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01 April 2012

The government's decision to offer tax credits to high-end drama and animation will lead to a surge in production in the UK. Tim Dams explains how they will work, and finds out who is set to gain

A game changer.’ ‘A shot in the arm.’ ‘A huge opportunity.’ ‘An enormous step forward.’ ‘Transformative.’ Chancellor George Osborne’s budget announcement last month of a new tax incentive for high-end TV drama and animation has been met with the kind of positive reviews that TV execs could only dream of.

Osborne announced that the new tax relief would be modelled on the successful film tax credit system, which is worth up to 20% of a budget, with the ambition that it is up and running by April 2013 subject to European state aid approval.

Further details are few and far between. But meetings are already booked in and taking place as the Treasury and the TV industry try to hammer out a working tax relief system.

Oli Hyatt, chairman of Animation UK, which lobbied for over three years for tax relief for animation, says that Treasury officials were on the phone within 20 minutes of the announcement to start booking in meetings. John McVay, chairman of producers’ alliance Pact also confirms that the Treasury were in touch very promptly to schedule meetings.

What’s unsure is if the Treasury can stick to the April 2013 timetable. Ideally, the process would run as follows: six weeks of industry meetings to shape the tax credit starting at the end of March; a period of public consultation over the summer; and then European regulatory approval in the autumn with the tax relief ready to go live in April 2013.

“I have already had lots of calls from producers saying can I put it [the tax relief] in my budget for April 2013. But I’m having to say, I don’t really know because we don’t have any details yet,” cautions McVay. “There isn’t anything in the Chancellor’s statement which isn’t positive but the process tends to take a bit longer than everyone thinks.”

In particular, the industry wants to make sure that the new legislation contains no loop holes that might allow the tax credit to be abused and exploited. The last time the industry enjoyed any form of tax relief – in the form of the sale and leaseback scheme introduced by the Labour government – it was abruptly closed off in 2002 as a result of widespread abuse which infamously saw soaps claiming relief meant for high-end drama and film.

There are other factors that will complicate the passage to the new tax credit system. Firstly, it’s possible that a distinct tax credit may be modelled for each of the three sectors – high-end drama, animation and video games – identified by the Chancellor. Each sector, reckons Hyatt, is rather distinct from each other, with the video games industry in particularly functioning in a very different way to TV.

“The Treasury will model it on the film tax credit, but they are not religiously going to force something that doesn’t work and will model a new thing for each industry,” he says.

Europe could also be a potential stumbling block. The EU is wary of measures that distort the workings of the single market. And this relief will clearly put the UK in a strong position to attract inward investment from drama and animation projects compared to some rival European nations. That said, many other EU countries – such as Ireland and Hungary – boast their own incentives and the UK’s will arguably help level the playing field.

On the plus side, the film tax credit, which has been up and running for five years, provides a strong basis for drama and animation tax credits, says Liz Brion, head of media tax at Grant Thornton. “A lot of the framework is already there.”

The film tax credit, she notes, provides “an absolute maximum” of 20% of budget. But, often, it is below this as a film cannot meet all the criteria required to access the full relief.

The film tax credit, for example, is available to UK film production companies for films that meet a cultural test administered by the BFI, and is based on qualifying UK production expenditure.

At the very least, Brion says she hopes that the TV tax credit is engineered so that it is producers and their shows which get the benefit. But, will it simply lead to broadcasters lowering their budgets by up to 20% and effectively banking the benefits? Or might it mean broadcasters with inhouse production arms choosing to make more dramas inhouse to take advantage directly of the relief? And will it mean that US studios like Warners and HBO, which have so vocally welcomed the relief, can simply make their shows much more cheaply as a result? “The profits for producers might be from more trading rather than the benefit of the tax relief,” notes Brion.

However, Pact boss John McVay thinks that interventions by his organisation earlier this year will mean that producers will remain key beneficiaries. “The early work I saw had set budget levels at a point where broadcasters would have discounted their budgets by the value of the tax credit.” So the proposed budget level for qualifying dramas was raised to £1m. This means that broadcasters will still likely have to pay their traditional drama licence fees of £600k-£800k. Says McVay: “There will be no benefit to broadcasters if they reduce their budgets by the value of the tax credit. Producers will be put in the same difficult position of closing the finance, and broadcasters would not get any benefit because the drama might not get made. If they want to get it made and they were going to pay £600-800k anyway, they might as well pay it and then the producer can give them a production worth £1m. So it is good for broadcasters – they will get the indirect benefit on air of the tax credit.”

The predictions are that the new tax credit will lead to a surge in business for drama and animation producers (Pact is also pushing for the tax relief’s remit to be extended to children’s production too.)

Titanic producer Nigel Stafford-Clark says that he would have shot his £10m mini-series in the UK rather than Hungary and Canada if the tax credits had been in place.

“One of the problems UK broadcasters and producers have been facing is that we didn’t have anything to put on the table when it came to attracting productions into the UK or getting our productions financed. We had the licence fee from broadcasters, but that is all we had.”

The new tax credit, he adds, will be “enormously important” in getting UK shows made and in attracting English language shoots to the UK. This in turn should lead to a string of knock on benefits for ancillary businesses, such as studios, post production houses and talent working in the industry.
Oli Hyatt, md of animation outfit Blue-Zoo Productions, says he has already had offers of work worth millions now that the tax credits have been agreed. “It’s a huge game changer for us. We will be the go-to country for animation.”

And, hopefully, the benefits should be spread around the country. Yorkshire, for example, has regularly attracted films and dramas such as Wuthering Heights,  Red Riding and The Damned United to shoot in the region. It has struggled to compete with the tax offers of rival countries, but hopes the new tax credits will change that.

Hugo Heppell, head of investments at Screen Yorkshire, says: “There’s no doubt that the cost savings and tax breaks in places like Eastern Europe or Ireland have offered a major competitive challenge. These new tax breaks combined with our new £15m Yorkshire Content Fund should mean the region can offer a financial package second-to-none for UK and overseas drama producers.”

Meanwhile, business affairs consultancy Industry Media says it has acted for the lead producer on 30 TV dramas over the past two years. Of those, more than a third were filmed outside the UK, including runaways Death in Paradise, Zen, Primeval and Titanic. Sometimes the script demanded this, as in the case of Wallander shooting in Sweden.

Industry Media’s Simon Vyvyan says: “But if those factors don’t exist and it’s a simple choice between accessing, say, the section 481 tax relief in Ireland or this new tax credit in the UK then, as lovely as parts of Ireland are, I cannot imagine many of my clients choosing to cross the Irish Sea unless the script is set there.”

 
 


























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