still be able to claim relief on its other eligible expenditure in relation to a production.

Chapter 4 — Films and television programmes

55. Chapter 4 contains new sections 1179D to 1179EA which set out the applications of Chapters 2 and 3 specifically to television programmes, certification, and other definitions. An expenditure credit which arises under this Chapter is called an ‘audiovisual expenditure credit’ (AVEC).

56. New section 1179DA sets out the meaning of ‘film’, being a record, however made, of a sequence of moving images that is capable of being used as a means of showing that sequence as a moving picture. Each part of a series of films is treated as a separate film unless it forms part of a series with not more than 26 parts, the combined playing time is not more than 26 hours, and the series constitutes a self-contained work or is a series of documentaries with a common theme.

57. New section 1179DB sets out the conditions for a film qualifying for the tax relief. The film must meet the following criteria: the theatrical condition at new section 1179DC, the British certification condition at new section 1179DJ and, the UK expenditure condition at new section 1179DP.

58. New section 1179DC provides that a film cannot qualify for the tax relief unless it is intended, at the end of each accounting period, for theatrical release by exhibition to the paying public at the commercial cinema and a significant proportion of the earnings from the film is intended to be obtained by such exhibition. If the film does not meet the theatrical release condition in an accounting period it cannot qualify for the tax relief in that or any subsequent accounting period.

59. New section 1179DD defines the meaning of ‘television programme’ which is any programme (with or without sounds) which is produced to be seen on the television or the internet. Two or more television programmes that are commissioned together under the same agreement (such as a television series or serial) are treated as a single television programme. A single commisioned programme (for example a pilot programme) is treated as a single programme.

60. New section 1179DE sets out which programmes are qualifying television programmes. A television programme will not qualify unless it is a : drama, documentary, animation, or a children’s programme. Certain other conditions must be met, such as the broadcast condition, and these are further defined in later sections.

61. New section 1179DF(1) states that a programme can only be a drama if it has the following properties:

• it must consist wholly or mainly of a depiction of events
• the events are depicted (wholly or mainly) by one or more persons performing
• the whole or major proportion of what is done by the person or persons performing, whether by way of speech, acting, singing or dancing, involves the playing of a role

For the purposes of section 1179DF(1), ‘drama’ may include a comedy.

62. New section 1179DF(2) states that a programme can only be a documentary if the following conditions apply:

• the documentary is intended to inform the viewer about real events (as opposed to fictional ones)
• those events have not, to any significant degree, been arranged for the purposes of the programme — the events cannot have been plotted, manufactured or constructed, and
• either:
  • the events are not depicted by one or more persons playing roles *to the extent that events are depicted in that way, the depiction is ancillary to a written or spoken narrative of the documentary — for example, dramatic reenactments of real events will not disqualify a programme provided they are not themselves the main focus of the programme

63. New section 1179DF(3) states that a programme can only be a children’s programme if, when production activities begin, it is reasonable to expect that the persons who will make up the programme’s primary audience will be under the age of 15. A programme can still be a children’s programme if it is watched by predominantly older viewers, provided it is aimed at audiences under 15.

64. New section 1179DF(4) provides that any drama or documentary that includes animation will be treated as an animation programme if the core expenditure on the completed animation constitutes at least 51% of the total core expenditure in the completed programme.

65. New section 1179DG(1) sets out those programmes that are excluded television programmes. These are:

• any advertisement or other promotional programme
• news or current affairs programmes or discussion programmes
• quiz shows, game shows, panel shows, variety shows, chat shows or similar entertainment
• it consists of or includes a competition or contest, or the results of a competition or contest
• it is a broadcast of a live event or of a theatrical or artistic performance given otherwise than for the purposes of being filmed
• it is produced for training purposes

66. New section 1179DG(2) allows a children’s programme to be a qualifying programme even if it is a children’s quiz or game show provided the prize total does not exceed £1000 per programme. Where a number of programmes are commissioned together (see new section 1179DD(2)) and treated as a single programme then the prize total remains £1000 regardless of the number of programmes or episodes commissioned because they are treated as one programme.

