CREC021120 - Qualifying productions: independent films: budget condition

Section 1179DJA Corporation Tax Act (CTA) 2009

The Corporation Tax (Certification as Low-Budget Film) Regulations 2024

A film is treated as an independent film if it has been issued with a low-budget certificate by the British Film Institute (BFI). The BFI will issue a certificate if the film passes the cultural test for film and also meets two further conditions:

  • The budget condition
  • The creative connection condition (CREC021130)

This page covers the budget condition. Please read CREC021130 for more detail about the creative connection condition.

The budget condition states that a film is an independent film if total core expenditure on the film does not exceed £23,500,000.

Core expenditure is the amount spent on pre-production, principal photography and post-production of the film (CREC051000).

Generally, core expenditure only includes expenditure incurred by the production company of a film. However, for the purposes of the budget condition, total core expenditure means all core expenditure incurred on the film by both the production company and any co-producers.

Importantly, it includes both core expenditure that has already been incurred, and any core expenditure that is anticipated to be incurred in the future.

Note: the budget condition is tested when the production company applies to the BFI for certification, not when it makes a claim to HMRC. For interim certification, the total core expenditure figure provided to the BFI must be accurate as of 3 months or less before the application date. For final certification, the figure must be accurate as of the date the film is completed.

See CREC032000 for details of when a film is treated as completed.

Evidence requirements

To evidence that the budget condition is met, production companies must provide the BFI with:

  • the total core expenditure in relation to the film
  • the total non-core expenditure in relation to the film
  • an auditor’s report verifying those expenditure figures
  • a budget document which sets out total expenditure in relation to the film, broken down by category (e.g. equipment, wardrobe, studio hire)

The requirements are the same for interim certification and final certification.

For more information, please see the BFI’s guidance: Apply for British certification and tax relief | BFI


Interaction with the £15m cap

A production company may only include up to £15m of relevant global expenditure on an independent film in its expenditure credit calculation (CREC061100). Relevant global expenditure is core expenditure that is not excluded expenditure. This means that the maximum core expenditure which a production company can include in its expenditure credit calculation for an independent film is £15m. This maximum would be reduced by any excluded expenditure incurred.

This £15m cap is lower than the maximum core expenditure allowed for the budget condition (£23.5m). A film which has core expenditure between £15m and £23.5m meets the budget condition and can be certified as a low-budget independent film. However, the production company can only include up to £15m of that core expenditure when it calculates the amount of expenditure credit it is entitled to receive in relation to the film.

Contingent compensation

For the purposes of the budget condition, total core expenditure includes both core expenditure that has already been incurred on the film and core expenditure which the company anticipates will be incurred in future.

In the film industry, payment for goods and/or services is sometimes contingent on the production receiving a certain amount or kind of income. It can also be dependent on the production making a profit. Effectively, the amount the supplier is to be paid is linked to the success of the project. Some contingent compensation can be anticipated, but in other cases it may not be possible to effectively estimate the amount a supplier will be paid.

The total core expenditure figure provided to the BFI must include any core expenditure that is contingent upon income that the production company includes in ‘estimated total income’ for the purposes of calculating the profit/loss of its separate film trade (CREC038000).

Total core expenditure should also include any contingent compensation which the company can reasonably expect to incur. This may be the case if there is contingent compensation which relies on the film making an amount of profit or income that it is almost certain to achieve.

Example

Company A is producing an independent film. The company has agreed that the film’s director will receive a contingent fee of £500,000 if the film makes at least £6 million in income (not profit). The director’s fee relates to core production activities and would be core expenditure.

When Company A completes the film, it is close to securing a deal with a streaming service that offers to pay £10 million for the rights to the film after its theatrical release. This means that, at the date the film is completed, Company A can reasonably anticipate that the film will have income of at least £6 million and the director’s fee will be incurred.

Company A must therefore include the £500,000 director’s fee in total core expenditure when it applies to the BFI for a final low-budget certificate. It does not matter that the deal has not yet been signed; what matters is that the company expects it to be signed.

End of example

Where the amount of contingent compensation cannot be reliably estimated in any way, it does not need to be included within total core expenditure for the purposes of the budget condition. For example, this would apply to a fee that depended entirely on an unpredictable event or income, such as the proceeds from cinema ticket sales.

The use of contingent compensation for independent films carries a risk of exceeding the maximum core expenditure for the budget condition

  • between interim and final certification, or
  • after final certification

Maximum core expenditure exceeded between interim and final certification

A production company which has received an interim low-budget certificate on a film may incur previously unforeseen core expenditure after certification. If this means that total core expenditure exceeds the £23.5m maximum by the time the company applies for final certification, the company must:

  • apply for a final certificate for a regular film (or animated film, if applicable)
  • surrender its interim low-budget certificate

Any claims made in reliance on the interim low-budget certificate will become invalid. However, using its final certificate, the company can make a claim for the film on a cumulative basis, covering all expenditure to date. This means it will still receive relief for all the expenditure on the film, but at a relevant percentage of 34% (or 39%, for animated films) instead of 53%.

If the new claim results in the company being entitled to a greater amount of expenditure credit, HMRC will pay the difference. If it results in the company being entitled to less, HMRC will claw back the excess credit received by the company.

Maximum core expenditure exceeded after final certification

If the core expenditure incurred on a film exceeds £23.5m after the production company has received a final certificate, what happens next depends on whether the company should have anticipated and included the extra core expenditure when it applied for the certificate. As explained above, some contingent compensation can be anticipated, and other contingent compensation cannot be anticipated.

If, at the film’s completion date, the company could not reasonably estimate or anticipate the amount of extra core expenditure, it can keep its low-budget certificate for the film. Any claims previously made in reliance on the certificate will continue to be valid, and the company can use it to make claims for any further qualifying expenditure. The £15m cap on relevant global expenditure (CREC061100) will continue to apply.

However, if the company reasonably have anticipated incurring the extra core expenditure, the low-budget certificate will be revoked, and any claims made in reliance on it will be invalidated. Any payable credit the company has already received must be repaid to HMRC. If the company is still in time to do so (CREC085000), it may replace the revoked certificate with an ordinary final certificate and amend its completion period claim to include all expenditure at the normal relevant percentage rate for the film (39% for animated films, or 34% for other films).

Switching to lower rates of Audio-Visual Expenditure Credit

In some cases, due to the £15m cap that applies to independent films, it is more beneficial for a company which exceeds £23.5m core expenditure on an independent film after final certification to instead claim for the film as an animated film or other film. If it is within the time limit to do so (CREC085000), a company can withdraw its previous independent film claims and use its low-budget certificate to make a cumulative claim to include all expenditure at the normal relevant percentage rate for the film (39% for animated films, or 34% for other films).