The UK Chancellor has confirmed that the four measures aimed at preventing perceived abuse of the tax reliefs available for UK film producti...

The UK Chancellor has confirmed that the four measures aimed at preventing perceived abuse of the tax reliefs available for UK film production will be included in the Finance Act 2005. The 2004 Budget announced that the special tax relief for low budget films (which was due to expire on 1 July 2005) would be replaced, and additional details of the new relief were announced in September 2004.

It has been confirmed that the existing relief will be extended until 31 March 2006. Currently, British qualifying films receive tax relief under section 42 Finance Act (No.2) 1992 or section 48 Finance Act (No.2) 1997. Section 48 relief (for “low budget films”) was due to expire in July 2005 and applies where the qualifying expenditure is up to £15 million and results in either the person incurring the expenditure or the person acquiring the master version of the film being eligible for 100 per cent allowances.

Section 42 relief (which has no expiry date) applies to films where the qualifying expenditure is greater than £15 million; tax relief is given for the expenditure for over three years. In his Budget speech the Chancellor announced that he intended to replace existing reliefs with new tax reliefs for both low budget and larger budget films, but no details were announced.

Four measures take effect from 2 December 2004 and are as follows:
· Legislation will be introduced to provide that relief under section 42 and section 48 can be obtained only once on any film; entitlement to relief under section 42 will be limited to the total production costs (as is already provided for in relation to section 48 relief). Relief will only be available in respect of expenditure on the production or acquisition of the film if the previous owners of the film have irrevocably elected not to claim relief).
· New rules will be used to counter arrangements to use film tax relief to defer tax beyond 15 years. It targets the situation where an investor has produced or acquired a film which it leases or licences to a producer or distributor for more than 15 years. The new rules will only apply where the lease or licence contains terms which guarantee that the investor will receive a minimum amount of income for more than 15 years. They work by restricting the amount of the section 42 or section 48 relief available. If any excess relief has been claimed under an agreement entered into on or after 2 December 2004, it will be treated a trading receipt in the period in which the agreement is made and will be subsequently treated as expenditure 15 years and one day after the date of the agreement. This will have the effect of deferring relief for excess expenditure.
· The Government proposes to introduce rules to combat the use of schemes (known as exit schemes) which are designed to convert the deferral of tax offered by the film reliefs into a permanent tax advantage. The rules are aimed at the situation where the company that owns the rights to a film which give it a guaranteed amount of income ceases to be a member of a group. If this occurs, then the accounting period of such company will end on the date the company ceases to be a member of the group.

The company will be treated as having received a trading receipt, just prior to exit, equal to the film rights value. It will also be deemed to have brought forward a trading loss equal to the film rights value from the accounting period ending on exit to the next accounting period. The new legislation will also provide that if, instead of leaving the group, such company disposes of its rights to receive a guaranteed amount of income arising from the film to a person who is not a member of its group, it will be required to bring into account as a trading receipt any amount by which the film rights value exceeds the amount actually received as trading income by it. The person buying the rights will obtain a deduction for the additional amount brought into account by the selling company.
· The Chancellor announced new legislation to prevent members of a partnership from obtaining loss relief for money which they contribute but which is not really at risk. The legislation will apply to limited partners, members of an LLP and general partners who do not spend a significant amount of time in running the business. The amount of loss relief which such persons can claim is already limited to the amount of capital that they actually contribute to the trade. The new rules aim to restrict the amount that such partners are treated as contributing to the trade by excluding any amount which is or could be borne by another person.

If the partner has not claimed loss relief (or the claim can be amended) then the restriction will be given by way of a straight reduction in the amount of loss relief which would be available to claim in the future. If a partner has already claimed loss relief, he will be treated as receiving income (which will be taxed under Schedule D Case VI) equal to the amount by which the loss relief exceeds the correct amount of loss relief available. If a partner borrows to fund his capital contribution to the trade, and if over any period of five years the cost of the loan is not substantially the same as the cost of a loan on ordinary commercial terms, then the amount of the loan will be treated as having been borne by another person.

The Chancellor had already announced that section 48 relief will be replaced by a new relief for production expenditure that can either be offset against profits (a deduction of 150 per cent will be available) or surrendered to the Inland Revenue for a cash payment (of 20 per cent of the amount of the expenditure surrendered). The key features of the new reliefs to replace section 48 relief will be:

· relief will be available to film-makers themselves;
· relief will cover 20 per cent of the production costs compared to 15 per cent under section 48 relief;
· the relief will apply to films with budgets of up to £20 million;
· the relief will include an added incentive for films to be profitable. It is not clear what this will mean. However, the Government has decided not to make the relief conditional upon a distribution contract being in place for the film;
· the relief will apply to all production expenditure, not just to that spent in the UK.

This article is a general guide only and is not intended to be definitive advice which should be sought as appropriate in relation to a particular matter. If you would like to discuss a particular matter, please contact the authors.