Lifeline for UK VFX Facilities in Promised Tax Break

IBC

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Can facilities survive the current lull until new proposed enhanced tax relief kicks in?

The promise of a more internationally competitive tax scheme targeted at the UK’s VFX industry can’t come a moment too soon for facilities, but lobby group UK Screen Alliance will be holding this and future governments feet to the flames to ensure the bill is passed by 2025.

“A number of companies are hanging on with white knuckles onto this timeline,”

Neil Hatton, CEO of UK Screen Alliance told IBC365. “We can see the light at the end of the tunnel with the end of the strikes and the light is brighter now we have a promise of greater tax relief. But we’ve got to get there first.”

The affirmation of the government’s commitment to supporting the VFX sector in the Autumn Statement is a welcome boon to the beleaguered sector.

“What was announced was a significant step forward in that the previous promise from the government delivered on budget day and repeated in the Creative Industries Sector Vision in July was that it would look at the case for increased support for VFX,” Hatton said.

Looking at something isn’t the same as doing anything about it of course but Hatton points to the more definitive statement in the foreword to the Call for Evidence on the UK Visual Effects sector.

“I can confirm that we will provide more additional tax relief for expenditure on VFX to boost the international competitiveness of the UK’s offer,” the Chancellor stated.

“That’s a firm promise that action will be taken,” said Hatton.

Although the implementation date is April 2025 “it will pass quickly enough with the pace of consultation and legislation”. Indeed, the Call for Evidence is now proceeding on a “absolute breakneck schedule”.

Normally such consultancies are given three months, but this has been allotted six weeks with two of those interrupted by Christmas.

“We’ve got a lot of work to do,” said Hatton who aims to get it submitted before the holiday break.

To compile the submission, UK Screen Alliance is engaging with its members, production companies and large content groups, notably the eight major studios and streamers.

The latter group are specifically being asked questions in the Call for Evidence paper aimed at gauging their appetite for change and where the best places for that change would be.

These questions include:

‘At what point in the production cycle do you choose your VFX studio?’ ‘How does the 80% cap on qualifying expenditure impact your decisions on where to spend your money on VFX work?’ Please provide information about how many productions meet or exceed the 80% cap on qualifying spend?’ and ‘How would removing the cap only in relation to VFX spend impact your decisions about where to place VFX?’

As is clear from this framing, the government seems to have grasped the import of addressing the territorial cap.

This has been in place since the introduction of film tax relief in 2006 where productions can claim a 25% rebate on up to 80% of its global budget if it is spent in the UK. Once that 80% of budget is spent in the UK you cap out of tax relief.

As Hatton pointed out, “If you’re coming to the UK to use our excellent crews, locations and studio infrastructure you are already spending that kind of money so the remaining 20% - which is the most likely to be spent on VFX- is also the most portable part of your budget and will go to VFX studios in other parts of the world that offer incentives for that.”

France, Canada (particularly Montreal) and certain states in Australia all have attractive incentives that VFX shows can and do take advantage of.

An analysis of UK production between 2017 and 2019, reveals that £1bn of VFX expenditure on projects qualifying for UK Tax relief was carried out overseas – this is approximately half of all VFX work carried out on UK-qualified productions in that time period.

“The cap is getting in the way,” Hatton said.

The second issue is the rate itself. “Even if a production could do VFX within the 80% cap, our rate of 25% does not compare to the 30%-50% you could get if you shop around.

“We need to do something with the rate.”

The UK does of course have some core non-financial benefits to international filmmakers including a large number of world class artists and technicians working in the English language (“an advantage not to be sniffed at,” said Hatton).

“So, in a sense we need to get close to the financial benefits to make the money argument go away and then we can compete on our creativity and innovation.”

While addressing the cap is “fundamental” UK VFX facilities want the government to go further.

“We feel that the 80% cap needs to be coupled with an increase in the rate in order to make this really fly. There will be some impact by just removing the cap but we’re not going to maximise the impact that we could have without increasing the rate.

UK Screen calculate that the net cost to the Treasury of introducing both changes is “nothing”.

“It creates economic activity which creates tax receipts, so they cover off the cost of providing the incentive - so really this is a no brainer. This is growth in jobs and economic value for no net cost to the Treasury.”

He added, “I think the government are minded to remove the 80% cap. Everything else is what we are proposing and we have no guarantee that they will.”

Studios will begin soon, if they are not already, to plan locations for productions that will shoot in 2025.

“The fact something is in the offing will pique studio interest but they’re not going to jump on a possibility,” said Hatton. “They need something definite.”

Timeline and Labour

Once the consultation closes there will then be a ‘design’ period where the Treasury comes forward with a firm proposition.

The likelihood is this would be published in time for the Spring budget after which there will be another consultation with a view to getting it passed through Parliament in the Autumn 2024.

That’s not withstanding General Election in the interim. While the Treasury officials handling the technicalities of this don’t change, the political will might which is why UK Screen is also lobbying the Labour party.

Hatton said he will engage with the Shadow DCMS team, itself subject of a recent reshuffle.

“This is all just mitigation,” he said. “The legislation might go through even though the implementation is beyond the next general election.”

Impact on VFX shops

None of this can come a moment too soon for VFX facilities. Many have had a torrid summer because of the actor’s strike the impact of which will extend along way into 2024.

“The impact on VFX is delayed because of the shut down in photography which is only now restarting. While relieved that the strike is over, the problem is that it will take several months before that work rolls into postproduction.

“We’ve got a long journey to go and some significant bumps in the road. A number of companies are holding their breath on whether they are going to get through this period. For those able to stay in good shape on other side I think there are reasons to be cheerful.”

No race to the bottom

The Studios seem to hold all the cards. Presuming the UK ups its incentives, won’t then Montreal or other hubs go one better?

“We’re not intending to beat the rates available,” Hatton said. “We have other advantages we can compete on. What we don’t want to do is go to the bottom of market. What we do want is to put ourselves back in the window of fair competition.”

UK Screen Alliance has a track record of success. It helped lobby for animated features not just animated TV to be eligible to claim a credit rate of 39% (29.25% net after tax and itself a 4.25% rise on the previous rebate), which comes into effect on January 1st. Hatton reports anecdotal evidence of an “uptick in interest in using the UK as a destination for animated feature production.

Closing the skills gap in the regions

UK Screen is further proposing that the government introduce a 5% differential for productions posting VFX outside London.

“We know there is significant latent talent outside London that could be developed,” Hatton said. “The costs of operating outside the capital are lower and this would be a boost to levelling up.”

Its research suggests that while 95% of VFX jobs are in London only 20% of people employed doing them are actually from the capital.

“Many are from overseas but in terms of VFX work as a magnet to pull talent from across the UK we think it shows that if the jobs had been available locally, I am sure they would work more locally. If we can create the fiscal environment to change that that’s what we’d like to do.”

Hatton accepts this is quite a radical proposal but insists that VFX companies headquartered in London would be receptive to the move, possibly establishing outposts in places like Liverpool or Leeds or the nations.

“VFX mostly not a client attend business. We showed at the outset of the pandemic that 10,000 people in the UK could be moved to remote spaces in just a month so in terms of technological deployment this is quite easy to do. The issue is do we have the local skills bases?”

UK Screen have prepared a skills plan that would do that. If it gets the full package its plan would see the creation of 3000 jobs, including 1000 apprentices supported by the main UK VFX vendors.

“It is an ambitious plan for growth,” insisted Hatton. “We are not just going to the Treasury and asking for more money. This is a plan about investment for growth. We want to make sure the UK is the first-choice destination in the world for productions looking to place VFX.”