67. New section 1179DG(3) defines the term ‘prize total’ for a children’s programme. This is the total of the amount of each relevant prize that is a money prize, and the amount spent on each other relevant prize by, or on behalf of, its provider. ‘Relevant prize’ means a prize offered in connection with participation in a quiz, game, competition or contest in, or promoted by, the programme.

68. New section 1179DH sets out the condition that a television programme can only meet the broadcast condition if it is intended for broadcast to the general public, and it is not a film that meets the theatrical release condition at section 1179DC. Whether this condition is met is determined at the end of each accounting period and if the programme does not meet the condition in an accounting period it cannot meet it in any subsequent accounting periods.

69. New section 1179DI provides for slot length and hourly cost conditions. A single television programme must exceed a slot length of 20 minutes. Where a programme consists of a number of episodes then the slot length of each episode must exceed 20 minutes.

70. New section 1179DI(3) sets out the condition that a television programme must meet the hourly cost condition of average core expenditure of at least £1 million (one million pounds sterling) per hour of slot length. Slot length’ means the period of time which the episode or (as the case may be) programme is commissioned to fill.

71. New section 1179DJ explains the conditions for certification. Any references to a ‘certificate’ in the section are to be read as:

• for film a certificate under Schedule 1 to the Films Act 1985
• in relation to a television programme, as references to a certificate under new section 1179DM

72. New sections 1179DJ(2)and (3) sets out the conditions where a production company has either an interim or final certificate. For pre-completion periods a film or television programme is to be provisionally treated as meeting the British certification condition in that period if it has a valid interim certificate at the end of the period, and the production company’s tax return for that period is accompanied by the certificate. At the end of the completion period (see section 1179DY) a film or television programme will meet the British certification condition if at the end of the completion period either a final certificate has effect in relation to the film or programme, or the production company has abandoned production activities in relation to the film or programme and the interim certificate has effect in relation to it. In all cases the production company’s tax return for that period must be accompanied by the appropriate certificate.

73. New sections 1179DJ(4) to (8) cover the situations where a film or television programme does not meet the certification conditions, or where the certificate ceases to have effect. In such cases the film or television programme are treated as not having met the certification condition so are not a qualifying film or programme, lose all eligibility for the tax relief, and any relevant company tax return drawn up in reliance of the certificate must be amended accordingly. In the case of a certificate ceasing to have effect subsection (6) will not apply where the interim certificate is superseded by the final certificate.

74. New section 1179DK sets out the functions of the Secretary of State (with the approval of the Treasury) where the regulation for television programme certification may be amended, or the certificate revoked.

75. New section 1179DL sets out the conditions for applying to the Secretary of State for a television certificate (interim or final). The Secretary of State may also ask for information relating to the certification.

76. New section 1179DM sets out when a television programme may be certified or a certificate revoked. Any certificate revoked by the Secretary of State is treated as never having had effect and a programme loses eligibility for the tax relief.

77. New section 1179DO allows for HM Revenue and Customs to disclose information to the Secretary of State for the purpose of the Secretary of State’s functions and also allows the same information to be disclosed to the British Film Institute.

78. New section 1179DP sets out the conditions relating to UK expenditure in both the pre-completion period and the completion period.

79. New section 1179DP(1) provides for pre-completion periods. The UK expenditure condition shall be provisionally treated as being met if the production company’s accounts for the period state the total amount of core expenditure that is expected to be incurred in relation to the film or programme, and the amount of expected UK expenditure. The amount of UK expenditure must be at least 10% of the total amount of expenditure.

80. New section 1179DP(2) states that a film or television programme meets the UK expenditure condition for the completion period and any subsequent period if the production company’s accounts for the completion period state the total amount of core expenditure that has been incurred and the total amount of UK expenditure. The amount of UK expenditure must be more than 10% of the total core expenditure for the UK expenditure condition to be met.

81. New section 1179DP(3) sets out that if a film or television programme does not meet the UK expenditure condition in relation to an accounting period then it will not be a qualifying film or television programme. Relief given in pre-completion periods is rescinded, and the relevant company tax return(s) must be amended to give effect to this.

82. New section 1179DQ sets out the general rules that govern whether a company is a ‘production company’ for a film or television programme.

