On Tuesday 18th July, HM Revenue & Customs (HMRC) published draft legislation providing further detail on the reform of the UK’s existing audio-visual reliefs into a single Audio-Visual Expenditure Credit (AVEC), an expenditure credit of broadly equivalent value. AVEC will be rolled out over the next four years, with the earliest opportunity to claim AVEC arising for accounting periods commencing on or after 1 January 2024 (see detailed transitional provisions below).

This publication is intended by HMRC to provide a final opportunity for industry stakeholders to comment, not so much on the overriding principles but on any unintended consequences of the draft legislation. The deadline for responses to this technical consultation is 12 September 2023.

Many features of the existing relief have been retained. Our list below identifies areas where there have been material changes to the existing reliefs and/or where we consider the draft legislation may have unintended or disproportionate consequences worthy of comment:

• Film and High-End TV Credit (25.5%): The headline credit rate of 34% will broadly equate to a 25.5% credit as a % of qualifying expenditure (see illustrative calculation here). This compares favourably to the existing 25% relief. This means that for a film or High-End TV production shot entirely in the UK, the value of the AVEC will equate to 20.4%, as opposed to 20% under the existing regulations, given the 80% cap on UK core expenditure, which is being maintained under the new regulations (see below).
• Animations and Children’s TV Credit (29.25%): The headline credit rate of 39% will broadly equate to a credit of 29.25% of qualifying expenditure (see illustrative calculation here). This is a material uplift to the existing 25% relief, intended to provide specific support to these areas. This means that for an animation or children’s TV production shot entirely in the UK, the value of the AVEC will equate to 23.4%, as opposed to 20% under the existing regulations

• AVEC will be structured as a refundable expenditure credit, based on the existing R&D expenditure credit (RDEC). The credit will be accounted for as a taxable trading income and included in a company’s profits and subject to corporation tax (with a deduction allowed from the corporation tax). This is different from the calculation of the existing reliefs which operate as an adjustment to taxable profits.
• As a taxable trading receipt, AVEC can be utilised in a number of ways, including being surrendered to other group companies and used to relieve their tax liabilities.

• The qualifying criteria applying to the existing reliefs will be maintained, including the UK core expenditure threshold of 10% and the 80% cap on UK core expenditure (defined as being goods or services “used or consumed” in the UK, i.e., with the focus on the location of the recipient customer, not the supplier) but will be subject to some additional restrictions (see below).
• For ‘High-End TV’, the minimum expenditure test remains at £1 million per hour of slot length but, in a nod to the changing nature of content consumption, the minimum slot length has been reduced to 20 minutes and will apply on an episode by episode basis, i.e. the aggregation of episodes will no longer be permitted.
• The definition of documentary has been restricted to programmes “intended to inform the viewer about real events” and “those events which have not, to any significant degree, been arranged for the purposes of the programme”  and either; (i) “the events are not depicted by one or more persons playing roles”, or (ii) ”to the extent that events are depicted in that way, the depiction is ancillary to a written or spoken narrative of the documentary”.

• Connected Parties: One significant change is the introduction of a connected parties rule which will restrict relief on payments between connected parties to the amount of expenditure incurred by the connected party in providing the service. For example, if a company pays a connected company £100 for a service which costs only £75 to provide, the qualifying expenditure of the engaging company will be restricted to £75 (not the £100 actually paid). With the exception of rental costs for use of a premises or land as a location for principal photography, many intra-group supplies will therefore be unable to claim full relief, for example, intra-group production services.
• AVEC cash refunds are only available after other tax liabilities are settled: HMRC reserves the right to set AVEC off against any existing tax liabilities of the company (including any current or previous year corporation tax or PAYE/NICs) before any cash refund can be obtained. Therefore the level of payments may be less certain at the outset and the payment itself will be made by HMRC later in the production cycle (i.e. once the applicable accounting period has ended, the associated corporation tax return submitted and corporation/other taxes paid). This is a key difference from the existing relief and the resultant uncertainty may impact credit lines (where relied upon), as well as cash flows. The impact of these changes will need to be considered and carefully managed.
• Going Concern: The expenditure credit is only payable if the company is a “going concern”. If the company is in administration or liquidation, then it’s not payable. Arguably this is unduly draconian for a company in administration, given that the purpose in those circumstances is to ultimately restore a company to financial health and reinstate its going concern status.
• Eligibility under AVEC and RDEC: Where expenditure technically qualifies under both AVEC and the RDEC, RDEC takes precedence and the draft AVEC legislation therefore contains an exclusion to prevent any double claim.

• For accounting periods beginning on or after 1 January 2024, AVEC will be available to companies alongside existing audio-visual tax reliefs
• If a company’s accounting period begins before 1 January 2024 but ends after 1 January 2024, it will have the option to apply the existing rules to expenditure incurred up to 31 December 2023 and apply the AVEC to expenditure incurred from 1 January 2024.
• From 1 April 2025, AVEC will be obligatory for new productions. If principal photography has started before this date, then the existing reliefs remain available until 31 March 2027.
• From 1 April 2027, all productions commencing principal photography must claim under AVEC and the current tax reliefs will cease to be available.
• A company that does not elect to opt into the regime by the relevant ‘closure dates’ as set out above will be treated as though it has abandoned its activities in relation to the film or television programme (i.e., will be precluded from benefiting).

Please see a copy of the expected timeline of events for reference.

• Companies must elect to opt into the new regime during the above transitional periods in their company tax return.
• Companies claiming AVEC will be required to complete and submit an online information form intended to improve the provision of additional information.

Please do get in touch if you would like to discuss these changes.