U.K. Gov Boosts Tax Incentives for Animated Indies, VFX

The U.K. Government’s Spring Budget announcement made today (March 6) introduces a 53% expenditure credit — equating to a tax relief of approximately 40% — for U.K. film productions, including animation, with a budget up to £15 million. Animation UK shared its welcome reaction to the news, having built the case for the nation’s original animation tax credit and campaigned vigorously for increased tax incentives.

The professional alliance argued the case, supported by compelling evidence from its members, for the animation uplift to include animated theatrical release films, alongside TV. The wider campaign led by the BFI to support independent film, including animation, is fundamentally essential to the vitality of the industry, say organizers.

“Animation UK enthusiastically embraces today’s Budget announcements, particularly the introduction of VFX tax relief and the substantial increase in the tax rate for indie films,” said Kate O’Connor, Executive Chair of Animation UK. “With the new rate set at 54%, our sector anticipates a significant impact, propelling animation production in the U.K. even further. Additionally, the VFX proposals will directly benefit our animation studios, enhancing their ability to provide top-tier VFX services. This momentous occasion marks a significant milestone in the evolution of our digital production sector, paving the way for unprecedented growth and innovation.”

This uplift in the expenditure credit is for U.K. films with a budget up to £15 million range (with either a U.K. writer or U.K. director, or certified as an official U.K. co-production) and it marks a transformative moment for the sector, as producers and filmmakers have increasingly struggled to finance films at this level and get them into production in the U.K. Films that meet the criteria will be able to claim an increased Audio-Visual Expenditure Credit (AVEC) at 53% (up from 34%) from April 1, 2024.

“This is a welcome announcement, at a time when it is really challenging to raise finance for independent film production in the U.K.,” said Sean Clarke, Managing Director of Aardman (Chicken Run: Dawn of the Nugget). “This will be significant in helping Aardman to continue to do what do best in producing British animated films for a global audience.”

The AVEC replaces the Film Tax Relief rate, which has provided 25% of qualifying U.K. expenditure on up to 80% of a film’s total production budget. The AVEC at 53% equates to a relief rate of approximately 40% under the Film Tax Relief.

“As U.K. producers of independent animated films which are often based on well-loved British literature, this is very welcome news indeed for Lupus Films,” noted Ruth Fielding, Joint MD of Lupus Films (Kensuke’s Kingdom) It will mean we can keep more IP in Britain, stimulate growth in the sector and create more jobs.”

Sean Feeney, Head of Production at GFM Animation, added, “Increasing the U.K. incentive to approximately 40% net of spend is a vital step in creating a level playing field with Europe and Canada. This is a game changer for our sector. For independent high quality animated films, this will be a great support and should encourage more animated films to be made in the U.K.”

The Budget updates announced today will also give a significant boost the U.K.’s visual effects industry, and are a result of the proposal presented to HM Treasury by the UK Screen Alliance, The Chancellor of the Exchequer, Jeremy Hunt, announced improvements to the film and high-end TV incentives specifically for VFX, hinted at in his Autumn Statement in November.

The government has proposed that for productions spending more than 5% of their budget on VFX in the U.K., it will lift the 80% cap on total eligible expenditure for the VFX spend only, and that the rate of AVEC for the VFX spend will be lifted to 39%, which represents a rate of 29.25% after tax, an effective increase of 3.75%. For productions shooting in the U.K., the removal of the cap means that they will be now also be incentivized to stay in-country for their VFX — effectively an almost 30% increase in the rate of incentive for VFX in this scenario, the Alliance points out.

“This is a major breakthrough. Before, productions would either film in the U.K. or do their VFX here, but rarely both, because of the cap on tax relief,” said Neil Hatton, CEO of UK Screen Alliance. “That will no longer be the case and the significant growth potential in the U.K.’s VFX sector will now be unlocked.”

Currently, the U.K. offers an expenditure credit for film and high-end TV production of 25.5% (effective after tax) for eligible U.K. expenditure. However, once a production has spent 80% of its global budget in the U.K., no further incentive is available. This has led to productions claiming the U.K.’s credit for filming, but as VFX represents the most portable part of the expenditure, very often it will be placed outside the U.K. so the production can access the tax incentives on the remaining 20% of their budget from another territory.

“This is great news for the U.K. VFX industry,” commented Tim Caplan, Co-Founder & Executive VFX Producer for Union VFX, which recently won the special effects BAFTA for its work on Poor Things. “Much of the VFX work that is currently being taken overseas will now remain in the U.K., allowing for sustained growth and ongoing development of the amazing, award winning talent we have here in the U.K. The U.K. can now compete globally on a much more level playing field.”

UK Screen Alliance, in their response to the Treasury’s Call for Evidence, revealed that for films and TV series claiming the U.K. incentive for filming in the U.K., £350 million of VFX on those productions was performed outside the U.K. each year.

The changes announced today, according to UK Screen Alliance estimates, are likely to stimulate an additional £175 million of VFX work to be performed in the U.K.; a 32% increase on the annual pre-pandemic VFX spend on film and high-end TV. This will generate 2,000 new high-tech and high productivity jobs in VFX and a further 800 indirect jobs. UK Screen Alliance has calculated that the VFX enhancement will be self-funding, as tax receipts from the increased economic activity will cover the cost of the Exchequer providing the incentive.

Stakeholders will now have 10 weeks to respond to a consultation on the government’s proposals, which are expected to take effect on April 1, 2025.

Read the HMT-HMRC policy note on the U.K. Independent Film Tax Credit here.