| Practice area: | Finance | Public Policy |
|---|---|
| Client: | HM Revenue & Customs |
| Published: | 17 November, 2022 |
| Keywords: | quantitative analysis finance |
1.1 Key points from the evaluation
- there is strong evidence that the tax reliefs across film, high-end TV, animation and children’s TV have made the UK a more attractive filming and production location, and led to more productions taking place in the UK
- the reliefs were seen as having aspects which made them competitive beyond their headline rate, including simplicity, consistency, and speed of payment. This meant that claimants could confidently factor the relief into their plans
- the process of claiming the reliefs is seen as straightforward
1.2 Introduction
HM Revenue and Customs (HMRC) commissioned Ipsos, in partnership with Olsberg•SPI and London Economics, to evaluate 4 creative industry tax reliefs: Film Tax Relief (FTR), High-end Television (HETV) Tax Relief, Animation Tax Relief (ATR) and Children’s Television Tax Relief (CTR). These reliefs aim to promote the sustainable production of culturally relevant films and TV in the UK.
The evaluation assessed 4 broad areas, including impact (on individual productions and on the wider creative industries), appropriateness and proportionality of the reliefs, and the claims process.
The evaluation draws on 3 main data sources. These are: a telephone and online survey of 164 recent FTR claimants (mostly independent UK film producers), econometric analysis of data on FTR and HETV tax relief claimants, and 63 qualitative interviews with claimants of all 4 reliefs.
1.3 Impact on UK productions and proportionality
On the basis of this evaluation, there is strong evidence that the reliefs lead to productions taking place in the UK that would not have happened in the UK otherwise. In qualitative interviews, the existence of the 4 tax reliefs was seen as a key reason as to why the UK has been an attractive filming location in recent years, and why UK production crews and infrastructure are currently in high demand. Some ATR claimants argued that the relief had been vital to the survival of the animation industry in the UK.
Large multinational film and TV companies explained that they chose to produce in the UK based almost entirely on the UK tax relief regime. These inward investors highlighted how the reliefs complemented the UK’s other advantages, such as high-quality industry infrastructure and talented cast and crew. Domestic producers also reported that the tax reliefs were important for their survival, especially given the increasing cost of UK crews and infrastructure.
Our survey of FTR claimants suggests that 38% of productions would not have taken place without this relief. Our survey sample is predominantly representative of domestic production companies, rather than inward investors. As such, based on the qualitative accounts – where inward investors were largely unanimous in their views of the importance of the reliefs – this 38% is likely to be a lower bound estimate for the true additionality figure. For comparison, a 2021 report from Olsberg•SPI with Nordicity estimated that 46% of domestic production company spending in the UK would not have taken place without FTR – a similar result to this study[1].
In our survey, 8 in 10 production companies reported that a less generous rate of relief would have resulted in their productions having smaller budgets or not taking place at all. By contrast, 7 in 10 reported that an equivalent more generous relief would have led to them increasing their production budgets. This suggests the potential losses from lowering the relief are more significant than the potential gains from increasing it. In other words, the relief appears to be set at a proportionate level.
However, across multiple strands of evidence, there was not conclusive evidence to suggest that the existence of the reliefs would lead to larger production budgets in reality. In interviews, production leads suggested that their budgets were determined by creative or commercial considerations, and that the tax reliefs were typically unlikely to affect these decisions, although there were some exceptions raised.
Some smaller domestic producers of animation or children’s television commented that, without the reliefs, they would not be able to make the types of more culturally niche or innovative productions they wanted to focus on. These creative projects therefore might not exist.
1.4 Wider economic and regional impacts
There was a widespread perception that the reliefs have had a significant impact on employment. This was by attracting inward investors to increase production in the UK and by enabling more domestic productions to take place at all. However, the effect on freelance work and contractors was felt to be greater than on payroll employment, because of the high use of contract workers in the creative industries.
The econometric analysis undertaken has generated estimates of the impact of increased economic activity as a result of the reliefs. This includes a direct impact from more production spending. It also covers indirect impacts on industries which supply goods and services to the film and HETV sectors, the resulting effect on the wider economy, and the effects on merchandise sales and tourism.
Overall, the direct and wider impacts of FTR were estimated at between £1.2 billion and £1.7 billion in 2019 to 2020; for HETV tax relief these were estimated at £0.7 billion to £1.0 billion. As this modelling is based in part on the survey data, which is largely representative of smaller, domestic productions, the finding is likely to understate the economic impact of FTR and HETV tax relief (given the considerable spending power of inward investors). As such, these should be treated as bare-minimum estimates, representing the added value for domestic productions.
Geographically, London and the south-east were found to retain a strong dominance in terms of film production, while the production of HETV, children’s TV and animation appeared to be more spread throughout the UK. Nevertheless, interviewees suggested the tax reliefs had increased regional production activity, with the high demand for crews and infrastructure permeating across the UK. The tax reliefs were felt to complement existing regional incentives. However, the bottlenecks to regional production – shortages of regional skills and infrastructure – remain a challenge for the industry.
1.5 Process of claiming the reliefs
Survey evidence (on FTR) and the qualitative evidence suggests that the design of the reliefs makes them competitive beyond their financial generosity. Claimants described a high degree of confidence in the reliefs, particularly due to their clear and stable design which means claimants can easily understand whether productions are eligible and plan accordingly.
The structure of FTR was seen as simpler than those in other jurisdictions, which can involve different rates for separate stages of production, or types of production. In addition, the reliefs were seen to pay out faster than reliefs in some other jurisdictions, giving production leads more confidence when managing their project budgets.
Both the survey evidence (on FTR) and the qualitative evidence suggest no major issues with the claims process. Across all 4 reliefs, claimants commonly described this process as easy and straightforward, especially if they had made a claim previously.
Our evidence suggests that if a UK production is eligible for tax relief, the production company will almost certainly claim, and their funders will expect them to do so. There were rare examples of companies choosing not to claim for very small productions, where the administrative cost of engaging accountants was considered too high.
1.6 Role and appropriateness of the reliefs
The UK is already seen as an attractive place to produce creative content. Some of its advantages, such as high-quality professionals and facilities, were seen as having been strengthened by the increased activity that the tax reliefs had generated. Altogether, the UK’s underlying advantages and the fact the reliefs operate without a set annual budget, or cap, mean that the tax reliefs do not necessarily need to be as generous in terms of headline rate as incentives in other markets. The tax reliefs’ simplicity and reliability were also compared favourably to the incentive schemes in other jurisdictions.
There was a strong perception that the 80% cap on the reliefs – tax relief can only be claimed on 80% of the total UK budget – encourages the more portable aspects of production, such as visual effects (VFX), to move abroad. Inward investors in particular said this led them to routinely undertake their VFX work elsewhere, and this was considered to be disadvantaging the UK VFX industry.
Finally, we heard from production leads that wanted the tax reliefs to play more of a role in tackling wider issues in the industry, such as skills shortages. However, interviewees were wary of any changes to the reliefs that would potentially reduce their simplicity.
[1] This study – Screen Business: How screen sector tax reliefs power economic growth across the UK 2017-2019 – gave more weight to responses from inward investors, to reflect that this group accounts for a high proportion of total sector expenditure. The study estimated that 92% of the UK film spending supported by the tax relief would not have taken place without it, and an equivalent estimate of 84% for UK HETV tax relief spending