5 Things to Consider Before Transitioning to the UK’s New AVEC Regime

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Zach Duthie
Zach Duthie Member, Administrator Posts: 49
edited February 28 in Producers

A comprehensive overview to help determine if you should use the UK’s new incentive regime to fund your next production.16 January 2024

Sam Collett

With the introduction of the new audio-visual expenditure credit (AVEC), the UK production incentive regime has undergone the most significant change since the introduction of the current systems for film in 2007, and high-end television (HETV) in 2013 (see here for more information).

The AVEC became available to productions on January 1, 2024, but is mandatory only for productions whose principal photography commences on or after April 1, 2025. That means there’s a 15-month period where both regimes are available.

There are numerous factors productions should bear in mind before deciding which regime to access. Productions should also note that in its final legislation published in November 2023, the UK government addressed some of the previous areas of uncertainty and provided clarity on how the new regime works in practice.

What to think about

Connected party costs

One of the headline elements of the draft legislation published in July 2023 was the restriction on claiming an incentive on connected party costs, whereby any profit element would be explicitly excluded from qualifying for the new incentive.

This was flagged to the UK Treasury as an area of concern both from a practical standpoint (in terms of being able to identify profit elements on some complicated transactions) and because the stated aim of the incentives was for them to be as generous as the existing tax credit regime, which would not be the case if this restriction took effect.

In the final legislation, HMRC changed the wording around connected party transactions. They now qualify in full for the expenditure credit, as long as they are conducted at an ‘arm’s-length basis’. There is considerable precedent for what HMRC will consider ‘arms-length’ – if you have any questions on this subject, please get in touch.

One further element that has been clarified in the final legislation is that HMRC now requires all connected party transactions within a production to be disclosed in an accompanying disclosure form (details of the form are not yet available).

Identification of connected party costs both at a budgeting stage, and also from a production accounting perspective, are therefore an important element to consider. This will be an area that advisors and auditors will focus on for calculating incentive values and preparing claims, and may therefore require additional input from productions (and especially production accounting teams).

Increased rate

For any initial internal calculations being done on the incentive (e.g., within Movie Magic Budgeting), you will need to remember to update the credit rate to 25.5% from the current 25% level – or up to 29.25% for animation and children’s TV.

Changes to corporation tax rate

The new AVEC and video game expenditure credit (VGEC) regimes have an implicit potential to have a variable rate by virtue of the gross credit (34% and 39%, respectively) being subject to the main rate of corporation tax (25%) to create the new effective rates of 25.5% and 29.25%.

Based on the draft legislation, the potential for a change in the main rate of corporation tax (either up or down) to impact the value of the tax credit was again flagged to HMRC.

HMRC’s response was that it would be a policy decision for any government to make in terms of adjusting the rates of the incentive to neutralise the impact of changes to the main rate of corporation tax. The expectation was that this would happen given the stated intent to maintain the generosity of the incentive.

The final legislation includes an additional clause which states that the government may by regulation change the incentive rate to a different percentage. The inclusion of this additional clause further suggests that the rate would be likely to change, should the net value of the incentive be impacted by a change in the main rate of corporation tax.

Enhancement for animation and children’s TV

For both animation and children’s TV, the new AVEC brings with it a more marked increase in rate up to a 29.25% effective rate. Clearly, any budgeting for those shows will need to factor this in to an even greater extent than for standard films or HETV shows.

An important reminder here is that animated feature films can now qualify as an animation, rather than just animated TV shows. This would therefore give the same film a 14.7% greater tax credit if it qualified as an animation compared with a standard film.

Timing

As noted above, the new regime is available from January 1, 2024 and will be mandatory for productions that start principal photography on or after April 1, 2025.

For this transitional period, a cost benefit analysis might be required to assess which regime is beneficial on a production-by-production basis—for some it may be beneficial to move to the new regime, for others it may be better to stick to the old regime.

This could also be important from a timing perspective when determining the start of principal photography if there is a significant difference in the value of credit available to a production.

It is important to note that there is a fixed sunset date for the new regime of April 5, 2027, after which only the AVEC will be available.

What not to think about

Cultural Test

The introduction of the AVEC has not affected the Cultural Test, which determines whether a production qualifies as ‘culturally British’ and is therefore eligible for the incentive. All existing rules and interpretations and the qualification process remain the same.

However, productions should note that due to the number of applications, and the nature of the applications being received, the current turnaround time for both interim and final certificates from the British Film Institute (BFI) is 18-20 weeks—longer than it has been previously.

Thankfully, extra funding has been made available to the BFI (as announced in the government’s Autumn Statement 2023) to allow it to work to bring the turnaround time back down to previous levels.

Planning for this longer turnaround time for financial close and cash flowing of final tax credits is an important element that productions should discuss with their advisors.

HMRC Process

While the AVEC does represent a significant change to the administrative operation of the incentive versus the current tax credit system, it is not an entirely new process for HMRC.

The AVEC mechanism has been based on the existing Research and Development Expenditure Credit (RDEC) and is designed to operate in the same way from an HMRC perspective. As such, the transition between the reliefs should be relatively smooth from an HMRC administrative process and should not lead to any significant changes to the HMRC review process.

In the short term, while HMRC is administering two concurrent regimes in the creative sector, there may be a slight increase in turnaround times, but this is not expected to be severe.

Want to know more about the AVEC?

Ultimately, if you have any concerns about the details, reach out to Lloyd Gunton and the team at FLB Accountants (an Entertainment Partners company), who can answer any questions you have on the new system and the interaction of the reliefs.

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.

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