What is an Incentives Estimate and Why Do I Need One?

Incentives are becoming an increasingly important element of finance plans around the world – for everything from major studio and streamer productions to independent features and even short films.

Although the UK incentives regime is known for its simplicity, it’s still recommended that productions obtain an incentives estimate at the outset of budgeting to ensure that their finance plan is as accurate as possible. Read on to find out more about incentives estimates and why you should get one for your next production.

Back to basics: What is an incentives estimate?

Put simply, an incentives estimate is exactly what it says on the tin: an estimate of the value of the incentive in a given territory that is available to a production.

An incentives estimate can come in many forms – from a ‘back-of-a-napkin’ high-level initial estimate to a detailed line-by-line assessment of a production budget.

Why do I need one?

Most finance plans now have incentives built in as a method of funding the production; therefore, knowing what level of incentive is available is crucial for locking down a finance plan and ensuring that your production can be made.

Also, many productions will get a loan against their tax credit to avoid equity financing it. In that case, the lending bank or company will want to know how much the incentive is worth when determining how much they are willing to lend.

In this situation, the lender will often want an Opinion Letter or Letter of Comfort. These are detailed assessments of all aspects of qualifying for an incentive, plus the incentives estimate, and form part of the qualifying criteria for the lender in assessing the viability of an incentive loan.

When do I need an incentives estimate?

The earlier you get an estimate of the value of the available incentive the better, as it can drive the finance plan and the level of equity or pre-sales that you need to achieve to go into production.

However, at an early stage, you may not need a detailed line-by-line estimate, especially if the budget is likely to change during the financing process. It may therefore be better to calculate a very high-level estimate early on and then get a detailed estimate once the budget is closer to being locked.

As the UK incentive is a flat rate, can I just calculate it myself by multiplying the budget by the rate?

It is true that the UK incentive is currently a flat rate across all qualifying expenses. However, calculating the incentive is not as simple as it seems, as you still have to determine:

• what expenses qualify for the incentive;

• which of those expenses are considered UK ‘used or consumed’; and

• when the 80% spend cap applies.

However, for the standard AVEC rate of 25.5%, you can get a good indication of the incentive available for a 100% UK production fairly simply. If you were to use 19% rate on all spend, you would get a reasonable estimate of the potential incentive – the 80% cap gives an effective rate of 20.4%; therefore, at 19% there is a reasonable allowance for non-qualifying spend to give a rough estimate.

How does EP calculate the incentive in detail?

When doing a full tax credit estimate, we take the extract from Movie Magic Budgeting and work through it on a line-by-line basis, determining whether each element qualifies and, if so, whether it is UK or non-UK used or consumed.

Movie Magic Budgeting has a built-in incentive estimation tool which can be used to get an initial idea of the potential value of the estimate. This is done by applying groups to expenses and tagging them as qualifying, which provides a good starting point for the calculation. However, due to the intricacies of the qualification criteria and methodology, we recommended that you engage a qualified advisor to help ensure the accuracy of your final estimate (and therefore your finance plan).

Will the IFTC or new VFX enhancement impact this process?

The new Independent Film Tax Credit (IFTC) will not fundamentally impact the process for a UK incentive calculation. While the incentive value will increase from 25.5% to 39.75%, the process for getting to that stage remains the same. This is also true for animation and Children’s TV where the rate is 29.25%.

However, the new VFX enhancement will impact the calculation process. From April 1, 2025, UK used or consumed VFX spend will be eligible for a 29.25% rate rather than a 25.5% rate. Further, it will not be subject to the 80% spend cap. As such, the mechanics of the calculation will change and impact the value of the tax credit, as two different rates of incentive will apply to certain elements of a production budget.

Looking for UK incentives support?

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, FLB can provide UK incentives estimates plus structuring and qualification advice for productions that are looking to come to the UK for elements of production (remember: not all of a production doesn’t needs to take place in the UK to qualify for UK tax relief). We can then assist you with an opinion letter for financiers, the Cultural Test and the actual process of accessing and monetising the tax credit in the UK.