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A keyÌýfactor in anyÌýfilm or televisionÌýincentiveÌýclaimÌý–ÌýwhetherÌýin theÌýUK,ÌýtheÌýUS orÌýelsewhereÌý–Ìýis ensuring thatÌýyour productionÌýis structured correctlyÌýto maximise the value of the incentiveÌýavailable. The legal and operational structure of a production can directly affect whether costs qualify and how much support a productionÌýultimately receives.

ForÌýproductionsÌýseeking to accessÌýthe UKÌýAudiovisualÌýExpenditure Credit (AVEC), proper structuring is particularly important. If a production is not set up correctly, it mayÌýfail to qualifyÌýfor the incentive altogether. In many cases, once production is underway, it can be difficult – or even impossible – toÌýretrofit a structureÌýthat meets the eligibility requirements.

This article explainsÌýthe key structural requirements for theÌýAVEC and the key considerations producers should keep in mind when structuring a production to maximise eligibility for the incentive.

What are the structural requirementsÌýto qualify for the AVEC?

The keyÌýstructuralÌýrequirementÌýto qualify for the AVEC is that the UK company applying for the incentive must be the ‘production company’ for theÌýproduction as a whole.ÌýUnderÌýtheÌýCorporation Tax Act 2009 (Chapter 4,ÌýPart 14a, Section 1179DP),ÌýtheÌýproduction company must:

a) BeÌýresponsible for—

(i) pre-production, principal photography and post-production of the film or programme, andÌý

(ii) delivery of the film or programme in completed form,Ìý

(b) beÌýactively engaged in production planning and decision-making during pre-production, principalÌýphotography and post-production,Ìý

(c) directlyÌýnegotiate,Ìýcontract and pay for rights,Ìýgoods and services in relation to the film or programme, andÌý

(d) beÌýmore directly engaged in the matters described in paragraphs  t´Ç , taken as a whole, than any other company that satisfies those paragraphs.Ìý

This makes it seem that the UKÌýproduction companyÌýmust do everything relating to the production,Ìýbut this is not the case. The UK production company can work withÌýnumerous other companies in differentÌýjurisdictions on the production as long as properly structured.

What doesÌýaÌýproperly structuredÌýproductionÌýlook like for AVEC eligibility?

In practical terms,Ìýthe UKÌýproductionÌýcompany must be commissioned orÌýinstructedÌýto produce the entire film orÌýtelevision programme.ÌýHMRC’s guidanceÌý(CREC010000 of the Creative Industries Expenditure Credit Manual)Ìýelaborates on this, but the key point to note is that it does not mean that the UK company mustÌýperform all aspects of production, but it mustÌýbe responsible for them.

The UK company therefore must sit at the top of the production structure and engage any overseas production services companies to do the work in other locations on its behalf and at its direction, as per the belowÌýexample.

AsÌýshown in the above example, the UK company can contract out part ofÌýtheÌýshoot and post-production to the US and Italian services companiesÌý(acquiring the rights that they produce in return for funding) and then sell the entire produced film orÌýtelevision programmeÌýto the commissioning entity,Ìýwhich may be aÌýbroadcaster, a streamerÌýorÌýanother group company that then deals with external sales or a number of other options.

Does it matterÌýwhich production activities take place in the UK for AVEC?

Fundamentally no, it does not matter whichÌýproductionÌýactivities take place in the UK. A production could shoot entirely in the UK and do all of post and VFX abroad or there could be no UK activity other than VFX.

It is not the nature of the activity that matters, but the level of activity in relation to the production overall.ÌýHowever, thereÌýareÌýa couple of key requirements as for any UK incentive claim:

• A minimum of 10% ofÌýglobal relevant expenditure (i.e., qualifying spend) must be usedÌýor consumed in the UK;
• The production must pass theÌýCulturalÌýTest;
• The production must be intended for theatrical release orÌýbroadcast (as applicable for films andÌýtelevision programmes, respectively); and
• IfÌýapplyingÌýforÌýtheÌýhigh end television incentive, thereÌýmust be a minimum spend of £1mÌýper hour of slot length.Ìý

For more information on the fundamentals ofÌýeligibility,Ìýsee our recent AVEC guide for producersÌýandÌýour deep dive into theÌýqualificaton of above-the-line (ATL)costs.

Can you change your production structure midway through production to qualify for AVEC?

Unfortunately, you cannot change your structure midway through production to qualifyÌýfor the UK incentive. The keyÌýreason for this is that the UK company mustÌýbe responsible for pre-production as part of its requirements.

If there was no contracting in place with a UK company until midway throughÌýproduction,Ìýit would be impossible for the UK company to haveÌýbeen responsible for pre-productionÌý–Ìýeven if that activityÌýwas subcontracted elsewhere.

This is whyÌýearly structuring of the production isÌývital forÌýqualification and why early involvement of advisers (like Â鶹ֱ²¥!) and lawyers is so important to ensure that the requirements are being met.

Does the UK production company needÌýto beÌýestablished before production begins?

YesÌý–Ìýthe UK company must have been incorporatedÌýbeforeÌýproduction starts,ÌýideallyÌýbefore or early on during pre-production. If it is not incorporated before principal photography begins qualification will not be possible.

Company incorporation isÌýrelatively straightforward in the UK and can be done withinÌýthree-to-fiveÌýbusiness days, soÌýthis is not a significant obstacle to ensuring qualification.

Are there specific legal contracting requirements for AVEC eligibility?

There are elements in the legal contracting of theÌýcommissioningÌý orÌýproduction service agreement that are important toÌýqualification under AVEC.

It is key that the UK entity is explicitly given the responsibilities discussed above so that there is contractual evidence of the UK company being the ‘production company’. It is equally important that the contracts with any service companiesÌýdemonstrate that the UK company is instructing thoseÌýentities on what to do and that they are providing services, rather than producing the entire film orÌýtelevision programme.

There are also elements within the commissioning agreement andÌýcontracts with service providersÌýregarding the structure of funding that are important toÌýensuring that productionÌýcanÌýmaximise the value of the AVEC. This can allow for protection of the value of the AVEC as well as give some potential tax upside for other UK companies within the same corporate group.

Ultimately, there’s a lot to consider when structuring your production to ensure that it qualifies for the AVEC. This is whyÌýit’s so important to speak to experienced advisers as early as possibleÌýsoÌýthey can ensure you are meetingÌýall of the requirements.

How Â鶹ֱ²¥ can help

IfÌýyou’d like to know more about how to structure yourÌýUKÌýproductions to qualify forÌýthe UK AVEC,Ìý!

With vast experience in global and domestic tax incentives, our expert UK team canÌýprovide structuring advice toÌýhelp you maximise your budget, as well asÌýassist withÌýyour entire UK incentives needs – fromÌýCultural Test applications and associated reports, film and TV incentives estimates to formal opinions to lenders, incentive claim submissions and deal close support.