What Expenditure Qualifies for UK Film Tax Relief?

The UK Film Tax Relief (FTR) gives films a financial boost by providing production companies with a payable cash tax credit.  

It’s one of the most generous, inclusive and reliable production incentives in the world, but it can be tricky to navigate.

Who can apply for the UK FTR?

The FTR is available to Film Production Companies (FPCs) involved in making films that are: 

• Certified as British by the British Film Institute (by passing the UK Cultural Test or being a qualifying co-production); 
• Intended for theatrical release; and
• Incur at least 10% of this core expenditure on goods or services consumed in the UK (referred to as “UK expenditure”).

The FPC claiming the FTR must be responsible for all aspects of production, including pre-production, production, post-production and delivering the completed film. Notably however, these can be subcontracted out; the requirement does not mean that all activity must take place in the UK and be paid for directly by the FPC.

The FPC must also be primarily involved in planning and decision making and directly negotiate, contract and pay for rights, goods and services. Again, as above, this is not exclusive and other companies in the production structure can be involved (e.g., guild companies required to contract with guild member talent).

What counts as qualifying expenditure?

UK FTR applies to most expenditure incurred during pre-production, principal photography, post-production and delivery. It does not apply to other stages, such as development, distribution or publicity.

Development expenditure

The FTR legislation makes a distinction between the “development” stage and the “pre-production” stage. The latter counts as qualifying expenditure, whereas the former doesn’t. But what’s the difference?

Put simply, any work done on a film before a decision has been made to green light it (or when the film is considered financially viable) counts as development. Effectively, it is work done speculatively before a definite decision has been reached.

Pre-production work, on the other hand, is not speculative. It counts as activities that are done knowing a decision has been taken for the film to go ahead – expenditure incurred in this phase is therefore qualifying expenditure.

That might sound straightforward, but it can be difficult to directly attribute expenditure to a specific stage.

For example, a screenplay will usually be written during development – before it is definite that a film will go ahead. In which case, that wouldn’t count as qualifying expenditure at face value. However, that screenplay will also be used in pre-production to rehearse, principal photography to work from and post-production for any dubbing or amends, and spend in those stages does count as qualifying expenditure.

In this example, it would be reasonable for the cost to be apportioned across the relevant stages of film-making, not including development.

The distinction between stages also applies to work done by an individual. For example, if a producer worked on a film for a year, with three months spent in development and nine months in pre-production, principal photography and post-production, then on a straight-line basis three-quarters of the fee would qualify. However, is that truly a fair representation of the split of value of the producer’s input into the final production?

As you can see, this can get complicated quickly and there are a number of examples where it may apply, so it’s important to seek proper advice when working out development vs pre-production expenditure.

Non-core expenditure

Expenditure which occurs outside pre-production, principal photography or post-production and delivery, and does not contribute to the production of the film isn’t qualifying expenditure.

This can include items like bonds, financing, option payments for rights, development, publicity and capital expenditure.

Essentially, any expenditure incurred on development, distribution or non-production activities likely will not qualify as core expenditure. But within these definitions, there are – again – nuances.

For instance, legal fees that are incurred relating to organising the financing of the production would be non-qualifying expenditure. However, fees from the same law firm relating to negotiating and drafting contracts with cast members would qualify. It is therefore important to clearly separate out the nature of costs incurred.

Once development and non-qualifying costs are stripped out of the budget you are left with core qualifying costs which, in line the overall qualification requirements, need to be at least 10% used or consumed in the UK.

UK expenditure

The next area to determine therefore must be UK expenditure. But what counts as “UK expenditure”?

UK-qualifying expenditure is defined as expenditure “used or consumed” in the UK.  In other words, it is costs incurred on production activities that take place within the UK, regardless of the nationality of whoever is carrying out the activity. 

Again, this seems straightforward, but there is complexity.

In a simple example, if an actor is hired to film scenes in the UK, this qualifies as UK expenditure, regardless of the actor’s nationality, the location of the company invoicing for the actor’s services or the currency the invoices paid in.

Conversely, if that actor was only hired for scenes that are filmed outside the UK, their fee wouldn’t qualify as UK expenditure because the actor’s services were not used or consumed within the UK. Again, this is true whether the actor is British or a foreign national.

However, if the actor was hired to appear in some scenes which were filmed in the UK and some scenes which were filmed overseas, an analysis would have to be made to establish how much of their service was used or consumed within the UK and therefore qualifies as UK expenditure.

This can get even more complicated when a service is used or consumed in more than one way.

For instance, imagine that a script is written in the UK (during development, so potentially not core qualifying expenditure) and then used in pre, production and post-production (qualifying expenditure). Let’s say some of the script was used in rehearsals in the UK (core UK qualifying expenditure), and then it was used again in principal photography, which took place partly in the UK (core UK qualifying expenditure) and partly overseas (core non-UK qualifying expenditure).

In this example, it would be necessary to make an apportionment of the relevant core expenditure between UK and non-UK expenditure, and this would need to be done on a case-by-case basis.

Expert help can be invaluable here in ensuring that you are maximising the relief available and are correctly calculating a film’s qualification regarding the 10% threshold.

What’s the FTR actually worth?

The FTR is payable at a 25% rate on UK qualifying expenditure.

However, the tax relief is capped at 80% of the total core qualifying expenditure (even if you have 100% UK qualifying expenditure, tax relief is only payable on up to a maximum of 80% of total qualifying expenditure).

There is therefore an effective maximum tax credit payable of 20% of total core qualifying costs (being 25% of 80%).

The good news is that there is no limit on the film budget or the amount of relief payable – both on a project-by-project basis or in any given calendar/financial year. There is also no minimum spend requirement – micro budget films can claim as long as they meet the same criteria.

The FTR incentive is undoubtedly beneficial to the industry and producers, as demonstrated by numerous studies into its effectiveness and economic impact.

That said, the definitions of what does and doesn’t count as qualifying expenditure can be a confusing terrain to navigate and it’s always worth seeking specialist advice.

The future of the incentive

In March 2023 the UK government announced a shift from the current FTR regime to a new Audio-visual Expenditure Credit (AVEC) from January 2024. The new credit regime will bring a slight uplift to the value of the incentive with an effective credit of 25.5%.

Importantly, there are no fundamental changes to the underlying rules, qualification requirements or interpretation of eligibility compared with the current regime. As such, all of the information above will remain valid and applicable for future productions.

More information on the new AVEC regime will be published once further clarity is received from the UK government on certain aspects.

How Entertainment Partners can help

As the UK incentives landscape continues to evolve, the Entertainment Partners team wants to make sure you understand how it impacts your productions. Keep an eye on our site for updates and if you ever have questions or need support, please contact us.

If you decide to explore the UK as a filming destination, reach out to Lloyd Gunton and the team at FLB Accountants (an Entertainment Partners company). FLB is a UK-based chartered accounting firm with expertise in media and entertainment accounting, tax and tax incentives, finance and accounting. They also provide film and TV tax credit incentive estimates and formal opinions to lenders, manage tax credit claim submissions, work with producers to advise on and finalise budgets and provide deal close support for both independent and multi-party financed projects.

Want to learn more about the UK tax credit? Check out our recent Master Series, What Productions Need to Know About the UK Tax Relief.

This article contains general information we are providing on a subject that may be of interest to you. Nothing in this article should be considered tax, accounting, or legal advice. You should consult with your own tax, accounting, or legal advisors regarding the applicability of this information to your specific circumstances.