New UK Tax Relief to replace Section 42 from January 1st 2007
A new 'Cultural Test' for British films
has been given the green light by the European Commission today, and should
come into force on 1 January 2007. The test determines whether films can qualify for the new system
of tax relie announced by the Chancellor in the Budget
earlier this year.
Cultural Test
There are four sections in the test, which together
measure the extent of a film’s British cultural character:
- Cultural Content – is the film set in the UK, does it have British
characters, is it based on British subject matter or underlying
material and is it filmed in English?
- Cultural Contribution – does the film contribute to the promotion,
development or enhancement of British culture relating to cultural
diversity, heritage and creativity?
- Cultural Hubs – is the film made in UK studios or on UK locations,
does it use British visual or special effects or music recording
facilities, does it use British post production houses?
- Cultural Practitioners – are the people who work on the film from the European Economic Area?
Film makers will be awarded points in each of the categories and
must score a minimum of 16 points out of a possible 31 to pass the test.
The test, which was published in December last year, has been
revised in line with the European Commission’s State Aid requirements.
The new tax relief
The new tax relief will mean:
-
For films that cost up to £20 million, the Film Production Company
(FPC) will be able to claim an enhanced deduction of 100% with a
payable cash element of 25% of UK qualifying film production
expenditure.
- For films that cost over £20 million, the FPC
will be able to claim an enhanced deduction of 80% with a payable cash
element of 20% of UK qualifying film production expenditure. The
minimum UK spend threshold for qualifying films will be set at 25%.
As part of the State Aid approval process, the draft Cultural
Test as passed by Parliament in April 2006 has been substantially
revised in order to satisfy the state aid requirements of European law.
The British Government has been working with the Commission to ensure
that the revised test does meet those requirements which allow EU
member states to subsidise films for cultural purposes, within the
regime established to protect open competition between member states.
Subject to Parliamentary approval of the cultural test, the new
film tax incentives will then be activated from 1 January 2007.
Full details on the transitional arrangements for films already in production will be available from Thursday morning at www.hmrc.gov.uk/films.
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Fiona Hotston Moore, managing partner of MRI Moores Rowland , said the announcement would have a negative impact on the long term future of the local film industry because of new cultural requirements, since it would deter US studios who help foster British film making.
'If a film was filmed and produced in the UK and the dialogue was in English it would be eligible for tax relief. The new cultural test means that the producer and director will have to be British to claim the reliefs,' Hotston Moore said.
A number of US studios have chosen the UK as a location because of the tax reliefs, but the new rules mean that many of these studios will no longer be eligible for the reliefs.