Grant Thornton comments on the legislation for Tax Relief for Television Production and Animation in the Finance Act Last updated 17 July 2013

Transcription

1 Grant Thornton comments on the legislation for Tax Relief for Television Production and Animation in the Finance Act 2013 Last updated 17 July 2013

2 Contents Appendices 1 Introduction 1 2 What is a Qualifying Programme? 2 3 What is a Qualifying Company? 5 4 What costs qualify for relief? 6 5 Calculating the tax relief 8 6 Tax relief for animation production 13 7 Key dates and transitional rules 15 8 Grant Thornton 16 A Proposed Cultural Test for Television 17 B Proposed Cultural Test for Animation 19

3 1 Introduction Following the announcement in the 2012 Budget and the subsequent consultation process, the corporation tax relief for high-end television productions, which includes animation productions, was included in the Finance Act 2013 which received Royal Assent on 17 July The relief comes into effect from 1 April EU State Aid approval was given on 27 March The highlights of the new relief are as follows; availability for production companies to claim a payable tax credit from HM Revenue & Customs (HMRC) of up to 20% of production costs. The exact percentage will depend on the nature of the expenditure For other than animation programmes, the slot length must be greater than 30 minutes and the average core expenditure per hour of slot length must be at least 1 million Whilst there is a minimum UK expenditure requirement (25%), there is no specific restriction on non-uk expenditure The programme must pass a cultural test (by obtaining a minimum number of points in set criteria) and receive a certificate, which will be administered by the British Film Institute Specific legislation applies to the taxation of television and animation productions, whether they qualify for tax credits or not. The draft legislation is lengthy and in order to benefit from the tax credit there are a significant number of conditions that must be met in respect of the programme itself as well as by the production company. In addition the calculation of the tax credit is quite complex and involves detailed rules regarding the computation of the profit or loss for the individual programme for corporation tax purposes. Set out in the following pages is a summary of the legislation. Professional advice should be sought before taking or refraining from taking any action. H M Revenue & Customs intend to publish guidance notes for both the high-end television and animation tax credits which are expected to be published in September The rules for television and animation tax credits follow the same basic principles; this document deals with both types of programming and highlights the areas of difference Grant Thornton UK LLP. All rights reserved. 1

4 2 What is a Qualifying Programme? 2.1 Type of Programme The new proposed legislation applies to television programmes. These are any programmes which are produced wholly or partly to be seen on television, and consist of images (moving or still) or text or a combination of the two. References to television throughout the draft legislation also includes the internet. Any television programmes that are commissioned together under the same agreement are treated as a single television programme; so a series or serial is treated as a single programme. The television programme must be a 'relevant programme' to qualify for the tax relief. This is a drama, documentary or animation programme and one that is not listed on the 'excluded programmes' list below. A programme is a drama if - it consists wholly or mainly of a depiction of events, - the events are depicted (wholly or mainly) by one or more persons performing, and - the whole or a majority proportion of what is done by the person or persons performing, whether by way of speech, acting, singing or dancing, involves the playing of a role. Drama includes comedy. Documentary has not been defined in the draft legislation. Included within the definition of drama are certain animation programmes. The definition of animation programmes is dealt with separately in section 7. Excluded from being 'relevant programmes' are - Advertisement or promotional programmes - Current affairs, news or discussion programmes - Quiz shows, game shows, panel shows, variety shows, chat shows or similar entertainment programmes - Competition programmes or the results show for a competition - Broadcasts of a live event of a theatrical or artistic performance (otherwise than for the purpose of being filmed) - Any programme produced for training purposes. If the programme is not an animation production then it must also satisfy two further conditions. Firstly, the programme must be greater than 30 minutes in 'slot length' (the time which the programme is commissioned to fill) and secondly it must have average 'core expenditure' per hour of slot length (including commercial breaks) of not less than 1million. The definition of core expenditure is referred to at 4.2 below. The drafting does not therefore cover a slot length of exactly 30 minutes Grant Thornton UK LLP. All rights reserved. 2

