HMRC Announces Changes to Claiming UK Creative Sector Tax Incentives

When the new UK Audio-Visual Expenditure Credit was introduced in January, one of the lesser discussed points was HMRC’s intention to increase the level of disclosure that it requires of companies claiming a tax credit. This ‘anti-abuse’ measure was brought in to prevent inappropriate claims being made under the regime.

These new disclosure requirements came into effect from April 1, 2024 for all tax credit applications – both those made under the new AVEC regime and those made under the ‘old’ tax credit system. This article sets out what’s changed and what productions need to do going forward to access UK tax relief.

Before we jump in, it’s important to note that there has been no change to what can be claimed under the new AVEC versus the old tax credit system. Rather, these changes concern the information that HMRC requires from production companies as part of their application.

What are the new requirements?

The new requirements are contained in the Relief for Creative Industries (Additional Information Requirements and Miscellaneous Amendments) Regulations 2024.

There are two sections of additional information to be provided: the first applies to all productions (whether utilising the AVEC or the old tax credit), and the second applies only to AVEC or Video Game Expenditure Credit (VGEC) claimants.

Requirements for all productions

Under the first section, all companies must supply the following information:

• Accounting period start and end dates;
• Registered name;
• Unique Taxpayer Reference (UTR) number;
• Value-Added Tax (VAT) registration number;
• Employer Pay-As-You-Earn (PAYE) reference number;
• Foreign Entertainment Unit number;
• Contact details for a responsible officer at the company;
• Contact details for the company’s tax agent;
• Types of relief claimed;
• Number of productions claiming each relief;
• Name of production;
  
  For each production within a claimant company:
  • Start date of pre-production;
  • Abandonment date (if applicable);
  • Calculation of relief;
  • British Film Institute (BFI) certificate reference number; and
  • BFI certificate;

• For each type of relief claimed, a breakdown of total expenditure (non-core/core/UK/non-European Economic Area), losses surrendered and total relief claimed; and
  
  At a company level:
  • Total AVEC and VGEC claimed;
  • Losses brought forward; and
  • Losses surrendered under each step of AVEC calculation.

While this seems extensive, in effect the only additional information is highlighted in bold above. Given the general special purpose vehicle (SPV) model that is adopted in the UK, the breakdowns by production or by company will correlate to the company’s sole production and the information will therefore be inherently available to your tax advisor. 

The requirements should therefore not put any additional burden on productions themselves and simply require that additional information be included on the online form.

Requirements for AVEC/VGEC claimants

Unfortunately, the second set of requirements which apply to AVEC and VGEC claimants are not as straightforward and will put an additional burden on production accounting teams and production executives.

Companies claiming any strand of AVEC (including the new Independent Film Tax Relief) or VGEC will now also need to supply the following:

• Declaration of connected party transactions;
• Number of connected parties for the period; and
• Total value of connected party transactions for the period.

For each transaction, the following will also need to be disclosed:

• Transaction date;
• Name of the connected party; 
• Transaction amount; and
• Description of the goods or service.

In practice, the key is going to be ensuring that all connected parties are identified at the start of production. Once this is done, production accountants should be able to ‘tag’ any transactions with those parties within the accounting system. For example, the free field functionality of EP’s advanced production cost management system, SmartAccounting, gives users complete flexibility to tag transactions so that they can quickly find the information they need to complete an incentives application.

If the transactions are tagged, accountants or advisors will be able to extract that data so that it can be submitted to HMRC. Additional testing will be required to ensure that the information is complete; therefore, there will likely be an increase in compliance costs in this area.

What are ‘connected parties’ in this context?

Specifically for these purposes, two companies are ‘connected’ if:

The same person has control of both companies;

• One person (“A”) has control of one company and persons connected with A (“B”) have control of the other company;
• One person (“A”) has control of one company and, together with persons connected with A (“B”), has control of the other company;
• A group of two or more persons have control of both companies and the groups either consist of the same persons or could be so regarded if (in one or more cases) a member of either group were replaced by a person with whom the member is connected; or
• A company is controlled by a person who controls another company in concert with other connected individuals.

With respect to the above, people are considered to be ‘connected’ if:

• A is B's spouse or civil partner;
• A is a relative of B;
• A is the spouse or civil partner of a relative of B;
• A is a relative of B's spouse or civil partner; or
• A is the spouse or civil partner of a relative of B's spouse or civil partner.

In general, if two companies are part of a worldwide group, they will be connected. Likewise, if two companies have common or connected control, they will also be considered connected even if not by direct ownership.

What happens if a production doesn’t provide connected party transaction information?

The first step above (the declaration of connected party transactions) must be made honestly. Therefore, if a production confirms the existence of such transactions, HMRC will likely be aware if the required information is not forthcoming.

Failure to provide full information will result in those transactions being excluded from qualifying spend, which could have a significant impact on the value of the AVEC available.

What do these requirements mean in practice?

Production companies will need to provide their accounting teams with a group structure so that they can identify connected parties and then ensure that these are tagged appropriately.

The same structure must also be provided to tax advisors so that they can perform checks and tests on this as well.

The lists of connected party transactions must be reviewed and approved by appropriate production executives as part of the final submissions made to HMRC. While tax advisors can assist in compiling and reviewing the list, it cannot be approved by anyone outside of the company.

When do these requirements take effect? 

The Part 1 (general additional information) requirements came into effect for all submissions from April 1, 2024, regardless of whether the submission relates to ‘old’ tax credits or new AVEC or VGEC claims.

All AVEC and VGEC submissions must comply with the second set of requirements (connected party disclosures) with effect from April 1, 2024.

Although HMRC did advise that these rules were coming, they have been implemented within a relatively short timeframe. As such, productions should ensure that they are aware of the requirements and are working them into their internal processes for preparing any tax credit or AVEC/VGEC applications.

Want to find out more about the new requirements?

If you have any questions about these changes, please don’t hesitate to get in touch with me, Lloyd Gunton, Director of Creative Sector Tax Reliefs at FLB Accountants (an Entertainment Partners company).

As a UK-based accounting firm with expertise in media and entertainment accounting, tax and tax incentives, finance, and accounting, the FLB team can also provide film and TV tax credit incentive estimates and formal opinions to lenders, manage tax credit claim submissions, work with producers to advise on and finalise budgets and provide deal close support for both independent and multi-party financed projects.