As with all budgets, there is a mixture of good news and bad news – increases to some reliefs that can benefit the sector, some tightening up of existing rules for Enterprise Investment Scheme (EIS) relief which will have an adverse effect in some situations, and some consultations and position papers on international issues whose impact will have to be considered carefully and where the industry may wish to respond.
There are also changes on the personal tax side where the Government is looking to treat more people as employed, rather than self-employed, a change which will undoubtedly affect those working within film and TV.
Extended reliefs
Tax relief schemes and funding have been extended to prove more profitable for the industry:
- Cultural Development Fund – to support the role culture can play in regeneration and local growth, the government will provide £2 million funding to the Department for Digital, Culture, Media and Sport for place-based cultural development;
- UK Games Fund – a further £1m has been provided to extend the UK Games Fund until 2020;this allows access to finance and business support for early stage video game developers;
- there has also been an increase in the Research and Development tax credit rate to 12%. More details can be found here.
EIS restrictions
Film and media production companies often use special purpose vehicles (SPVs) within a company group structure to produce individual projects, in line with normal commercial practice. New conditions will deny relief unless capital invested is clearly at risk and the investee company must have an intention to grow and develop. Any SPV involving a production company which is seeking investment for its long-term growth and development with the intention of reinvesting profits for future activities will still qualify for EIS. However, an investment in a one-off film production company will not satisfy this test so EIS relief would be denied.
Relief may also be denied where there is pre-agreed income, for example pre-sales or eligibility for other support, before a project begins as capital investment would not be genuinely at risk.
Investment that is not covered or protected by pre-agreed income or support (referred to in the media industry as the “gap”) should be eligible for EIS relief. The rule also does not preclude the investment being made to fund costs where only a proportion is covered or protected by pre-agreed income or support, provided that capital remains at significant risk.
HMRC will take a ‘reasonable’ view and a ‘rounded’ approach as to whether an investment has been structured to provide low risk return for investors. However, as HMRC will cease to provide advanced assurance on proposed investments this will create uncertainty for investors as well as companies raising much needed finance.
International issues
A position paper has been released on corporate tax and the digital economy and the Government’s approach to addressing challenges in the international tax framework. Consultation is open until the end of January and the Government is focused on ensuring multinational groups don’t escape a fair amount of tax in the UK market. While it is not solely relevant to the creative sector, there is a focus needed on the sector given the advances in technology and the way the sector operates. For example, if the success of an online platform is the development of a customer base in the UK then some profits should arguably be taxable in the UK.
There is a specific proposal to the extension of the withholding tax regime for royalties, where there are sales to UK customers, where transactions are with low tax countries. This will affect a company (A) selling digital services to UK customers where a royalty payment is made to a company (B) in a low tax jurisdiction. If neither company A or B have a taxable presence in the UK there are not currently any withholding tax requirements on the royalty payment. However, the proposal will require withholding tax to be deducted on the payment as it relates to UK sales. The consultation needs to consider how this will be managed and implemented.
Personal tax
The Government reformed the off-payroll working rules (known as IR35) for engagements in the public sector in April 2017. They consider that, what they refer to as public sector compliance, is increasing as a result. They will consult as to whether to extend these rules to the private sector so that individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company.
The Government will also publish a discussion paper on the options for longer-term reform to make the employment status tests for both employment rights and tax clearer.
The Government will delay implementing the following NICs policies by one year: the abolition of Class 2 NICs, reforms to the NICs treatment of termination payments, and changes to the NICs treatment of sporting testimonials.
For more information on personal tax changes, please
click here.
If you have any questions or concerns about how the budget will affect you,
contact us today.