Tax relief: the bigger picture
By Kate Bulkley
For Broadcast June 01, 2015
High-end TV drama tax credits have turned the UK into a haven for big-ticket productions, but have also had some unintended consequences. Kate Bulkley assesses their impact
While Star Wars fans across the world are on tenterhooks waiting for JJ Abrams to finish the latest episode of the sci-fi saga, UK television producers are looking forward to the film’s release for reasons of their own: it will free up acres of studio space at Pinewood and put hundreds of technical staff back on the market.
“It’s a real problem,” says Alex Jones, head of production and business at Red Planet Pictures.
“For our series Dickensian, we needed a huge lighting rig, which has been a challenge: we can’t find the lights because there are so many big films being made, and we can’t find the crew to put the lights up. Suddenly you have Star Wars, which has taken on 40 sparks – and films pay very well.”
The skills shortage exacerbated by Star Wars is one of the unintended consequences of the tax breaks for UK high-end TV drama productions brought in last year. These breaks, plus those for animation, have helped to attract more and bigger productions to the UK, with the knock-on effect of constraining the supply of services, such as trained electricians.
Of course, the lack of sparks, crew and location space should be regarded as a ‘good problem’, as it reflects a rising demand to film in the UK. Certainly, the big picture on tax breaks is that they have been a huge benefit to both the production business and to the UK economy as a whole.
According to the British Film Institute (BFI), UK government spend on creative tax relief for TV has generated a more than eight-fold return: for each £1 spent on high-end TV, tax relief has returned £8.31 to the UK economy. The shooting of the first four series of HBO’s Games Of Thrones in Northern Ireland generated a spend of nearly £90m on goods and services.
In addition, the BFI calculates that on average 573 local crew and trainees were employed across each of the first four series.
Ten years ago, such growth in high-end TV drama production would not have been forecast, says Simon Flamank, executive director at Bob & Co, a media advisory firm that invests in, and develops, productions across TV, fi lm and theatre. “The UK is now seen as a centre of excellence for writers, producers, facilities and talent, with great incentives.”
Flamank is convinced that prior to the introduction of tax breaks, the UK was not getting its “fair share” of productions.
“We were being underbid by countries with their own tax-relief schemes,” he argues. Furthermore, the tax breaks have underpinned the existing appeal of certain regions of the UK, particularly Northern Ireland, which offers additional incentives.
“The additional factors that attract producers to Northern Ireland are the soft-money incentives, such as subsidised hotel rooms, and the fact that studio space in Northern Ireland is more readily available,” says Flamank.
He adds: “The tipping point for where to produce is a simple question: where is it cheaper overall to run the project? This has to include factoring in not just the tax break, but also the cost and availability of studio space, and the availability and cost of labour.”
Of course, there are also creative decisions to be factored in, such as the best location for a production, but even with a series such as Sky Atlantic’s Artic-set Fortitude, a whopping two-thirds of the series was shot in the UK (in a studio in Hayes) and the rest on location in Iceland.
“The truth is there is probably more being shot in the UK than there might have been without the tax break,” says Cameron Roach, commissioning editor at Sky Drama.
“Projects of the high-end drama scale would still have been commissioned, but they might have been shot in Ireland or Eastern Europe because of tax breaks and efficiencies in those countries.
“Bringing in the UK tax breaks means that they stay here now, and we are seeing lots of productions in Wales, Scotland and England.”
Roach is adamant that the “extra” money “earned” through the tax relief is not being deducted from the amount the broadcaster puts into a project. Instead, he believes that as the quality bar for drama has risen in recent years – with demand from both broadcasters and subscription VoD services such as Netflix – budgets have followed suit.
“Because the scale of ambition in projects has gone up concurrently, we have not seen a fall in channel contributions,” he says. “We recognise the added value that comes from that tax efficiency, and I would say that value is going on screen.”
Many dramas have benefited from the high-end drama tax relief, including Game Of Thrones and Red Planet’s The Passing Bells and By Any Means, the latter being the first UK drama to clear the cultural test necessary to apply for the new tax relief. This offers 20% relief for dramas costing £1m or more per hour – so £1m per hour spent gives back £200,000 to the production.
The Passing Bells
There have been some bumps in the tax relief road – for example, when Red Planet applied for relief on Dickensian, it had to make its case to HMRC because tax relief is given to dramas costing more than £1m per hour and Dickensian’s episodes are 30 minutes long.
“We were prepared to fight a battle to get the relief,” said Jones. “If we had been making just one half-hour [show] it would not have been eligible, but the fact that we were making 20 half-hours meant that HMRC came around to the idea of pro-rating the relief across a total of 10 hours.”
But while the tax breaks have been welcomed across the industry, the spike in demand for staff, studios and resources that has followed has raised concerns among producers.
Flamank says much of the premium studio space in the UK is booked up, while much of what is available has yet to be configured for new cameras or green-screen technology. He believes the UK needs “one or two more studios, in the south-west of England in particular”.
Gareth Neame, managing director of Carnival Films, maker of ITV’s Downton Abbey and a co-producer on BBC2’s The Hollow Crown series of Shakespeare adaptations, adds: “We are all scrambling around the same pool of people and there aren’t enough now that it has become so much more attractive to work here.
“People are having to look further afield from the traditional parts of the country where drama is produced, and there is more competition for talent when you are crewing up.”
There has also been an inflationary effect on pricing.
“In the long term, it is better to have the tax breaks than not, particularly if the UK can get its act together on training, but it’s not free money,” says Neame.
“There are costs involved from lack of resources here and the cost of those resources once you get them.” “But the tax breaks have made shooting in Britain much more attractive.
Previously we could have gone to the Czech Republic or Hungary, South Africa or Ireland to follow their tax breaks.”
But in some cases, tax breaks alone are not enough to ensure productions stay in the UK. Carnival and Neal Street shot The Hollow Crown here because it would be hard to find or recreate the kind of locations needed anywhere else.
But Carnival is planning to shoot several shows in Eastern Europe next year and is currently shooting The Last Kingdom in Hungary. Not only does Hungary have an attractive tax break but the production requires landscapes, crowd shots and lots of construction.
“These are all things we can get more cheaply over there than we can in the UK,” says Neame. “Even though we have a tax break in the UK, we are still a very expensive locale to shoot in.
We’d have to pay nearly double what we pay in Hungary. So if both countries have a tax break, you are still going to go where your actual cash costs are lower.” Producers need to think hard about how best to operate under the tax-break system. First there is a tick-box list of why to shoot in the UK and why not to.
For Flamank, this shouldn’t – and usually doesn’t – start with access to the tax relief, but with quality of production staff, quality of acting talent, access to locations and studios, and a common language.
But he admits that the tax relief is also a big part of the equation: “What the 20% tax relief has done is drag productions back into the UK that might have gone elsewhere.”
Locations such as Romania, with a skilled but cheaper labour pool, and where red tape can be cut through more quickly than in the UK, remain competitive.
Want permission to fly a plane 100ft off the ground? You are more likely to get a “yes” in Romania than in the UK, says Flamank.
Tempted to bump up the budget just to get the tax break?
Think again. HMRC has the right to review budgets and interrogate them. “If you get it wrong and HMRC finds you out, all those revenues get frozen,” says Flamank. “You don’t want to do that.”
If the production has raised its finance in sterling and plans to shoot out of the UK, there is also potential currency risk, though this only tends to become an issue if the production is more than a few months in length.
While tax breaks have benefited high-end drama producers, the money is staying in the top end and has not been released to help smaller productions or other genres. Interested parties are lobbying to lower the £1m an hour hurdle for genres such as factual, but Neame says this needs to be carefully thought through.
“I think the tax credit now is about creating high-end drama that is exportable and has a commercial value,” he says. “This is about making world-class drama, not lower-cost productions.
This is an economic incentive that brings back a significant amount to the economy because there is a rough corollary that it is the higher-end dramas that have more chance of exporting.”
The tax relief has been nicknamed the Downton Abbey tax credit because Carnival’s show is the biggest drama export Britain has ever had. The high-end tax break is meant to create more shows with that kind of reach and success, especially now Downton is drawing to a close.
What will be next?
TO HEDGE OR NOT TO HEDGE? CURRENCY RISK
If a project is being shot in countries using different currencies, protecting the production budget against fluctuations makes sense, particularly for large, long productions that incur a decent proportion of their costs outside of the country where the funding is being provided.
In fact, even if only a small amount of a production is taking place outside of the funding country, there is a risk of delays and overruns. If these occur in a currency other than the funding currency, it can have a significant impact on the budget.
Currency risk is not wholly predictable and can become a significant issue. This is where hedging can make a big difference.
If your funding currency depreciates against the payable currency – for example, the production is funded in sterling but you are shooting in Germany and sterling depreciates against the euro – you will have a bigger bill to pay. If the production overruns and there are more bills to be paid in the higher currency, it can put a hole in your budget. “A 5% adverse swing in the currency can have a serious impact on the whole project, especially
TV productions, as they tend to be budgeted very close to the mark,” says Jonathan Pryor, head of corporate and institutional treasury at Investec Bank. He identifies three stages to hedging:
Step 1: How much of your budget is exposed to currency risk?
To assess the need and size of any currency hedge, look at how much of the production you expect to shoot outside of the funding country.
Step 2: Look at scenarios
Build scenarios that factor in currency fl uctuations so that you have an idea at what point -– based on a range of exchange rates – your production budget no longer adds up. Say sterling is at 1.40 to the euro – at what point does your budget no longer work? Does this happen when the sterling-euro rate drops to 1.25?
Step 3: Evaluate the solutions available
These could include applying different solutions, such as fixed forward, open forward or option product hedging solutions. “It’s not about second-guessing the market, but about following a portfolio approach to managing your exposure, whereby you decide what percentage of the budget needs to be hedged in any particular way,” says Pryor.
He warns that despite the recent strength of sterling against the euro, the situation can change rapidly as that is the nature of the market: “Underestimate currency risk at your peril.”