5 In order to qualify for the credits the programme must in addition meet the qualifying conditions; 2.2 Minimum UK expenditure At least 25% of the core expenditure of the relevant programme expenditure must be UK expenditure. If it is a qualifying co-production this test applies to the combined expenditure of the co-producers. Core expenditure is referred to below at Intention to broadcast The relevant programme must be intended for broadcast to the general public. This condition is tested when production activities begin, so that where a relevant programme is originally intended for broadcast, this condition continues to be met even if that ceases to be the intention. However where the relevant programme is not originally intended for broadcast, this condition is not met if this subsequently becomes the intention at a later date. It is therefore important for producers to ensure they have contemporary evidence of the broadcast intention at the time production activities begin. 2.4 British programme and the cultural test The relevant programme must be certified by the Secretary of State as a British programme, with certain conditions met in a "Cultural Test". The main difference to the Film Cultural Test is the expansion of the Cultural Content section to include the European Economic Area (EEA), not just the UK. So points will be awarded for programmes; (i) set in the UK or another EEA state (ii) with lead characters from the UK or another EEA state, and (iii) depicting a British story or a story which relates to an EEA state (including where the underlying material is British or relates to an EEA state). A claim for television tax relief must be accompanied by either an interim or final certificate, but a final certificate will always be required, unless the programme is abandoned. The legislation provides for interim certification so that tax relief may be claimed in advance of completion of the programme (on costs incurred so far). For co-productions the interim certificate is the provisional certificate issued when the provisional application is made. This application must be made at least 4 weeks before the start of principal photography. The process for obtaining certification will follow that adopted for the Film Tax Relief, and the BFI will have responsibility for approval. The cultural test for television is at Appendix A. The cultural test for animation is at Appendix B. (see also section 6). 2.5 Co-productions If the programme is an official co-production it will need to qualify under one of the UK s bilateral treaties for television/animation. Currently the UK has treaties for TV programmes with; Australia Canada France Israel New Zealand Occupied Palestinian Territories Six out of the nine bilateral treaties include television, the remainder cover films only Grant Thornton UK LLP. All rights reserved. 3

6 The remaining three treaties, and also the European convention, do not include television co-productions. However, it will be open to producers to ensure any programme co-produced with these territories can qualify as British under the main cultural test; it should be noted that this is significantly wider than the test for film, as the tests encompass EEA nationals, locations and cultural involvement Grant Thornton UK LLP. All rights reserved. 4

7 3 What is a Qualifying Company? 3.1 Television production companies Television tax relief is only available to television production companies (and not therefore to businesses or partnerships etc). To be a qualifying company, the production company; must be actively engaged in the production planning and decision making process during pre-production, principal photography and post production of the programme, and must directly negotiate, contract and pay for rights, goods and services in relation to the programme, and must be responsible for pre-production, principal photography and post production of the programme as well as the delivery of the programme. There can only be one television production company per relevant programme. Where a programme is being co-produced, it is the company that is most directly engaged in the activities mentioned above, that can claim relief, irrespective of whether it is a qualifying co-production or not. It is common for television programme producers to sub-contract some of the work to other companies or people. This is acceptable for this relief. The contracting production company is the company that claims the relief. Importantly, there is no requirement for ownership of the programme or other programme rights, so that the television production company can be a television production special purpose vehicle company which does not own the programme exploitation rights, although care is needed to ensure it does carry out all of the functions of a production company set out above. 3.2 Choice of company Producers will have a choice of using an existing company, perhaps their historical trading entity, or a special-purpose company, as the television production company. It will normally be advantageous to use a special-purpose company for each programme for both cash flow from the tax credit and commercial reasons. Whilst most producers will use a UK company, the relief will also apply to an overseas company within the charge to UK corporation tax. 3.3 Co-productions Where a qualifying co-production programme is a British programme under an official UK treaty with another government or international organisation, and the UK company is a co-producer for the purposes of such an agreement, it is a qualifying producer for the purposes of the television tax relief. In any co-production arrangement, the production company must make an effective creative, technical and artistic contribution to the film. Financial only co-production companies will not be able to claim relief Grant Thornton UK LLP. All rights reserved. 5

