Co-production agreements

The UK is a signatory to bilateral agreements with Australia, Canada, France, India, Jamaica, New Zealand and South Africa (and to the European Convention on Co-production). These treaties were created over a number of years, in an ad-hoc fashion and without reference to an overall strategy. With the quantity and value of co-productions growing far beyond that originally envisaged, the UK government concluded that the treaties were no longer delivering optimum economic and cultural benefits to the British film industry and audiences. In particular, the government felt that the agreements were not robust enough to protect the integrity of current and future tax reliefs, and have not resulted in the creation of a strategic and sustainable series of economic and cultural relationships with the UK’s international partners.

The starting point for all negotiations is a model co-production agreement developed by the Department of Culture, Media & Sport (DCMS) in collaboration with the UK Film Council (UKFC), the British Screen Advisory Council (BSAC) and the Producers Alliance for Cinema and Television (PACT). It encapsulates a policy which reflects the realities of a modern international film industry and contains clearly articulated aims and objectives – in particular, the need to deliver economic and/or cultural benefits to both the co-producing countries, and to ensure that balance is maintained over time between what the UK taxpayer delivers and what is being offered by the co-producing partner. The model will be adapted to ensure it complies, where appropriate, with the reform of fiscal incentives and the final terms of the new cultural test which will provide a clearer definition of a British film.

Fiscal Incentives

HM Treasury provides tax incentives to makers of culturally British films.The tax relief offers qualifying films:

(With production budgets up to £20 million) a guaranteed minimum benefit worth 20% of qualifying production costs where they spend 80% or more of their budget in the UK

(With production budgets of £20 million and above) a benefit typically worth 16% of qualifying production costs where they spend 80% or more of their budget in the UK

The Cultural Test

The cultural test acts as the gateway to accessing this tax relief, and will provide better targeted support for culturally British films. The test will be structured as a points-based system based on the content of the film, and the nationality of key individuals working on the film. Films which score at least 50% of the total points available will be certified as ‘British’. In addition, the introduction of pre-qualification will provide filmmakers with a new level of certainty ahead of production which has not existed previously. Responsibility for this now falls under the UK Film Council.

Preparing for Qualification

'Applying for a Certificate of British Nature of a Film? Then do your homework', says John Mills

To obtain qualifying status as a British film, a production will need to obtain a 'Certificate of British Nature of a Film' from the UK Film Council (UKFC). And to secure that all-important certificate, the application to the UKFC will need to be accompanied by a report from a firm of Chartered or Certified Accountants.

Your auditors will require various details which must be entered on the application, such as the name of the maker and the running time. Also needed are the details of the split of the UK/non-UK production spend and the split of the qualifying/non-qualifying labour. Additionally, they will require access to all accounting records such as invoices, petty cash, bank statements and contracts.

Typically, the auditors will perform the bulk of their work sometime around the middle to late stage of post-production. In order to minimise potential problems, it is essential that consultation is sought with the production's accounting and legal advisors at the earliest possible stage.

Maker To qualify as a British film, there must be a "qualifying" maker. Generally speaking, that is a company registered, controlled and managed in the UK, EU or certain other European countries. A US corporation cannot be a qualifying maker but a UK subsidiary can.

Post-production costs Where post-production is taken outside the UK, bear in mind that any overruns in cost are likely to affect the qualifying percentage for UK spend and possibly for "qualifying" labour.

Exchange rate fluctuations Where costs are being expended overseas, it is possible that exchange rate fluctuations might cause the percentage of non-UK spend to increase.
General spend problems Both the UKFC and the Inland Revenue will look into the overall fees payable, deferred or otherwise, and examine whether they consider them to constitute valid amounts in respect of the services provided.
Equipment Spend is deemed to occur where the production activity actually takes place, not where the equipment is supplied from nor where the equipment is sourced.
Insurance claims If costs are incurred twice as a result of loss or damage, or where excess costs are incurred due to an interruption to shooting, and these costs are the subject of an insurance claim, then care must be taken not to double-count the costs of production.
Excluded individuals For the purposes of the calculation of the qualifying labour percentage, the cost of one or two non-qualifying individuals may be excluded completely. Where this happens, it is essential to remember that the amounts payable to those individuals must also be excluded from the calculation of UK and non-UK spend.
Travel costs Where filming is taking place in the UK, all travel costs connected with the production, both inward and outward journeys, will be regarded as qualifying UK spend. Where the production activity is taking place outside the UK, only inward flights to the UK are considered to be UK spend; the outward travel is classified as non-UK spend.
Excluded costs Certain costs must be excluded from the calculations of production spend. These include any financing costs, costs of acquisition and licensing of rights (including novels) and indirect overhead costs.
Labour cost calculation The calculation of qualifying labour percentage will be required to take the labour element of sub-contractors into consideration on any project.

John Mills is a specialist entertainment tax advisor at Tenon Godfery Allan
inkberrow@tenongroup.com