83. New section 1179DQ(1) includes the criteria a company must meet to be a production company for a film or TV programme that is not a qualifying co-production. The company must be responsible for pre-production, principal photography and post-production of the film or programme, as well as the delivery of the completed film or programme. The company must be actively engaged in production planning and decision making during pre-production, principal photography and post-production, and directly negotiates, contracts and pays for rights, goods and services in relation to the film or programme. The company must also be the company most directly engaged in the activities described above.

84. New section 1179DQ(2) includes the criteria that a company must meet to be the production company for a film or TV programme that is a qualifying co-production. The company must be a co-producer and make an effective creative, technical and artistic contribution to the film or programme. The company must not do this in partnership and co-producers who only provide finance are excluded. The company must also make a greater creative, technical and artistic contribution than any other co-producer which is within the charge to UK Corporation Tax.

85. New section 1179DQ(3) excludes activities carried on in partnership in relation to a film or programme when determining whether a company is the production company.

86. New section 1179DR provides for when a film or television programme may be a ‘qualifying co production’ which is when certified under an international agreement between His Majesty’s Government in the United Kingdom and any other government, international organisation or authority. A company is a ‘co-producer’ if it is regarded as such under the international agreement by which the film or programme is a qualifying co-production.

87. New section 1179DS sets out that expenditure incurred by the production company for a film or television programme counts as ‘relevant production expenditure’ if it is core expenditure and it is not excluded expenditure. The terms core expenditure and excluded expenditure are further defined in later new sections.

88. New section 1179DT defines what is meant by ‘core expenditure’ in relation to a film or television programme. Core expenditure is expenditure on the pre-production, principal photography or post production of the film or programme. Expenditure on development, distribution and other non-production activities is excluded as it is non-core expenditure.

89. New section 1179DU sets out specifically excluded expenditure in relation to relief for research and development costs (R&D relief) and connected parties. Expenditure is not eligible for AVEC if a company is entitled to claim relief on it under any of the R&D schemes, or to the extent that it represents connected party profit.

90. New section 1179DU(3) defines connected party profit as the excess of the payment made to a connected party for supplying something over the cost incurred by the connected party in supplying that thing. For example, if company 1 pays connected company 2 £100 for a service, and providing that service costs company 2 only £75, company 1’s qualifying expenditure will be £75. The remaining £25 is the connected party profit.

91. New section 1179DU(4) makes provision to exclude connected party profit where payments flow through a chain of connected parties. For example, if company 1 sells a product worth £50 to connected company 2 for £100, and company 2 sells it on to company 3 for £100, company 3’s qualifying expenditure will still be only £50. The provision applies no matter how long the chain is.

92. New section 1179DU(5) includes an exemption to the connected party profit rule. Connected party profit is not excluded from being eligible expenditure for relief if it is incurred on renting, hiring or otherwise securing the use of premises or land as a location for principal photography. Connected parties must still charge each other at an arm’s length rate, as set out in HM Revenue and Customs guidance.

93. New section 1179DV sets out the percentage rate of relief which is to be applied to the qualifying expenditure on a production at Step 5 in section 1179CA to reach the amount of expenditure credit to which the production is entitled.

94. New section 1179DV(2) sets the relevant percentage at 34% for:

• qualifying films, excluding animated films
• qualifying television programmes that are a drama or documentary, but not an animated programme or children’s programme

95. New section 1179DV(3) sets the relevant percentage at 39% for:

• qualifying animated films
• qualifying television programmes that are an animated programme or children’s programme

96. New sections 1179DV(4) and 1179DV(5) amend the relevant percentage for animated films, animated programmes and children’s programmes in certain circumstances. If the production company claims an expenditure credit on the production in any period on the basis that it is a production of a type listed in section 1179DV(2), the relevant percentage is set at 34% for all subsequent periods. This means that if the company later claims for the production on the basis that it is of a type listed in section 1179DV(3), the relevant percentage will be 34% instead of 39%.

97. New section 1179DW sets out when the separate trade is deemed to begin for a production. It is from this point that the separate trade rules must be followed (see section 1179B). The separate trade begins when pre-production begins on the film or programme or, if earlier, when the company first receives income from the film or programme.

