Like many involved with the UK content industries, we welcomed the announcement in last month's Budget of the extension of the UK film tax credit regime to high-end TV drama, animation and video games (/pdfs/budget_2012_-_Creative_Industries.pdf) Less heralded is the commencement of a consultation by the European Commission on changes to the State Aid rules as they apply to the audio-visual sector.
As many of you know, the EU-wide State Aid rules set out the parameters within which the various national subsidy regimes for the audiovisual sector across the EU must operate. The draft Communication issued on 14 March will impact the extended UK tax credit as it applies to television and animation as well as feature films (video games are unaffected).
At the heart of the draft Communication are two proposed changes that we believe together represent a significant threat to the UK content production sector.
- Territorial scope of tax credit subsidies
Under the proposal, EU countries would no longer be entitled to distinguish between spend in their own country and spend in other EU member states for the purposes of determining the amount of the State Aid, beyond stipulating that 100% of an equivalent amount to the amount of the State Aid must be spent in the country contributing that State Aid.
To take the current UK tax credit regime as an example, a film production would need to spend only the amount of its budget for which it would be claiming tax credit (say 18%) in the UK and, provided it qualifies as British either under the Cultural Test (see /pdfs/filmtax_nov09.pdf) or as an official co-production under (we assume) its bilateral treaty with France or the Convention (defined below), the entire qualifying spend in the EU would count for the purposes of calculating the amount of the UK tax credit. This could encourage culturally British productions to spend less money in the UK and more in lower cost areas of the EU and use fewer British cast and crew. We expect the application to high-end television and animation to be similar.
Since it was implemented in 2007, the UK tax credit regime has been successful in targeting support for the British film industry on the basis of objective criteria. It has introduced a degree of certainty and its success in supporting film production and bringing increased financial benefit and growth in the sector to the UK is clearly a factor in its extension to TV, animation and video games. It is hard to imagine the UK government continuing the tax credit regime in its present form if money from UK taxpayers could effectively be used largely to subsidise production spend outside the UK.
- State Aid limits for higher budget "non-European" productions
The draft Communication also proposes new caps on the amount of State Aid for audiovisual works. Under the proposal, the maximum proportion of the budget of an audiovisual work that can be made up of State Aid (currently 50% of the total budget) will be reduced for higher budget works that fail to qualify as "European". The change is aimed at preventing EU member states from competing with each other for inward investment, most notably of course from the US.
Under the draft Communication, in order to qualify as European, a work has to:
(a) be majority produced by a producer or producers established in the European Union/EEA; other elements such as creative control, ownership of exploitation rights and share of profits may also be taken into account in determining which is the producer; and
(b) score at least 10 points out of 19 on the following scale (which in the allocation of actor points differs from the test in the European Convention on Cinemato-graphic Co-Production applicable to feature films http://conventions.coe.int/Treaty/en/Treaties/Word/147.doc) (the "Convention"):
Actor 1 2
Actor 2 2
Actor 3 2
Production design 1
Director of Photography 1
Shooting location 1
Structuring a project as an official treaty co-production with a co-producer from outside the EU with not enable "non-European" elements from the co-producer country to count towards the 10 point minimum.
Should a film fail to qualify as European on this basis, the maximum amount of State Aid that can make up the budget tapers off for higher budget projects as follows:
- 50% of that part of the budget which is between €0 and €10 million
- 30% of that part of the budget which is between €10 million and €20 million
- 10% of that part of the budget which is over €20 million
The proposal, in particular the 10% subsidy cap for films which have a budget well in excess of €20 million but which may qualify as British under the Cultural Test or as official co-productions but fail to reach 10 points on the European scale, would reduce the attraction of the UK as a destination for inward investment. This is not merely an issue for Hollywood majors and mini-majors. The entire UK industry benefits from inward investment fostering talent and sustaining the UK production ecosystem.
If you are interested in learning more about the proposed changes or in responding to the consultation, you can do so here:
The closing date for submissions is 14 June 2012.
For further information, please contact: