Film tax relief under the spotlight

film-1A consultation on the future of tax relief for film investment has resulted in calls for new incentives for video game and digital production. Stephen Dineen reports.

The Department of Finance’s consultation on tax relief for investment in film and TV drama production has concluded and a decision on its future is due to be announced in the Budget or in time for next year’s Finance Bill. Various forms of the tax relief have been in place since 1984 and relief was extended to the end of 2015 through the 2011 Finance Act. An investor receives up to 41 per cent tax relief on a maximum of €50,000 of investment in one year.

In its consultation document, the department highlighted a 2007 review of the scheme conducted by consultants Indecon that found that the benefits to the economy were low and declining. Consultation opened in May and closed in August.

Among the questions the department asked interested parties were whether the relief is an efficient use of scarce resources, what the merits of restricting or terminating the scheme are, and how it interacts with other enterprise tax incentives such as enterprise investment schemes (now called business expansion schemes).

Responses to the consultation were overwhelmingly supportive of its design and retention. The Irish Film Board, the State’s film development agency, stated that film relief here is proven, well understood, transparent and focuses on the indigenous production partner.

The audiovisual production sector is not covered by the relief, it noted, as it covers only companies established for single projects. The board added that the relief could be amended so that digital production (an increasingly important part of live action feature film production) was covered by it. While the relief requires that a film’s budget is fixed before filming begins, the digital visual effects budget is typically not determined until the later stages of production.

“If you didn’t have a tax credit for film and television production in Ireland,” the Irish Film Board’s Chief Executive James Hickey told eolas, “there is a risk that virtually no production activity would take place in Ireland.”

A major reason, he believes, for continuing the relief is the UK’s tax incentives. “The truth of the matter is that if there are tax credits in the UK for features films and there weren’t tax credits in Ireland for feature films, all features films would be made in the UK.” Film making is a highly mobile activity and “you can make a film as easily in Belfast as you can in Dublin.”

The competition between Ireland and the UK to attract films has been heightened by the UK Government’s plans to extend film sector tax reliefs to cover high-end TV drama, animation television production and computer games.

film-2High-end TV dramas have becoming increasingly popular with viewers and Ireland has succeeded in attracting the production of prestigious dramas such as The Tudors and Ripper Street.

The question of adding computer games to activities eligible for film relief was raised by Games Ireland, which represents companies involved in the sector. It stated that section 481 has evolved “exclusively to suit the needs of the film industry” with its structures “not well suited to today’s video game sector where a large number of products with varied business models exist.” While all game development is software-based and includes some aspect of research, development and innovation, it added that a high proportion of games do not contain a ‘cultural’ element. State aid such as section 481 is only permitted by the European Commission because it covers cultural content.

The association proposed that the current R&D tax credit be amended to include expenditure on content creation and the social sciences, “both of which are essential ingredients in game development today.”

According to the Irish Film Board’s submission, the UK proposal to extend tax credits to gaming “recognises the potential blurring between content production for different media.” Hickey explains that the agency is currently working on a funding scheme “to persuade computer games companies, which are largely tied up in the technology of making computer games, [to collaborate] with animation companies which are obviously largely tied up in making content.” Computer games, says Hickey, are stories too; the only difference between them and with traditional forms is that the player generates his or her own story.

For the Dublin City Business Association, the case for retaining section 481 is economic. Its submission stated: “We see Irish film and TV production as a key business which can draw in foreign revenue to the city, create employment and create wealth for businesses and citizens alike.”  In its 2011 review of the film and television sector in Ireland, IBEC’s Audiovisual Federation reported that the net gain to the exchequer (tax receipts set against the cost of section 481) from feature films, independent TV production and animation projects was €8.6 million. It estimated that employment in 2010 stood at 15,111, an increase from 14,198 in 2009. In full-time equivalents, this represented an increase from 1,368 to 1,695.

Section 481: How it works

Since 2005, the cost of section 481 has grown from €15 million to a peak of €66 million in 2010. Last year, the relief cost €49 million. Fifty-seven projects availed of the scheme in 2011 (the same number as 2010). Films accounted for the largest share of projects, followed by domestic TV productions, foreign TV productions and documentaries respectively.

On average, according to the Revenue Commissioners, investors receive 72 per cent of investment back through producers. For example, once an investment of €100 is approved by Revenue for section 481 relief, a production company deposits €72 of the investment in an account for remunerating investors. This sum is ultimately returned to the investor, who typically has received a €41 tax incentive by way of tax relief. Combined with the returned investment, a €113 return represents a 13 per cent return on investment (excluding administration costs and other expenses).

Investors are typically remunerated over a one-year period and this is not dependent on the commercial success of production. They can gain relief on 100 per cent of investments and the limit on investment is €50,000 a year. A company can raise up to 80 per cent of the total budget through section 481, while the ceiling on qualifying expenditure stands at €50 million per annum.

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