8 4 What costs qualify for relief? 4.1 Key definitions Costs incurred on a programme will fall into two categories; Production expenditure this means expenditure on production activities in connection with a specific programme in the widest sense Core expenditure this means production expenditure on preproduction, principal photography and post-production of the programme. The distinction is important as the tax relief is only available for core expenditure. 4.2 Core expenditure Core expenditure for the purpose of the draft tax legislation does not include development expenditure. The television legislation does seek to be helpful to producers by way of a specific deeming provision that treats development spend as arising at the point that the specific programme trade commences, so that it is captured as part of the programme cost. During the 2012 consultation process it was commonly understood that development expenditure would qualify for the 25% tax credit, however the draft legislation provides that the credit is only available on core expenditure, and the definition of core expenditure does not include development expenditure (as above). HMRC have confirmed that the development expenditure will be considered on a case by case basis to examine the exact nature of the costs incurred and the extent to which these are used over the production process itself. Where it can be demonstrated that the costs are used or consumed during production they should be admissible as core expenditure. Since the introduction of the Film Tax Credit, HMRC have developed a number of precedents to determine which costs are considered to be core. Not all of these will translate through to television and animation productions, however, as an indication the following certain costs are excluded from the definition for films. financing and interest costs (including finance legal costs and audit fees), and completion bond errors and omissions insurance entertaining marketing and publicity costs (except for unit publicist) print and advertising costs. Certain other specific costs may be core as follows: Overhead and management charges The legislation does not contain any statutory definitions or limitations such as a cap of 10% for production fees, as proposed in the original consultation. Commentary and working practice will be included in HMRC detailed guidance. It is expected that recharges of justifiable 2013 Grant Thornton UK LLP. All rights reserved. 6

9 overhead costs will be allowable, even where charged from a person or company connected to the television production company. Rights acquisitions costs HMRC's view is that in general, a payment to acquire an option over the right to use a book or story would be speculative (development), but the purchase of the actual rights is core expenditure. Delivery costs HMRC s view for the film tax credit legislation is eventually a film is brought to a stage where it can be shown to the public as a finished work. It is then delivered by the film production company. The film production company will be required by its contract to deliver a specified list of items (for example master version in particular formats) and the costs of producing those which relate to theatrical exploitation would normally be part of production expenditure (and indeed of core expenditure). A similar approach is likely to be applied to these and other costs which are incurred on television and animation programmes. 4.3 UK Expenditure UK expenditure is the amount spent on services or goods, used or consumed in the UK. For instance, if a US actor were to provide his or her services within the UK their costs whilst working in the UK would be counted as UK spend. However, if a UK actor were to do some shooting abroad then the costs associated with that would not be included. The apportionment of such costs needs to be established on a fair and reasonable basis. The used or consumed test does not focus on the supplier of goods and services but instead concentrates on the recipient or customer of those goods and services as the means of determining UK expenditure To determine whether an item of expenditure incurred in relation to a film should be treated as UK expenditure, it is necessary to establish: the nature of the specific goods or services in question; and the place where the customer or recipient uses or consumes those goods and services Application of the used or consumed test is fairly straightforward in the case of those services supplied in relation to principal photography because it should be fairly clear where they are used or consumed based on the location of filming. 4.4 Co-productions In a qualifying co-production situation, the 25% spend requirement in the UK is applied by adding up what all of the co-producing parties spend in the UK. However, they will not all obtain relief for their portion of the UK spend as only one of the co-producing parties can be the production company claiming relief in respect of a particular programme. It will be essential that the UK co-producer incurs the costs of services provided in the UK. This may be relatively easy, for example if an actor from a third country (say the US) is working in the UK. However, if for example, foreign personnel working in the UK need to be paid by the foreign co-producer under co-production rules, the cost will not qualify for the UK tax credit. HMRC has provided a number of examples of the practical application of this rule for the Film Tax Relief, which, again are likely to apply to be television/animation tax credits. The nationality of those providing goods and services has no bearing on whether the expenditure qualifies as UK expenditure 2013 Grant Thornton UK LLP. All rights reserved. 7

