Generative AI Costs Deemed Eligible VFX Spend: What Does the UK's Enhanced Rate Mean for Productions
Learn how the incoming VFX incentive rate, including the eligibility of generative AI costs, will work in practice.
In the Autumn 2024 budget, UK Chancellor Rachel Reeves and HMRC and the Treasury brought welcome clarity as to the incoming enhancement of the VFX incentive rate that was initially announced in the March 2024 budget by the previous government.
Background
As part of the 2024 budget, it was previously announced that VFX spend would be eligible for a higher rate of Audio-visual Expenditure Credit (AVEC) at 39% compared to the standard 34% for other spend. It was also announced that VFX spend would be excluded from the 80% qualifying spend cap, creating a double benefit for VFX spend.
HMRC and the Treasury issued a consultation (which Entertainment Partners was part of) on:
- The details of the incentive uplift
- How it was to be administered
- What would qualify and
- Any unforeseen consequences of the uplift as originally designed.
What has now been finalised?
Post-consultation, VFX spend is to be more concisely defined than the original BFI definition – namely, as “work consisting of the use of computer technology to create or alter images for the inclusion in the film or programme.”
In HMRC’s original proposal, generative AI costs were excluded from the enhanced rate. Our response to the consultation was that excluding such costs would have had a detrimental consequence to the industry in the longer term, and that attempting to isolate such costs would create an almost impossible administrative burden on accountants and production companies – a view that was replicated across the industry.
It has now been explicitly confirmed that generative AI costs are eligible for the enhanced rate, which is of huge benefit to the value and futureproofing of the incentive.
How will the enhanced VFX rate work in practice?
All standard rate HETV and film productions will be automatically eligible for the enhanced VFX rate. Animations, children’s TV and IFTC-eligible productions will not be eligible as they already receive the increased rate (or higher) on all eligible costs.
When preparing the incentive calculation, VFX costs will be removed from the overall calculation and two separate incentive calculations will then be performed:
- one on the ‘main’ costs where the 80% cap is applied; and
- one on the VFX only costs where the 80% cap is not applied and the percentage rate is higher.
The value of the increased rate and the removal of the 80% cap is as follows:
When are costs eligible for the enhanced rate?
VFX costs incurred on or after January 1, 2025 will be eligible for the higher rate and it can be applied for from April 1, 2025.
However, one point that should be emphasised is when the enhanced rate will be payable for a production. The enhanced rate will only be payable in completion periods. Interim claims that include VFX spend will receive the standard AVEC rate and then receive the uplifted rate in their final claim on all costs to date.
Practically, this has limited impact as most interim claims are done to the end of shoot and therefore include minimal VFX elements. There is also no impact on the total value of the incentive, merely the timing.
Will productions need to provide extra information to HMRC to claim the higher rate?
Yes, there will be additional disclosure requirements to HMRC.
So far, we know that productions will need to provide HMRC with evidence of the VFX costs on which they wish to claim relief and details of the VFX provider(s) that carried out the work. Detailed guidance on this has yet to be published by HMRC.
Is the VFX rate final and written into law?
This is not yet legislated into law, but it is expected to be included in the Finance Bill published off the back of the budget, which will likely be in late 2024 or early in 2025.
Any changes to HMRC’s published final consultation are unlikely, but we cannot be certain on this until the legislation is published.
How EP can help
If you’d like to know more about these changes or how to access the enhanced VFX rate on your production, please don’t hesitate to contact me, Lloyd Gunton, Director of Creative Sector Tax Reliefs.
With vast experience in media and entertainment accounting, tax and tax incentives, finance, and accounting, our expert team can 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.