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Creative sector tax reliefs

Author: Graham Steele and Will Simpson

Published: 03 Feb 2022

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Graham Steele and Will Simpson take a deeper look at the Autumn Budget changes and outline how creative organisations can benefit.

The Autumn Budget 2021 announced a generous increase to the rates of cash tax credit that museums, galleries, theatres and orchestras may claim on qualifying expenditure. These measures are a much-needed boost for organisations badly hit by public closures during the coronavirus pandemic.

What are creative sector tax reliefs?

Creative sector tax reliefs allow qualifying companies and charities to claim a cash credit on the costs of developing new productions or exhibitions. The pre-Autumn Budget rules enabled unrestricted cash payments up to a maximum of between 16% and 20% of qualifying spend to be claimed, administered through HMRC.

The creative tax reliefs originally started out with film tax relief, before moving on to animations, high-end TV, children’s TV, video games, theatres, orchestras and, most recently, museums and galleries. The amount of cash credit available is based on the level of qualifying expenditure on new ‘productions’. Despite the title, it is important to note that companies or charities do not need to be tax-paying to benefit from the reliefs.

Qualifying conditions

There are various qualifying conditions for the claimant company and the type of production that is being undertaken. Although the criteria are relatively straightforward to understand, in practice there are often grey areas in relation to specific productions or exhibitions to be addressed when determining eligibility.

For films, animations, TV and video games (but not other creative reliefs), a cultural certificate must be obtained from the British Film Institute to certify that the production is British. This is a points-based system where points are awarded for attributes such as location, language and content. HMRC will not approve any claims without a certificate.

How the credit is calculated

Assuming there is a claim to be made for a particular production, claimants should calculate the credit available for each qualifying production separately. This is done by streaming all income and expenditure for that particular activity. An additional deduction is then available for the qualifying spend (broadly the activities involved in getting the production ready for the general public, but not running costs once the production is open).

The additional deduction is the lower of 80% of core expenditure and the amount of core expenditure on goods and services provided from a defined geographic area (either the UK or EEA depending on the relief).

To the extent that this deduction creates a loss, then that additional loss may be surrendered for a tax credit, usually at rates of between 20% and 25%.

The benefit for a loss-making production may therefore be greater than for a profitable one as illustrated in the examples using a 25% tax credit rate (see Table 1, below).

Example 1 profitable production

Example 2 Loss-making production

£

£

£

£

Income for production

1,000,000

200,000

Expenditure for production

(500,000)

(500,000)

Net profit/(loss)

500,000

(300,000)

Qualifying expenditure

350,000

350,000

Additional deduction at 80%

(280,000)

(280,000)

Taxable profit/(loss)

220,000

(580,000)

Tax saving (assuming 19% tax rate)

53,200

Tax credit at 25%

70,000

The relief itself must be claimed for each accounting period, for productions taking place within that period, via a company tax return submitted to HMRC.

Budget changes and pandemic support

The pandemic has had less impact on the film, animation, TV and video game industries than many other sectors, as after the initial disruption studios and development teams have been able to adapt working practices. Demand for such content has also risen rapidly.

Unfortunately, the same cannot be said of arts-based organisations such as theatres, orchestras, museums and galleries. These organisations, which are also generally charitable enterprises, have suffered greatly from not being able to open to the general public during large portions of 2020 and 2021.

While the government’s Culture Recovery Fund – a £1.57bn fund supporting cultural organisations through the impact of the pandemic – has provided short-term support to the sector, the Autumn Budget announced a generous increase to the rates of creative sector tax relief for museums, galleries, theatres and orchestras. These measures are welcome as a much-needed boost to these creative sectors as they reopen their doors to the public after closures during the pandemic.

Enhanced rates

For theatre tax relief, orchestra tax relief and museums and galleries exhibition tax relief, rates for tax credit have been temporarily increased, with claimants now able to obtain a cash benefit up to a maximum of between 36% and 40% of eligible expenditure.

The rate changes substantially enhance the available benefits and apply with immediate effect, although relief will taper back down to the original levels by 1 April 2024, which is set out in Table 2 (below).

Relief

Usual rates %

27 October 201-31 March 2023 %

1 April 2023-31 March 2024 %

1 April 2024 onwards %

Theatre tax relief: non-touring/touring 

20/25

45/50

30/35

20/25

Orchestra tax relief

25

50

35

25

Musuems and galleries exhibition tax relief: non-touring/touring

20/25

45/50

30/35

20/25*

Sunset clause extended for museums and galleries 

Museums and galleries exhibition tax relief was the only creative tax relief regime that included a sunset clause, allowing HMRC to review its continued application from 1 April 2022. This had been a cause of great concern for the sector. While there is disappointment that the sunset clause has not been completely removed, announcement of an extension of the sunset clause to 1 April 2024 provides a measure of additional certainty. 

HMRC has noted that the take-up for this particular relief has not been as widespread as expected and is hoping that the enhanced benefit and extended sunset clause will encourage more charities to claim relief.

Further announcements 

In addition to the rate changes, there were some minor clarifications regarding the types of production that can qualify and changes to ensure the reliefs are better targeted, such as making it easier for touring museum and gallery exhibition production companies to claim relief.

When do the enhanced rates apply? 

HMRC has clarified that the enhanced rates of relief only apply to productions where production activities had not commenced before 27 October 2021. For example, theatres already rehearsing for winter shows at this date would only be able to claim relief at the old rates on those productions.

The industry is also waiting for clarification on what constitutes commencement of a production, as this may have a big impact on decisions regarding timing as the rates of relief taper back to their original levels.

For orchestras specifically, they are able to elect for a series of concerts to be treated as one trade. This election helps to reduce the administration for claimants, but it needs to be submitted to HMRC in advance of the first concert in a series and therefore could mean that production activities are deemed to have commenced for all concerts within the election at the same date as the first concert. HMRC has indicated it will allow such concert series elections to be amended so that companies are not prevented from claiming the enhanced rates of relief on productions included within historical concert series elections. We expect HMRC guidance to be updated accordingly to reflect this.

What should cultural organisations be doing now? 

These tax reliefs are often poorly understood by both claimants and their advisers. In particular, smaller charities will rarely deal with tax advisers and will often rely on the support of their accountants rather than specialists. As a result, misconceptions as to which types of entity can claim are still widespread, as are misunderstandings as to what costs can be included and how complicated the claim process might be.

Larger claimants have often benefited most, as they have more resources to navigate the process, but the increase in the rates of payable credits means that all companies and charities with relevant activities should be looking afresh at these reliefs. Submitting a claim for a cash tax credit is often much less onerous than grant applications and the funding received is unrestricted, unlike many grants, which usually come with conditions attached.

Claimants should ensure they speak to a specialist adviser to ensure they get their full benefit entitlements. 

About the authors

Graham Steele, Partner, RSM 
Will Simpson, Associate Director, RSM