10 5 Calculating the tax relief 5.1 Basic computation of profit/loss of the programme The calculation of profits and losses of television production companies for corporation tax purposes is different from normal trading companies. This has been the case since the introduction of the Film Tax rules, as television companies fall within the same basic definitions, but until now could not access any enhanced benefits. It is possible for television companies to opt out of the legislation via a once and for all election on their tax return. This might be the case where all productions (including those in the future) do not qualify for the TV/Animation tax credit, because the loss provisions are more restrictive under the television tax relief rules and there is also more administration under the television tax relief because of the requirement to separate each programme. Firstly, each television production is treated as a separate trade for corporation tax purposes. There is therefore a requirement for production companies to stream their income and costs for each programme they are producing in an accounting period. Secondly, the income to be bought into the corporation tax computation for an accounting period is calculated as C/T x I, where; C is the total to date of costs incurred (and represented in work done), T is the estimated total cost of the relevant programme, and I is the estimated total income from the relevant programme. In subsequent periods of account the same approach applies except that amounts previously brought into account are deducted. 5.2 Income (I) Income from the relevant programme is any receipt by the company in connection with the making or exploitation of the programme including: receipts from the sale of the programme or rights in it, royalties or other payments for use of the program or aspects of it (for example, characters or music), payments for rights to produce games or other merchandise, receipts by the company by way of a profit share agreement, and income from relevant programmes held as capital assets (the income will be treated as revenue in nature). 5.3 Costs (C and T) Costs are expenditure incurred by the company on television production activities in connection with the programme or activities with a view to exploiting the programme. Expenditure incurred on the creation of the relevant programme is treated as being of a revenue nature, but otherwise there is no deduction for amounts that would otherwise be disallowable for tax purposes Grant Thornton UK LLP. All rights reserved. 8

11 Costs brought into the corporation tax computation are those of the relevant programme incurred (and represented in work done) by the end of the accounting period. Payments in advance for work to be done are ignored until the work is being carried out and deferred payments are recognised to the extent the work is represented in the state of completion. The costs incurred on the relevant programme are taken to include an amount that has not been paid only if it is the subject of an unconditional obligation to pay. If an obligation is linked to income being earned (eg deferral fees) from the relevant programme, no amount is to be brought into account in respect of the costs of the obligation unless an appropriate amount of income is or has been brought into account. Note also for the purposes of calculating the additional deductions at 5.5 below there is an overriding rule that no account is to be taken of an amount if it has not been paid within four months after the end of the period of account. Relief will then be available in the period in which it is paid. 5.4 Development expenditure Expenditure on development of the relevant programme may be treated as if incurred immediately after the company began to carry on that trade. This means that historic development expenditure in prior years will be treated as qualifying expenditure of the specific programme in its first accounting period (a company s tax return for prior years may then need to be amended as relief will not be given twice on the same spend). It is not intended that relief will be available for speculative expenditure ie projects that never eventually get commissioned, but rather it will be available once a project has the go-ahead and is also a qualifying programme. 5.4 The Relief in brief The Tax Relief enhances core television production expenditure, providing an additional tax deduction, and enables the television production company to 'surrender' enhanced expenditure in exchange for a 'tax credit' (cash payment) from HMRC to the production company. 5.5 Calculating the additional deduction The production company may claim an additional tax deduction, based on its qualifying expenditure on the relevant programme. The additional deduction is calculated as 100% of the lower of: core expenditure incurred in the UK in relation to that programme, and 80% of core expenditure incurred by the television production company in relation to that programme trade. Example A programme costs 2 million and 90% of the spend is core and is all incurred in the UK by the television production company. Therefore the additional deduction is the lower of: core spend incurred in the UK million, and 80% of core spend incurred by the television production company million. Therefore the additional deduction is 1.44 million. Note that the additional deduction cannot exceed more than 80% of production expenditure even for wholly UK productions. On the other hand, productions can have up to 20% of overseas core expenditure without reducing the level of additional deduction they would otherwise receive Grant Thornton UK LLP. All rights reserved. 9

