Film Finance: UK PLC
Dave Morrison explores why UK film production, locations and credits are proving so appealing to tax credit tourists, and how it stacks up against other European countries.
‘The tail should not wag the dog’ is an old adage used by tax experts when advising clients who are too focused on tax advantages rather than commercial considerations. So, when looking at financial incentives on offer to film and TV productions in any given country, one really should look at the bigger picture: namely commercial practicalities including transport costs, local expertise, facilities and whether the headline incentive on offer is really as good as it seems.
So, where does good old UK PLC stand in a competitive world market? Warner Bros.’ investment in UK facilities would seem to indicate that the UK is a desirable base, and there have certainly been enough major films made here over the years to demonstrate that the local workforce has the skills to do the job. Furthermore, there are several renowned studios in the south east offering world-class facilities, so the UK seems to tick a lot of boxes. We know that the UK can deliver, then, but what about cost? One needs to consider not only the cost of goods and labour, but also currency exchange rates and logistic costs. And local incentives, such as Tax Credits, need to be factored in too.
Local costs often reflect local infrastructure and accessibility. Remote or undeveloped areas, for example, often prove cheaper in accordance with the natural economic laws of demand and supply. But is the local workforce up to the job, or is there a cost of shipping in expertise? And what are the implications of local labour laws, such as those found in France? As for exchange rates, they are unpredictable; as it is not the remit of this article to indulge in too much economic theory, let’s skip exchange rates and move on to local financial incentives.
Before comparing what may be on offer around the world, it may be useful to remind ourselves what the UK offers. Apart from Lottery funding via the British Film Institute (BFI) or a national agency (Creative England; Creative Scotland; Film Agency for Wales; Northern Ireland Screen; and Film London) or regional body (Screen South; Northern Film & Media; and Screen Yorkshire), the headline incentives are the creative Tax Credits.
For film, certain top-end TV and animation productions, a producer can receive up to 20 per cent of qualifying UK production costs in cash. As always, there are a number of hoops to jump through, but that is the headline UK production incentive. Because the UK is a member of the European Union it is subject to EU State Aid restrictions on subsidising industries. Consequently the incentive is deemed to be ‘cultural’ rather than ‘industrial’ and it will come as no surprise to discover that other EU countries which have incentives are subject to similar restrictions, and that their incentives tend, consequently, to broadly resemble what is on offer in the UK—with subtle differences.
The German incentive (DFFF), for example, is set at 20 per cent like the UK, but is limited to €70m in total annually, spread around all recipients, so there is always a risk that the money can run out. Germany, however, also has a lot of local state incentives which can either compensate or enhance this. France offers its TRIP incentive for foreign producers, again at 20 per cent but capped at €10m per project. Lesser developed countries in the EU, including Hungary, have also been offering tax credits of 20 per cent with some success but, again, it is well worth checking that the funds are not capped and that local infrastructure and skills meet requirements. So, with the UK having no restriction on how much may be applied for, nor how much is available in total, it scores well in comparison with other European countries. (Where a project has ‘core production expenditure’ of more than £20m, however, the UK Tax Credit is likely to be restricted to 16 per cent rather than 20 per cent.)
Looking beyond Europe, where there are no EU-imposed restrictions, the range of incentives includes some interesting models, some at national level and others more regional. For example in the USA, incentives are found on offer from individual states and other more localised areas. Canadian provinces also provide competitive incentives. It is easy to get drawn in by seemingly high percentages, but questions must be asked. Some incentives, for example, are based on all local activity, whereas others may be restricted to, say, local labour costs. If a 40 per cent rebate based on labour costs only equates to 15 per cent of total costs, the UK’s 20 per cent incentive may actually yield more. Manitoba in Canada offers a choice, either 45 per cent of labour costs or 30 per cent of production costs, and this can be enhanced with other bonuses. The numbers look good but the location and winter climate may not suit everyone. Mauritius, Malaysia, Columbia and Abu Dhabi boast good headline rates but, as ever, check compatibility!
Some tax credits really are what they suggest: a voucher that the owner can use to settle a tax liability. Assuming that the producer is not based in that particular territory, it is possible that they do not have a tax liability, so they are allowed to sell it on to a local taxpayer. Inevitably, a local taxpayer is not likely to pay full price for the voucher so, consequently, the headline percentage is unlikely to be realised. An example is Puerto Rico, which offers 40 per cent on money paid to local residents, whilst payments to foreign talent attract a lower credit of 20 per cent.
New York has recently added an incentive which means that a film shot elsewhere could still benefit by engaging in post-production there, with better rates when undertaken further upstate. The political landscape in the USA, however, includes some who question whether the incentives offered justify the economic stimulus they create and, consequently, incentives are sometimes liable to change or even to disappear.
Closer to home, Ireland and Belgium continue to offer incentives which, prima facie, benefit the investor with their Section 481 relief and Belgian Tax Shelter schemes respectively. With the right structuring, this can have a flow-through cost benefit to the producer but is unlikely to be replicated in the UK any time soon, particularly given the government’s previous experiences with so-called Sale and Leaseback Schemes. (The subsequent proclamation was that the Film Tax Credit was introduced with a view to ensuring that producers, rather than investors, got the cash.) Subject to size limitations, however, it is still possible to finance a film using the Enterprise Investment Scheme (EIS), so that investors get UK tax breaks. A £5m movie funded through an EIS structure could obtain 30 per cent (£1.5m) in tax breaks for investors, plus up to £1m Film Tax Credit; add in some regional funding, plus world-leading facilities and personnel and it’s no wonder that the UK is an extremely attractive location indeed.
Dave Morrison is a partner of entertainment accountants Nyman Libson Paul, and chairman of the Institute of Chartered Accountants’ Entertainment and Media Group
This feature was originally published in movieScope magazine, Issue 36 (October-December 2013)