CREC053000 - Eligible expenditure: non-qualifying expenditure
Non-qualifying expenditure
To qualify for the Audio-Visual or Video Games Expenditure Credits (AVEC or VGEC), relevant global expenditure must be of a kind that would be taken into account in calculating the profit/loss of the separate production trade under section 1179DX Corporation Tax Act (CTA) 2009 (for films and TV programmes) or section 1179FP (for video games). Costs must be incurred on production/development activities in relation to the film, TV programme or video game in order to be eligible.
It is not possible to give a comprehensive list of non-qualifying expenditure, but the following items merit comment.
Completion bonds and other forms of insurance
Completion bonds are a form of insurance against the risk that a production may not be completed. Costs of the completion bond do not qualify for relief. They are not incurred on production/development activities.
Other forms of insurance, more directly concerned with the production/development activity itself, may qualify. For example, the owner of a UK property used as a filming location may require that the property should be insured against possible damage sustained during or as a result of filming. The costs of such insurance would be allowable.
Development and initial concept design costs
See CREC051000 – these costs are not part of core expenditure.
Entertaining
Cost related to hospitality and entertainment are disallowable under normal Corporation Tax rules.
Capital expenditure
Most capital expenditure is disallowable under normal Corporation Tax rules. However, where a cost would be treated as capital only because it is incurred on the creation of an asset (that is, the qualifying film, TV programme or video game), it may be treated as revenue expenditure (CREC037100). The legislation is in section 1179BE CTA 2009.
Publicity and promotion
Publicity and promotional costs do not qualify for relief. They are not concerned with the making of the film, TV programme or video game.
Financing, sales and distribution
The costs of obtaining finance or funding, and arranging for sales and distribution are not related to the core production/development activities, so they do not qualify for relief.
Audit fees
These do not relate to production/development activities, so they do not qualify for relief.
Bank interest and charges
While interest itself is regarded as part of the costs of financing a production, and therefore not incurred on production/development activities, charges incurred by banks for facilities that are needed by the production company to engage in those activities are part of the costs of production/development. This includes charges associated with the maintenance of a current account from which suppliers, cast and crew can be paid.
Furlough payments, including those met by the Government through the Coronavirus Job Retention Scheme (CJRS)
When a company places an employee on furlough, the employee must cease work. The employee is not carrying out production/development activities and is not working on any of the core activities (see CREC051000).
Staffing costs in respect of an employee on furlough are therefore not considered by HMRC to be on production/development activities, and do not constitute production expenditure. Such payments are not considered to be costs of the separate production trade and are not eligible for relief. This applies equally to all furlough payments, whether or not they are reimbursed by the CJRS, and includes any ‘top-up’ element. If an employee has been placed on flexible furlough, then any payment in respect of the furloughed time will not be eligible.
Holiday pay and sick pay are statutory requirements. HMRC considers them to be a necessary cost of employing staff and part of the cost of their working time. Any period during furlough which is taken as annual leave or recorded as sick leave is potentially eligible for relief, and should be apportioned in line with work done.
Requirement to be both relevant global expenditure and UK expenditure
Relief is provided only on those elements of relevant global expenditure which are also UK expenditure.
Where a company incurs:
relevant global expenditure which does not qualify as UK expenditure, or
UK expenditure which is notrelevant global expenditure,
such expenditure will not attract relief under AVEC or VGEC.
UK expenditure is not automatically relevant global expenditure
It therefore follows that relief is not provided on all UK expenditure. Some elements of UK expenditure will not attract relief because they do not relate to the core activities:
Pre-production, principal photography and post-production of a film or TV programme, or
Designing, producing and testing a video game.
Even if such expenditure takes place within the UK, no expenditure credit is due on it.
For example, to the extent that a script is used as part of the process of establishing the practical viability of a film, the relevant expenditure will be development expenditure and therefore it is not core expenditure. Similarly, to the extent that a UK programmer works on debugging a game, the cost of their wages is excluded from core expenditure.
Likewise, expenditure on advertising a film, TV programme or video game is part of the cost of its distribution and therefore will not attract relief on the grounds that it is not core expenditure.
Elements of UK expenditure that represent excluded expenditure will also not attract relief. For example, take expenditure on a transaction with a connected party to provide lighting technicians for a TV shoot in the UK. Because the lighting technicians perform their services in the UK, the expenditure is UK expenditure. However, if the transaction is not priced at arm’s length, the expenditure is still restricted and partially excluded from relief even though it is UK expenditure.
Eligibility for tax purposes
Relevant global expenditure that is not UK expenditure, and UK expenditure that is not relevant global expenditure, are not eligible for AVEC or VGEC. However, this does not mean that such expenditure will not be relieved for tax purposes. Instead, the expenditure will be subject to normal tax rules, and so will generally be available to be set against the income of the production/development company.