When you think of “Innovative Tax Reliefs”, what is the first thing that springs to mind?
Does it conjure up images of “schemy” “grey area” types of tax planning?… well worry not because we’re not going there. We’re talking Research & Development and Creative Tax Reliefs.
They are very similar (but different) government-approved incentives for UK businesses that pay corporation tax. They apply to different types of activities carried out by limited companies and are considered as state aid.
In my experience of the accountancy and tax industry, it is VERY common that these reliefs are missed, overlooked, underclaimed, or confused. Even a well-known tax publisher had to be corrected as their explanation of the calculation for creative tax reliefs was incorrect and meant that a client would be given a lot less relief than they are entitled to if a tax adviser had followed their formula. Doh!
So if you are currently feeling confused or don’t know about these reliefs, fear not. Tax is not straight forward or easy to interpret, sometimes even for qualified Chartered Tax Adviser like me.
In this blog, I’m going to cover Creative Tax Reliefs but you can find more about R&D tax relief here.
Creative Tax Reliefs
There are eight creative industry tax reliefs available to eligible businesses. Relief is available for theatre productions, video games development, museum and gallery exhibitions, film and TV productions as well as orchestral productions.
Whether your client is eligible to make a claim, depends on their business activities and involvement in relevant creative projects.
Film, TV, and video games relief requires a company to apply to the British Film Institute (“BFI”) for a certificate to certify that the creative project is British.
The reliefs increase the amount of core expenditure your client can claim, saving them corporation tax. However, instead, it can increase a loss or result in a tax credit of up to 25% of the loss being paid back to your client, if they are currently making a loss.
Companies can get back up to £45 back for every £100 spent on a creative project!
The time limit for making a claim is 2 years after the end of the accounting period in which funds are spent on creative projects.
The types of costs which can be claimed depend on the type of relief being claimed. The reliefs have restrictions on costs that are incurred outside of the European Economic Area.
As an example, a video games company can claim:
– Wage costs of developers designing and testing the game
– Hardware, software and other IT equipment used to design, produce and test the game
– All other costs spent on designing, producing and testing the game
Compare this to a theatrical production where you can claim for:
– Actors costs during rehearsals
– Cost of set design and constructions
– Wage costs of producers, production designers and directors during the rehearsal phase
– Closing the show – the cost of taking down sets etc.
– Costs of revising the script
Here’s an example:
A business is developing a new video game and has spent £25,000 on designing and producing the game in the UK. Without claiming any reliefs, only the £25,000 spent would be deductible from their taxable profits.
Through making a video games tax relief claim, they can claim an extra £20,000 (80% of £25,000). This will reduce the taxable profits and result in the business paying £3,800 less corporation tax (£20,000 at 19%). This then allows the business to reinvest the £3,800 into developing the game.
If you have a client who you think may be able to make a claim for the relief or want to find out more, contact us.