Successive Governments, including the new Labour Government, have identified the Creative Industries sector as key to the UK’s economic growth and have implemented tax measures and incentives to encourage investment in the sector. That said the 30 October 2024 Autumn Budget (the ‘Budget’) was a bit of a mixed bag for Creative Sector companies. In this article for TIGA, accountants James Cowper Kreston analyse the impact for creative sector businesses…
The Good
Industry focus
The Government recognises the importance of the Creative Industries to the UK growth agenda; the recent Green Paper – “Invest 2035 – the UK’s modern industrial strategy” issued for consultation on 17 October identifies the Creative Industries sector as one of eight key sectors for focus. In the Budget this is demonstrated in the form of funding commitments, e.g. for the UK Games Fund, and the commitment to tax reliefs including the recently implemented Audio Visual Expenditure Credit (‘AVEC’) and Video Games Expenditure Credit (‘VGEC’) and the predecessor Video Games Tax Relief (‘VGTR’).
Creative Sector Tax Reliefs
The Labour Government appears committed to supporting the industry through tax reliefs of £15bn over the next 5 years. However, after the introductions of AVEC and VGEC, it seems the Government are content with the operation of the Creative Sector tax reliefs with very few changes announced. Those that were announced were positive for the industry including:
- An enhanced 39% rate of relief for VFX, plus a removal of the 80% core cost restriction for VFX costs (effective 1 January 2025)
- The introduction of the previously announced enhanced Independent Film Tax Credit for costs incurred from 1 April 2024 on UK films with a budget under £15m, providing a 53% rate of relief.
- Setting the rate of Theatre Tax Relief, Orchestra Tax Relief and Museums and Galleries Exhibitions Tax Relief at 40% (45% for touring productions and Orchestral productions).
New administrative requirements will continue to apply and scrutiny of claims for tax credits is only expected to increase (the importance of filing a complete and accurate Additional Information Form should not be underestimated as the payment of claims will be and has been delayed for avoidable errors and omissions). As a reminder the Form is required for both claims under the VGEC and the VGTR regimes.
There were no changes announced to the transitional provisions from VGTR to VGEC so the current timetable of no new VGTR claims from 1 April 2025 and a complete closure of the scheme from 1 April 2027 remain relevant.
Finally R&D tax credits and Patent Box were also both unaffected by the Budget at a headline level. However, it is expected that the current level of HMRC compliance activity will continue with the establishment of an R&D Advisory Panel and a consultation on widening the use of advance clearances on R&D relief.
Corporation Tax Roadmap
The publication of the CT Roadmap alongside the Budget was welcome.
This document represents more or less business as usual from a Corporation Tax perspective, indicating a number of areas that will continue or remain the same until the next election; with the aim to provide stability and certainty for businesses which is a positive move.
The Government has committed to maintain the current Corporation Tax rate at no more than 25% until the next election. It should be noted that this is a cap, and there remains scope to reduce the rate in the future should fiscal conditions allow.
Alongside that there is a commitment to maintain current generous capital allowances including full expensing (100% first year relief and 50% first year relief on brand new Main Rate and Special Rate assets respectively) and the Annual Investment Allowance at £1m per annum. This should ensure that for all but the largest Groups, capital investment can be carried out when it is needed without concern around the availability of tax reliefs.
The Bad
Employer National Insurance increase
Creative Sector businesses will be affected by the increase in Employers’ National Insurance to 15% and the lowering of the threshold in the same way that other businesses will be. For each employee over the employment allowance the reduction in the secondary threshold will cost an employer approximately £600.
For earlier stage businesses this will impact on funding runways and in some cases could make it more challenging to meet investor milestones. Hopefully Government funding initiatives such as the UK Games Fund might take this into account.
Larger businesses should be factoring this change into cash forecasts as soon as possible to understand the potential impact.
Increase in late tax payment interest rates
A change that went under the radar to an extent but one that companies in the Creative Industries sector should be aware of.
HMRC will increase the rate on late paid tax by 1.5%. At current rates this would increase the rate charged for late paid corporation tax to 9%.
This is significant for business claiming AVEC or VGEC (but not VGTR) as the credit is included ‘above the line’ in taxable income on which tax (and therefore late payment interest where tax is not paid) is calculated. For a large business within the quarterly instalment payment (‘QIP’) regime interest can therefore start accruing (albeit at the slightly reduced late QIP rate) as early as month 3 of a financial period, when often the benefit of the credit is not realised until at least 12 months after that. Consequently, companies claiming AVEC or VGEC will very likely pay interest, now at the highest rate this century, on tax liabilities that may never become due once the tax credit is realised.
The Ugly
Transfer pricing – consultation to reduce ‘Medium’ thresholds
Another of the less talked about announcements that could have a significant impact on businesses. Currently UK companies are exempt from transfer pricing requirements if part of a Small or Medium sized group. Currently, a Group is considered to be Medium if it has no more than 250 staff and either an annual turnover of less than €50 million or a balance sheet total (gross assets) of less than €43 million. A Group is ‘small’ if it has no more than 50 staff and either an annual turnover or balance sheet total (gross assets) of less than €10 million.
The Government announced in the Budget that it would launch a consultation on bringing Medium sized Groups within the scope of transfer pricing rules by reducing the existing thresholds.
It is not only cross-border groups which should be concerned; transfer pricing applies equally on UK-UK transactions. Specifically for Groups claiming AVEC and VGEC, connected company costs can only be brought into a claim where they can be demonstrated to be arm’s length. Connected party costs are reportable to HMRC on the Additional Information Form. While current best practice would be to support the arm’s length basis by carrying out some level of transfer pricing work, if, following consultation, the upper limit for being Medium is reduced, more SME Creative Industry businesses will fall within the full scope of the rules.
Full transfer pricing compliance can be expensive and burdensome, so developments in this space should be monitored carefully.
Looking forward for the sector
Broadly for Creative Industries sector companies the recent Budget carries many positives but also a good number of negatives, some of which weren’t immediately covered in the main headlines. Businesses should keep an eye on some of the developments in this area to ensure they are not caught flat footed.
About us
James Cowper Kreston has worked with tech companies for the last 30 years and specifically with creative industry companies since 2016.
We have a team of specialists who bring the depth of our expertise to advise on financial, accounting and taxation issues affecting businesses and their stakeholders throughout the life-cycle of these businesses from start-up to exit.