98. New section 1179DX(2) explains that expenditure only counts towards the costs of the film or programme if it is expenditure on production activities in connection with the film or programme, or activities with a view to exploiting the film or programme.

99. New section 1179DX(3) provides that no amount is to be included in costs incurred for a period if those costs are still unpaid 4 months after the period ends.

100. New section 1179DX(4) sets out that income from a film or programme constitutes any receipts in connection with the making or exploitation of the film or programme. This includes:

• receipts from the sale of the film or programme or rights in it
• royalties or other payments for use of the film or programme or aspects of it (for example characters or music)
• payments for rights to produce games or other merchandise
• receipts by way of a profit share agreement

101. New section 1179DY defines what is meant by ‘accounting period’, ‘completion period’ and ‘pre-completion period’.

102. New section 1179DZ explains the effect on a production’s entitlement to relief if it moves out of one of the categories with the higher rate of relief into a lower one. The production company cannot claim relief on the production in a lower rate category after claiming in a higher rate category in an earlier period/periods, unless it amends its previous returns so that it claims at the lower rate in all periods to date.

103. New section 1179E provides what is meant by ‘production activities’ which are, in relation to a film or television programme, activities involved in the development, pre-production, principal photography and post production. ‘Principal photography’ includes the generation of images by a computer for inclusion in the film or programme.

104. New section 1179E(3) sets out that a film or television programme is only treated as an animation where the imagery of the completed film or programme includes animation, and the core expenditure on animation is at least 51% of the total core expenditure .

105. New section 1179EA sets out when a film or television programme is ‘completed’. For a film it is when it is first in a form in which it can reasonably be regarded as ready for copies of it to be made and distributed for presentation to the general public (for example by a distributer). For a television programme it is when it is first in a form in which it can be reasonably regarded as ready for broadcast to the general public.

Chapter 5 — Video games

106. Chapter 5 contains new sections 1179F to 1179FS which set out the applications of Chapters 2 and 3 specifically to video games, certification, and other definitions. An expenditure credit which arises under this Chapter is called a ‘video game expenditure credit’ (VGEC).

107. New section 1179FA sets out the criteria for a video game to qualify for relief. The game must meet the following conditions: the intended supply condition (section 1179FB), the British certification condition (section 1179FC) and the UK expenditure condition (section 1179FI). The game must also not be an excluded game, as described in new section 1179FA(2). That includes games produced for advertising, promotional or gambling purposes.

108. New section 1179FB contains the intended supply condition. In order to qualify for relief, the video game must be intended for release to the general public. The condition must be met at the end of every accounting period. If the game fails the condition at the end of an accounting period, it will not be eligible for relief in that period or any subsequent period, but relief given in earlier periods does not need to be repaid to HM Revenue and Customs.

109. New section 1179FC contains the British certification condition.

110. New sections 1179FC(1) to (3) set out the conditions where a development company has either an interim or final certificate. For pre-completion periods a video game is to be provisionally treated as meeting the British certification condition in that period if it has a valid interim certificate at the end of the period, and the development company’s tax return for that period is accompanied by the certificate. At the end of the completion period (see section 1179FQ) a video game will meet the British certification condition if at the end of the completion period either a final certificate has effect in relation to the video game, or the development company has abandoned production activities in relation to the video game and the interim certificate has effect in relation to it. In all cases the development company’s tax return for that period must be accompanied by the appropriate certificate.

111. New sections 1179FC(4) to (8) cover the situations where a video game does not meet the certification conditions, or where the certificate ceases to have effect. In such cases the video game is treated as not having met the certification condition so is not a qualifying video game, loses all eligibility for the tax relief, and any relevant company tax return drawn up in reliance of the certificate must be amended accordingly. In the case of a certificate ceasing to have effect, subsection (6) will not apply where the interim certificate is superseded by the final certificate.

112. New section 1179FD sets out the functions of the Secretary of State (with the approval of the Treasury) where the regulations for video game certification may be amended, or the certificate revoked.

113. New section 1179FE sets out the conditions for applying to the Secretary of State for a video game certificate (interim or final). The Secretary of State may also ask for information relating to the certification.