12 Having calculated the additional deduction, the production company can then use the deduction as an additional deduction against the taxable profits of the production that gave rise to the additional deduction (see also the section on losses at 5.8), or surrender an available loss to HMRC in exchange for a payable tax credit. 5.6 Payable Tax credit A television production company may claim a payable tax credit for an accounting period in which it has a surrenderable loss. The company's surrenderable loss in an accounting period is the lower of; the company's available loss (see below) for the period in the separate programme trade, and the available qualifying expenditure (see below) for the period. Available loss The company's available loss for an accounting period is the amount of the company's loss for the period and the amount of any relevant unused loss of the company. The relevant unused loss of a company is so much of the available loss for the company of the previous accounting period as has not been surrendered or carried forward and set off against profits of the separate programme trade. Available qualifying expenditure The available qualifying expenditure is the lower of; -80% of core expenditure and -the UK expenditure (less amounts previously surrendered). To claim a payable tax credit the company may surrender the whole or part of its surrenderable loss. A claim can be made in respect of each accounting period in which the company has a surrenderable loss, taking into account amounts claimed in respect of previous periods. Example A television production company produces a programme with total core expenditure of 1 million, all of which is UK expenditure. The total expected income is 0.8million. Income 800,000 Expenditure (assume all UK core (1,000,000) expenditure) Actual trading loss (200,000) Additional deduction lower of; (UK core expenditure of 1 million) 1,000,000 (80% x core expenditure of 0.8 million) 800,000 Therefore additional deduction (800,000) Available loss (actual loss plus additional deduction) (1,000,000) 2013 Grant Thornton UK LLP. All rights reserved. 10

13 The surrenderable loss is the lower of the available loss of 1 million and the available qualifying expenditure of 800,000, so in this case the television production company can surrender the whole qualifying expenditure of 800,000. The amount of payable tax credit due is the credit rate of 25% multiplied by the loss surrendered, giving a payment of 200,000. Therefore the headline announcement of a 25% tax credit available is not strictly accurate as in practice because; there will always be at least a 80% cap on enhanceable expenditure, so resulting in an effective tax credit rate of no more than 20% ( 1 million expenditure x 20% = 0.2 million), and as the tax credit is only available on core expenditure this will mean that the amount claimed as a percentage of total production costs (which will inevitably include some non-core costs) will nearly always be less than 20%. This headline rate of 25% can be amended by HMRC by way of a statutory instrument; note it is not a function of or related to the standard rate of UK corporation tax. Given the rate of corporation tax is 23% from 1 April 2013, surrendering the maximum loss for a payable tax credit at a rate of 25% on the tax deduction that is surrendered is likely to be optimum in almost all cases. 5.7 Claiming the tax credit It is not necessary to wait for a television production to be completed before making a tax credit claim. However the claim is made as part of the production company's corporation tax return for an accounting period, and cannot be made until that accounting period is complete. It is important therefore that advice is taken as to the most appropriate setting of the company's accounting period end date. Note that an amount payable to the production company in respect of the television tax credit may be applied by HMRC firstly against any outstanding liability of the company to pay corporation tax, PAYE, foreign entertainers withholding tax, or Class 1 National Insurance Contributions. The experience of the film tax credit has been that HMRC will make a prudent "holdback" of tax credit claims, pending confirmation that all appropriate withholdings have been made and paid over to HMRC. It is advisable to ensure then this is the case prior to submissions of claims, also that a copy of the certificate is sent to HMRC at the time of a claim. HMRC will process the corporation tax return and the tax credit claim, and subject to the standard corporation tax enquiry process, repayments of the film tax credit are currently processed in 21/28 days, but it can take longer particularly if HMRC have questions, in which case HMRC may make payments on account of amounts not in dispute. 5.8 Use of losses Losses arising while the relevant programme is in production may only be carried forward to set against profits of the separate programme trade in a subsequent period. In the accounting period during which a relevant programme is completed (or abandoned) and in subsequent accounting periods if the trade continues, any trading losses brought forward are to be treated as a loss for the purposes of loss relief for that accounting period. This losses can then be used as follows; -to the extent that the losses are not attributable to television tax relief,(ie the additional deduction) the loss can be set against other profits of the company of the same or the previous period, or 2013 Grant Thornton UK LLP. All rights reserved. 11

