U.K. Bolsters Tax Credits for Big Movies, Extends Incentives to VFX

UPDATED: The British government says the VFX sector will benefit from the tax credit systems currently available for films, high-end TV productions, animation and gaming projects.

LONDON – The U.K. government said Thursday it would bolster tax credits available for bigger-budget movies and extend the incentives to the VFX business.

The government said it would make relief available at 25 percent on the first $32.7 million (£20 million) of qualifying production expenditure, and 20 percent thereafter, for both small and large budget films from April 2014.

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So far, productions with a budget of $32.7 million (£20 million) or less could apply for the 25 percent tax credit, while projects with a budget higher than that could claim only a 20 percent rebate.

The government will also reduce the minimum U.K. expenditure requirement from 25 percent to 10 percent. It will also “modernize" the so-called "cultural test," the system used to certify projects as eligible for the tax incentives.

In 2015, Britain will also increase the rate of tax relief to 25 percent for all qualifying expenditures.

As part of the changes, the government will also extend the tax credits currently available for films, high-end television productions, as well as animation and video game projects to the VFX sector with a tweak to the cultural test giving applicants more points for carrying out VFX work in the U.K.

The U.K. VFX sector, which counts the Sandra Bullock starrer Gravity, Christopher Nolan's Inception and the Harry Potter franchise among its output, could benefit from a tax credit shift.

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The VFX industry in Britain has done well, but the sector has been hit hard in many countries amid competition from low-cost suppliers, particularly from Asia. Numerous effects houses have shut down or been forced to consolidate.

The tax credit changes was contained in the British government's fall budget statement made by George Osborne, Britain's chancellor of the exchequer, the equivalent of other nations' finance minister or treasury secretary.

Osborne hopes the tax credit system for VFX work will help reinforce the U.K. as a destination for post-production for Hollywood projects and beyond.

The move follows the introduction of a tax credit system for high-end TV productions, animation and gaming in April.

The U.K.’s creative industries have previously been hailed by the current government as a success story worth more than $56 billion (£36 billion) a year.

In his Thursday speech, Osborne called the tax incentives launched in April a "huge success."

Osborne also signaled that regional stage productions could start getting the benefit of the tax incentives. "We’re making our successful film tax relief even more generous, and look to extend the principle, including to regional theater," he said without providing full details.

U.K. Screen, the trade association for the film and TV facilities sector, presented the industry’s feedback to the government with advice from U.K. VFX house Double Negative and Saffery Champness, accountancy specialists in U.K. and international film and television tax incentives during a consultation on the changes.

VFX house Double Negative's managing director Alex Hope, whose company's output includes work on Hunger Games: Catching Fire, Rush, Thor: The Dark World and Captain Phillips, said: "Adjusting the film tax relief so that it reflects changes in the production process will enable the U.K. industry to capitalize on its strengths in VFX and cutting-edge production technologies. This makes financial and creative sense."

In number terms, Hope pointed out that VFX budgets can now account for 10 percent-50 percent of a project's overall budget, which can be $40 million (£25 million) on just one film.

"Digital technologies have transformed the film-making process, and will continue to do so, giving film-makers new ways to tell their stories," Hope said.
"It is vital that the U.K. has an integrated approach to the digital future of the film industry. Today’s announcement is crucial in giving VFX companies confidence to continue investing in their U.K.-based operations and generating further growth for film and the creative industries."

John Graydon, partner at U.K. accounting firm Saffery Champness, said: "The changes mean that large-budget films will receive more tax relief and find it easier to qualify."

He also noted that the new measures "more closely reflect changes in the film-making process which have a direct bearing on international producers and their decision making in bringing VFX work to the U.K."

And Graydon also noted that lowering the minimum U.K. spend requirement to 10 percent and adjusting the cultural test "will allow more productions to come to the U.K., and will also help U.K. independent production companies develop co-production partnerships and in turn open up creative and commercial opportunities for U.K. companies, cast and crew."

Adrian Wootton, who is both chief executive of the British Film Commission and Film London, the latter being the government backed agency tasked with attracting inward investment to the capital and push the U.K. as a destination for producers, said the fiscal incentives were a foundation for a healthy industry here.

"The U.K. is home to world-class film-making talent and expertise which help drive the industry forward, as demonstrated recently by the U.K.-produced and critically-acclaimed Gravity. However, in order to continue to attract business to the U.K. in a fiercely competitive global marketplace, our industry must be underpinned by effective fiscal incentives."

Wootton described the introduction of the tax relief in 2007 as a "game changer" adding that Thursday's tax announcement "ensures we can continue to grow our industry, boosting the U.K. economy and creating British jobs; it will also encourage the production of more culturally British projects."

Charles Moore, one of the partners at media law firm Wiggin, who helped steer the tax break for high end TV through said Thursday's changesis "further public recognition by the government not only of the opportunities for growth of the U.K. creative industries in a global market but of the valuable contribution these sectors make to the country’s economy."

He added that the changes "are likely to mean an increased number of films being attracted to the UK to utilize its world-class VFX houses, thereby addressing the current loss of such work to overseas suppliers."