114. New section 1179FF sets out when a video game may be certified or a certificate revoked. Any certificate revoked by the Secretary of State is treated as never having had effect and the game loses eligibility for tax relief.

115. New section 1179FH allows for HM Revenue and Customs to disclose information to the Secretary of State for the purpose of the Secretary of State’s functions and also allows the same information to be disclosed to the British Film Institute.

116. New section 1179FI sets out the conditions relating to UK expenditure in both the pre-completion period and the completion period.

117. New section 1179FI(1) provides for pre-completion periods. The UK expenditure condition shall be provisionally treated as being met if the development company’s accounts for the period state the total amount of core expenditure that is expected to be incurred in relation to the video game, and the amount of expected UK expenditure. The amount of UK expenditure must be at least 10% of the total amount of expenditure.

118. New section 1179FI(2) states that a video game meets the UK expenditure condition for the completion period and any subsequent period if the development company’s accounts for the completion period state the total amount of core expenditure that has been incurred and the total amount of UK expenditure. The amount of UK expenditure must be more than 10% of the total core expenditure for the UK expenditure condition to be met.

119. New section 1179FI(3) sets out that if a video game does not meet the UK expenditure condition in relation to an accounting period then it will not be a qualifying video game. Relief given in pre-completion periods is rescinded, and the relevant company tax return(s) must be amended to give effect to this.

120. New section 1179FJ sets out the general rule that governs whether a company is a ‘development company’ for a video game. The company must be responsible for designing, producing and testing the video game. The company must be actively engaged in production planning and decision making during design, production and testing, and must directly negotiate, contract and pay for rights, goods and services in relation to the video game.

121. New section 1179FJ(1)(d) recognises that in some cases there may be more than one company meeting the definition of a development company for a video game and provides that, where this is the case, the company most directly engaged in the activities referred to in sections 179FJ(1)(a) to (1)(c) is the development company for the video game.

122. New section 1179FJ(2) excludes activities carried on in partnership in relation to a video game when determining whether a company is the development company.

123. New section 1179FK sets out that expenditure incurred by the development company for a video game counts as ‘relevant production expenditure’ if it is core expenditure and it is not excluded expenditure. The terms core expenditure and excluded expenditure are further defined in later new sections.

124. New section 1179FL defines what is meant by ‘core expenditure’ in relation to a video game. Core expenditure is expenditure on designing, producing or testing the video game. Expenditure on designing the initial concept, or debugging and maintenance work on a completed game, is excluded as it is non-core expenditure.

125. New section 1179FM sets out specifically excluded expenditure in relation to relief for research and development costs (R&D relief) and connected parties. Expenditure is not eligible for VGEC if a company is entitled to claim relief on it under any of the R&D schemes, or to the extent that it represents connected party profit.

126. New section 1179FM(3) defines connected party profit as the excess of the payment made to a connected party for supplying something over the cost incurred by the connected party in supplying that thing. For example, if company 1 pays connected company 2 £100 for a service, and providing that service costs company 2 only £75, company 1’s qualifying expenditure will be £75. The remaining £25 is the connected party profit.

127. New section 1179FM(4) makes provision to exclude connected party profit where payments flow through a chain of connected parties. For example, if company 1 sells a product worth £50 to connected company 2 for £100, and company 2 sells it on to company 3 for £100, company 3’s qualifying expenditure will still be only £50. The provision applies no matter how long the chain is.

128. New section 1179FN sets out the percentage rate of relief which is to be applied to the qualifying expenditure on a production at Step 5 in section 1179C to reach the amount of expenditure credit to which the production is entitled. The relevant percentage for video games is set at 34%.

129. New section 1179FO sets out when the separate trade is deemed to begin for a production. It is from this point that the separate trade rules must be followed (see section 1179B). The separate trade begins when the design of the game begins or, if earlier, when the company first receives income from the game.

130. New section 1179FP(2) explains that expenditure only counts towards the costs of the video game if it is expenditure on development activities in connection with the video game, or activities with a view to exploiting the video game.

131. New section 1179FP(3) provides that no amount is to be included in costs incurred for a period if those costs are still unpaid 4 months after the period ends.

132. New section 1179FP(4) sets out that income from a video game constitutes any receipts in connection with the making or exploitation of the video game. This includes:

• receipts from the sale of the video game or rights in it
• royalties or other payments for use of the video game or aspects of it (for example characters or music)
• payments for rights to produce games or other merchandise
• receipts by way of a profit share agreement

133. New section 1179FQ defines what is meant by ‘accounting period’, ‘completion period’ and ‘pre-completion period’.

134. New section 1179FR provides what is meant by ‘development activities’ which are, in relation to a video game, activities involved in designing, producing and testing the game.

135. New section 1179FS sets out when a video game is ‘completed’. A video game is completed when it is first in a form in which it could reasonably be regarded as being ready for copies to be made and made available to the general public.

Schedule 1: Part 2: Consequential amendments on Part 1

136. Paragraph 2 amends section 6 and Schedule 1 of the Films Act 1985.

137. Paragraph 3 amends Schedule 18 to the Finance Act 1998.

138. Paragraph 4 amends Schedule 24 to the Finance Act 2007.

139. Paragraph 5 substitutes sections 808 to 808E of the Corporation Tax Act 2009 with new section 807A. It also amends section 1040ZA and Schedule 4.

140. Paragraph 6 amends section 45A and Schedule 4 of the Corporation Tax Act 2010. It also inserts new Chapter 10A into the same Act.

Schedule 1: Part 3: Repeal of existing regimes for films, television and video games.

141. Paragraph 7 removes Parts 15 to 15B of the Corporation Tax Act 2009, with effect from 1 April 2027.

Schedule 1: Part 4: Amendments consequential on Part 3

142. Paragraph 8 amends section 6 and Schedule 1 of the Films Act 1985.

143. Paragraph 9 amends section 826 of the Income and Corporation Taxes Act 1988.

144. Paragraph 10 amends Schedule 18 to the Finance Act 1998.

145. Paragraph 11 amends Schedule 24 to the Finance Act 2007.

146. Paragraph 12 amends section 1040ZA, section 1310 and Schedule 4 of the Corporation Tax Act 2009.

147. Paragraph 13 amends Schedule 54A to the Finance Act 2009.

148. Paragraph 14 amends section 45A, section 45B, Chapters 11 to 13 and Schedule 4 of the Corporation Tax Act 2010.

149. Paragraph 15 amends Schedule 24 to the Finance Act 2016.

150. The amendments in this Part have effect from 1 April 2027.

Schedule 1: Part 5: Commencement and transitional provisions relating to Parts 1-4

151. Paragraph 17 sets out the closure of the existing reliefs to new productions. Companies may only claim AVEC or VGEC on productions in respect of which the separate trade begins on or after 1 April 2025. For the rules around when the separate trade begins for a production, see section 1179DW for films and television programmes, and section 1179FO for video games.

152. Paragraph 18 explains how productions may enter the new reliefs during the transition period.

153. Sub-paragraph (1) allows companies which elect to transition a production into the new regime in an accounting period that straddles the 1 January 2024 commencement date to apportion their expenditure for that accounting period. Expenditure up to 31 December 2023 is eligible under the relevant existing relief; expenditure from 1 January 2024 is eligible for AVEC/VGEC.

154. Sub-paragraph (2) ensures that once a company has switched a production into the new regime, it must remain in that regime in subsequent periods.

155. Sub-paragraphs (3) and (4) allow companies which elect to transition a production into the new regime in an accounting period that straddles the relevant closure date for the old reliefs to apportion their expenditure for that accounting period. Expenditure up to the relevant closure date is eligible under the relevant existing relief; expenditure from the relevant closure date onwards is only eligible under AVEC/VGEC.

156. Sub-paragraph (6)(c) explains which date should be used as the relevant closure date for a production. Films and TV programmes which have not commenced principal photography by 1 April 2025, and video games which have not commenced development by the same date, must use 1 April 2025 as their relevant closure date. Productions which have already commenced principal photography/production by 1 April 2025 should use 1 April 2027 as their relevant closure date.