14 -to the extent that the losses are not attributable to television tax relief, the loss can be deducted from total profits or surrendered to another member of the same group, otherwise losses are carried forward. If the company ceases to carry on a separate trade in relation to the relevant programme and has a loss, the company can elect to -treat such a loss as being carried forward to the next accounting period to set against other separate programmes, or -surrender the loss to another television production company within the same group. A television programme is completed when it is first in a form in which it can reasonable be regarded as ready for broadcast to the general public. 5.9 Anti-avoidance Provisions have been included in the draft legislation to prevent artificially inflated claims for the additional deduction or the tax credit. The wording of these provisions is very wide and covers any arrangements entered into. Also if it subsequently becomes apparent that the amount of UK expenditure on completion will be too low, (ie less than 25%) or does not meet the 1million limit, the company loses eligibility for all periods for that programme Grant Thornton UK LLP. All rights reserved. 12

15 6 Tax relief for animation production 6.1 Introduction The legislation also provides relief for producers of qualifying animation productions. As for the high-end television tax relief, where the conditions in respect of the producer and the production itself are met, the relief will enable the producer to claim an enhancement of qualifying expenditure. This additional deduction can then be set off against eligible profits chargeable to corporation tax or, surrendered in exchange for the production company receiving a payable tax credit from HMRC of up to 20% of the production expenditure. 6.2 Qualifying animation productions The animation tax relief legislation forms part of the high-end television relief. An animated programme can apparently qualify in two ways: being a programme that is animation (not defined) or being a programme that is a drama or documentary and that contains at least 51% animation. The distinction is important because a programme that qualifies under the first definition will not have to meet the requirement the relevant programme slot length (the period of time which is the programme is commissioned to fill) is greater than 30 minutes or that the average core expenditure per hour of slot length in relation to the programme is not less than 1 million. The meaning of animation has not been defined within the draft legislation. However, express confirmation has been made that where images in a programme are generated by computer, the reference to principal photography includes these images. Where a programme that is a drama or documentary contains animation and the animation component comprises at least 51% of the total core expenditure, it is treated as an animation under the first heading, so again the slot length and cost per hour conditions will not need to be met, but the other drama criteria must be met. As for the television relief, core expenditure is defined as production expenditure on pre-production, principal photography and post production of the programme (and potentially development expenditure as referred to at 4.2). 6.3 Other conditions All the other requirements of the television tax relief will also apply to animation productions, including; other conditions relating to the programme content, and the intention for a public broadcast, and meeting the cultural test (see below) and obtaining a certificate, and 2013 Grant Thornton UK LLP. All rights reserved. 13

16 at least 25% of the core expenditure of the relevant programme expenditure must be UK expenditure. 6.4 Core Expenditure 6.7 Commencement date The rules for introduction of the relief are the same as for television as set out in section 7. The production process for animation differs to that for film or television. The terminology, such as principal photography, used in the legislation to cover the production process is based on that for film. HMRC are considering the application of these provisions in practice to the animation process and these will be reflected in the guidance notes to provide producers with a clear understanding of the legislation, and in particular to the used or consumed test for determining UK expenditure. 6.5 Calculation of profits and losses, the additional deduction and the tax credit These are the same as for the television tax credit. The tax credit that can be claimed is 25% of the surrenderable loss; therefore the effective amount that can be claimed is up to 20% of total production costs. The procedure for claiming the relief is the same for television productions. 6.6 Cultural test Animation productions have their own cultural test. The proposed test is set out in Appendix B. Where drama contains animation that amounts to at least 51% by reference to expenditure, this is treated as an animation programme. The assumption is that in this case the animation cultural test would apply Grant Thornton UK LLP. All rights reserved. 14

