UK’s New Film Tax Credit Attracts US Producers Igniting Optimism

The introduction of the UK’s Independent Film Tax Credit (IFTC) is being celebrated as a significant milestone for the local film market. The IFTC will enable eligible films with budgets under £15 million to opt-in for the enhanced Audio-Visual Expenditure Credit (AVEC). This credit, offered at 53% on qualifying expenditures, effectively provides around 40% in financial relief.

The 40% tax credit is available to independent producers as well as studios and streamers that choose to produce more modestly budgeted features under £15 million.

However, despite the enthusiasm, questions remain about the practical implementation of the new credits. Producers are still concerned about securing financing and managing escalating production costs, which pose significant challenges.

UK Producers Garner Increased Interest at Cannes

Since the introduction of the Independent Film Tax Credit (IFTC), independent producers in the UK have reported substantial interest from potential partners at Cannes. Notably, there has been a surge in interest from US producers. 

The so-called ‘Indie Tax Credit’ aims to revitalize the UK, particularly in London, as Europe’s premier production hub. Rising production costs in the UK have driven many film producers to explore more cost-effective options in Central and Eastern Europe, where local expenses are significantly lower. The IFTC aims to reverse this trend.

The UK has become Europe’s largest film and TV production center, doubling studio space in the last three years. The current expansion rate could make the UK second only to Hollywood globally.

The UK’s tax incentives, introduced in 2007, have attracted billions in investment. Inward investment and co-production spending on film and episodic television in the UK reached £5.4 billion in 2022 and £3.31 billion in 2023.

Essential Details on UK Film Tax Incentives

The Audio-Visual Expenditure Credit (AVEC) was introduced on January 1, 2024, to replace the previous tax reliefs for film, episodic and children’s television, and animated works.

Under the previous schemes, audio-visual tax relief was provided through an additional deduction from profits or by surrendering a loss for a tax credit. With AVEC, companies now receive an above-the-line tax credit based on qualifying expenditures, which is taxable at the main corporation tax rate.

Thanks to its attractive incentives and high-quality crew and facilities, the UK has long been a leading hub for international production. Thus, many film studios and streamers commit a significant portion of their production output to the UK.

Claims can be submitted to HMRC from 1 April 2025 onwards for expenditure incurred from 1 April 2024, provided a film started principal photography after 1 April 2024. Below is an overview of the new incentive.

  • Enhanced Tax Credits: UK-qualifying films with budgets under £15 million can now claim an enhanced Audio-Visual Expenditure Credit (AVEC) at 53%, equating to about 40% in relief. Full details are pending confirmation.
  • Visual Effects and Studio Relief: From April 2025, visual effects relief will increase by 5%, removing the 80% cap, resulting in a 39% total relief for UK visual effects. Additionally, studio facilities in England will receive a 40% relief on business rates until 2034.
  • Current Relief Rates: Films and high-end TV (HETV) programs currently have an incentive rate of 34%, equating to 25.5% actual relief, capped at 80% of core expenditure without a budget limit.
  • Certification Requirements: To qualify for UK tax incentives, films, animation, or TV programs must be certified as British through the cultural test or qualify as official co-productions.

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Soaring Costs and Disruptions Challenge UK Independent Film Producers

The UK’s independent film producers are grappling with rising costs and significant market disruptions, primarily driven by the transformative influence of US streaming giants. Since 2020, production costs have surged by approximately 20%, yet overall budgets have not kept pace. Concurrently, cinema audiences have dwindled and have yet to return significantly, exacerbating the financial strain on producers.

Private investment in UK film production has become increasingly scarce, with a noticeable shift towards debt financing over equity. Investors are demanding more significant yields, with some seeking double or triple the percentages they did just a few years ago. 

Compounding these challenges is the aggressive expansion of US streamers in international production. The relationship between the UK film industry and US streamers is complex. As competition among these streamers intensifies, they aggressively acquire intellectual property rights, often for substantial sums. While this provides immediate financial relief to producers, it also strips them of future revenue streams from these properties.

Despite these challenges, inward investment in the UK film industry reached record levels in 2022, with total production spending hitting £2 billion, marking a 31% increase from 2021. However, spending on local UK films dropped by the same percentage, and independent UK filmmaking comprised only 9% of the total spend on film and television content.

With their substantial financial resources, US streamers have also monopolized UK studio space and driven up crew rates, further straining the budgets of independent producers. The independent sector is pushing hard to finance and shoot films this year, but investors, sales agents, and distributors are wary of making commitments amidst ongoing uncertainties about theater attendance and the collapse of several distribution revenue streams.

FilmTake Away: Aided By Industry-Leading Incentives, UK Producers are Still on the Ropes

Generating robust admissions for UK independent films at the global box office remains challenging. Most UK feature films are relegated to the festival circuit, where their rights hold little value, and few British films manage to recoup their budgets. This reality underscores the necessity of crafting finance and distribution plans grounded in commercial viability. Furthermore, UK producers must adopt a global perspective to sustain a vibrant independent film market.

The UK’s independent film producers are at a crossroads, facing escalating costs and the disruptive presence of US streamers. To overcome these challenges, producers must develop realistic financial strategies and embrace a global outlook. By doing so, they can maintain a healthy and dynamic independent film sector in the UK.