157. Sub-paragraph (5) sets out how apportionment of expenditure is to apply. Companies should treat the accounting period as if it were two separate accounting periods, but only for the purposes of the relevant reliefs and Paragraphs 19 to 24 of this Schedule.

158. Paragraph 19 sets out the rules for productions in which do not switch into the new regime at their relevant closure date. The separate trade for these productions is deemed to have ceased on the day before the relevant closure date, and the production is treated as being abandoned. This means relief is not available under FTR, HETV, ATR, CTR or VGTR from that date, and the company cannot claim AVEC/VGEC in relation to the production in later periods.

159. Paragraph 20 allows for the separate trade treatment to continue without interruption for productions which switch between regimes. No adjustment of amounts brought into account to date for the separate trade is required; they are to be carried over from the old regime into the new.

160. Paragraph 21 links the cumulative calculation of qualifying expenditure between the existing reliefs and AVEC/VGEC for companies which switch partway through production. For the calculation of entitlement to AVEC/VGEC in section 1179CA(1), ‘qualifying expenditure incurred to date’ under the existing reliefs counts towards ‘relevant global expenditure’ in Step 1. ‘E’ under the existing reliefs is to be used as ‘qualifying expenditure to date’ in Step 4.

161. Paragraph 22 allows for certificates issued by the BFI for productions under the existing reliefs to continue to have effect for the new reliefs. Companies will not have to re-certify. References to revocation, ceasing to be in force and final certificates in the new reliefs have effect for the existing regimes so far as they affect accounting periods beginning before 1 April 2027.

162. Sub-paragraph (3) explains that the cessation of the existing reliefs from 1 April 2027 does not remove the certification requirement from being in force for claims under those reliefs up to the cessation date.

163. Paragraph 23 explains that the cessation of FTR, HETV, ATR and CTR from 1 April 2027 does not remove the UK expenditure condition from being in force for claims under those reliefs up to the cessation date.

164. Paragraph 24 sets out the transition rules for the move from the European expenditure condition to the UK expenditure condition for video games. The European expenditure condition applies to claims to VGTR, while the UK expenditure condition replaces it in VGEC.

165. Sub-paragraphs (1) to (3) explain that when a production switches into the new relief, provided it is not already completed, the accounting period immediately before the period in which VGEC is first claimed is treated as the completion period for the purposes of the European expenditure condition of VGTR.

166. Sub-paragraph (4) explains that, under the same conditions, core expenditure for the purposes of determining whether the UK expenditure condition is met under VGEC includes only core expenditure incurred after the switch to VGEC.

167. Paragraph 25 allows for the transfer of terminal losses between productions claiming under the old reliefs and the new reliefs. The terminal loss rules of the relief which applies to the trade receiving the loss take priority over the rules of the relief which applies to the trade surrendering the loss. This means that the transfer of a terminal loss from a film production trade to a TV programme production trade, and vice versa, is only possible where the recipient trade is subject to the new scheme.

Background note

168. As announced at Spring Budget 2023, the audio-visual creative tax reliefs are being reformed to expenditure credits. These changes will modernise the creatives tax relief system and ensure they continue to work as intended in the current global tax environment.

169. The Audio-Visual Expenditure Credit (AVEC) will cover the current Film Tax Relief (FTR), High End Television tax relief (HETV tax relief), Animation Tax Relief (ATR) and Children’s TV Tax relief (CTR). The Video Games Expenditure Credit (VGEC) will cover the existing Video Games Tax Relief (VGTR).

170. Currently, relief is given by way of an additional deduction from profits or surrendering a loss for a tax credit. Under the new expenditure credit schemes, companies will instead receive a taxable above-the-line tax credit based on qualifying expenditure. The qualifying criteria and other rules of the current reliefs will mostly be carried across to the new AVEC and VGEC schemes.

171. The new expenditure credits will be available to claim from 1 January 2024. There will be a transition period which will conclude with the existing tax reliefs being sunset from 1 April 2027.

172. If you have any questions about this change, or comments on the legislation, please contact Stephanie Martinez and Alice Williams at: stephanie.martinez@hmrc.gov.uk and alice.williams1@hmrc.gov.uk.