17 7 Key dates and transitional rules 7.1 Commencement The new tax relief has effect for accounting periods beginning on or after 1 April HMRC intend to publish full guidance after Royal Assent, which will be similar to the existing Film Tax manual, containing detailed guidance and examples. No formal guidance will be available until that time. 7.2 Transitional period Where a production company has an accounting period that straddles this date, the draft provisions require; The accounting period to be split into two separate periods, to isolate the period before and after 1 April 2013 The profit for that accounting period will need to be apportioned between the two periods on a basis that is just and reasonable. It should be noted that throughout the consultation process it was understood that only those costs incurred after 1 April 2013 would qualify for the relief. The current draft legislation appears to allow a wider interpretation of how to allocate costs, which could lead to subjectivity and uncertainty for producers. HMRC have confirmed it is not their intention to allow expenditure incurred prior to 31 March 2013 to qualify. 7.3 Next steps The legislation is included in the 2013 Finance Act, which received Royal Assent on 17 July Grant Thornton UK LLP. All rights reserved. 15

18 8 Grant Thornton If you would like to discuss any aspect of the information covered in this document please contact: Liz Brion Partner - Head of Media Tax T E liz.a.brion@uk.gt.com Terry Back Partner - Advisory T E terry.a.back@uk.gt.com Christine Corner Partner - Assurance T E christine.corner@uk.gt.com Richard Palmer Senior Tax Manager T E richard.palmer@uk.gt.com 2013 Grant Thornton UK LLP. All rights reserved. 16

19 A Cultural Test for Television Appendix A Cultural Test Maximum Points 3(a) up to 4 points depending on the percentage of the drama or documentary that is set in the following locations: 4 i 4 points if at least 75% set in the UK or another EEA State ii 3 points if at least 66% set in the UK or another EEA State iii 2 points if at least 50% set in the UK or another EEA State iv 1 point if at least 25% set in the UK or another EEA State 3(b) up to 4 points depending on the number of characters depicted in the drama or documentary with the following characteristics 4 i If there are more than three characters depicted in the drama or documentary, 4 points if two or three of the lead characters are from the UK or another EEA State or, if only one of the three lead characters is from the UK or another EEA State or from an undetermined location, 2 points if that character is the first or second lead, 1 point if that character is the third lead. ii If there are only three characters depicted in the drama or documentary, 4 points if two or three of them are from the UK or another EEA State or, if only one of them is from the UK or another EEA State 2 points if that character is the first or second lead 1 point if that character is the third lead. iii If there are only two characters depicted in the drama or documentary, 4 points if both of them are from the UK or another EEA State or from an undetermined location or, 2 points if one of them is. iv If there is only one character depicted in the drama or documentary, 4 points if that character is from the UK or another EEA State. 3(c) 4 points if the drama or documentary depicts a British story or a story which relates to an EEA State 4 3(d) Up to 4 points depending on the percentage of the original dialogue that is recorded in the English language or in a recognised regional or minority language as followsi 4 points if at least 75% ii 3 points if at least 66% iii 2 points if at least 50% iv 1 point if at least 25% 4 Up to 4 points may be awarded in respect of the contribution of the drama or documentary to the promotion, development and enhancement of British culture Grant Thornton UK LLP. All rights reserved. 17

20 Appendix A Up to 3 points shall be awarded in respect of work carried out in the making of the drama or documentary as follows- 3 (a) 2 points if at least 50% of the work carried out on any of the following is carried out in the UK i in relation to a drama- (aa) principle photography (bb) visual effects (cc) special effects ii in relation to a documentary (aa) Shooting (bb) visual effects (cc) research and development (dd) special effects (b) 1 point if at least 50% of the work carried out on any of the following is carried out in the UK i performing and recording the music score created for the drama or documentary ii voice recording iii audio post production iv picture post production 6 Up to 8 points shall be awarded in respect of the personnel involved in the making of the drama or documentary as follows- 8 (a) 1 point if the director (or, if there is more than one, the lead director) is a qualifying person (b) 1 point if at least one of the scriptwriters (or, if there are more than three, one of the three lead scriptwriters) is a qualifying person (c) 1 point if at least one of the producers (or if more there are than three, one of the three lead producers) is a qualifying person (d) 1 point if the composer (or, if there is more than one, the lead composer) is a qualifying person (e) 1 point if at least one of the actors or participants (as the case may be) (or, if there are more than three, one of the three lead actors or participants) is a qualifying person (f) 1 point if at least 50% of the cost or participants (as the case may be) are qualifying persons (g) 1 point if at least one of the heads of department is a qualifying person (h) 1 point if at least 50% of the production crew are qualifying persons TOTAL ALL SECTIONS (pass mark 16) Grant Thornton UK LLP. All rights reserved. 18

21 B Cultural Test for Animation Cultural Test Maximum Points 3(a) up to 4 points depending on the percentage of the animation that is set in the following locations: 4 i 4 points if at least 75% is set in the UK or another EEA State ii 3 points if at least 66% is set in the UK or another EEA State or set in an undetermined location iii 2 points if at least 50% is set in the UK or another EEA State or set in an undetermined location iv 1 point at least 25% is set in the UK or another EEA State or set in an undetermined location 3(b) up to 4 points depending on the number of characters depicted in the animation with the following characteristics 4 i ii iii If there are more than three characters depicted in the animation, 4 points if two or three of the three lead characters are from the UK or another EEA State or from an undetermined location or, if only one of the three lead characters is from the UK or another EEA State or from an undetermined location, 2 points if that character is the first or second lead, 1 point if that character is the third lead. If there are only three characters depicted in the animation, 4 points if two or three of them are from the UK or another EEA State or from an undetermined location or, if only one of them is from the UK or another EEA State or from an undetermined location, 2 points if that character is the first or second lead, 1 point if that character is the third lead. If there are only two characters depicted in the animation, 4 points if both of them are from the UK or another EEA State or from an undetermined location or, 2 points if one of them is. iv If there is only one character depicted in the animation 4 points if that character is from the UK or another EEA State or from an undetermined location. 3(c) 4 points if the animation depicts a British story or a story which relates to an EEA State 4 3(d) Up to 4 points depending on the percentage of the original dialogue that is recorded in the English language or in a recognised regional or minority language as follows- i 4 points for at least 75% ii 3 points for at least 66% iii 2 points if at least 50% iv 1 point if at least 25% 4 Up to 4 points may be awarded in respect of the contribution of the animation to the promotion, development and enhancement of British culture Grant Thornton UK LLP. All rights reserved. 19

22 5 Up to 3 points shall be awarded in respect of work carried out in the making of the animation as follows- 3 (a) 2 points if at least 50% of the work carried out on any of the following is carried out in the UK i shooting ii visual design iii layout and storyboarding iv visual effects v Special effects (b) 1 point if at least 50% of the work carried out on any of the following is carried out in the UK i performing and recording the music score created for the animation ii voice recording iii audio post production iv picture post production 6 Up to 8 points shall be awarded in respect of the personnel involved in the making of the animation as follows- 8 (a) 1 point if the director (or, if there is more than one, the lead director) is a qualifying person (b) 1 point if at least one of the scriptwriters (or, if there are more than three, one of the three lead scriptwriters) is a qualifying person (c) 1 point if at least one of the producers (or, if there are more than three, one of the three lead producers) is a qualifying person (d) 1 point if the composer (or, if there is more than one, the lead composer) is a qualifying person (e) 1 point if at least one of the actors (or, if there are more than three, one of the three lead actors) is a qualifying person (f) 1 point if at least 50% of the cast are qualifying persons (g) 1 point if at least one of the heads of department is a qualifying person (h) 1 point if at least 50% of the production crew are qualifying persons TOTAL ALL SECTIONS (pass mark 16) Grant Thornton UK LLP. All rights reserved. 20