It’s an exciting time for the UK creative industry. Grand Theft Auto VI, one of the most hotly anticipated video games in recent memory, is being developed in Edinburgh. Meanwhile, huge blockbusters like Jurassic World Rebirth, Mission: Impossible – The Final Reckoning, and the upcoming Spider-Man: Brand New Day all chose the UK as one of their main filming locations.
It’s good news, then, that as part of the government’s Industrial Strategy, HMRC will be releasing new guidance on R&D tax relief aimed specifically at creative industries like film, high-end television and video game production.
The announcement was published in their Creative Industries: Sector Plan, which said that the new guidance will be released in 2025 and will clarify that eligible interdisciplinary innovation from within the creative industries is supported by R&D tax relief. This means that arts research and development activities that seek an advance in science or technology – by solving a scientific or technological uncertainty – will fall within the definition of R&D for tax purposes.
This will provide the creative industries with welcome – and long overdue – certainty regarding research and development activities.
It’s been five years (and three prime ministers) since the R&D in the Creative Industries report, which found that nearly 61% of creative businesses could be classed as innovative because they’d introduced new or significantly improved products, services or processes. This level of innovation is much higher than other industries in the UK, where the national average is 38%.
We can’t be sure how many of the businesses surveyed within the R&D in the Creative Industries report were eligible for R&D Tax Credits, but only 9% had used the scheme, and only 45% even knew that relief was available. One of the report’s conclusions was that within the creative industries, R&D “may be under-reported and potentially under-supported in policy terms.”
While some projects from within the creative industries may already qualify for R&D tax relief because they’ve directly contributed to scientific or technological advances in an recognised sector like software development, there is currently too much ambiguity within the existing rule (rules that currently say “you cannot claim if the advance is sought in the arts”).
This is despite UK’s arts sector being a global leader in developing creative technologies, representing a huge opportunity for economic growth. This opportunity is well-summarised by Professor Christopher Smith, Executive Chair of the Arts and Humanities Research Council:
“The creative industries are an outstanding example of where human imagination and innovation drives technological advance and economic growth. Arts and humanities are not simply beneficiaries of R&D, they are the fertile ground in which invention, design and application come together.”
Indeed, our creative industries GVA grew at a faster rate than the rest of the UK economy in both the short term between 2021 and 2022 (9.8% vs 4.4%), and the long-term between 2010 to 2022 (50.3% vs 21.5%). According to the most recent statistics, the UK’s creative sector contributes 2.4 million jobs and £124.6 billion GVA to the economy with the biggest contributors to GVA coming from ‘IT, software and computer services’ (£53.4bn) and ‘film, TV, video, radio and photography’ (£20.8bn).
The government’s proposed changes are a welcome step forward for this pioneering industry. We’re looking forward to seeing the new guidelines in full and hope they’re communicated effectively after publication, so that as many eligible creative businesses as possible can benefit from this valuable tax relief.
How can R&D tax relief help drive innovation in the creative industries?
R&D Tax Credits help to take the financial risks away from experimental projects by allowing companies to reduce their taxable profits or claim a credit based on their eligible R&D expenditure.
Not only does this boost investment, it creates an environment where innovation is encouraged and, hopefully, breakthroughs can follow. The UK is already renowned for its technical arts expertise, so this revised guidance could really help to drive further cutting-edge creative projects that push the boundaries of science and technology.
At the moment, the Creative Industries Tax Relief scheme is available for various arts sectors, but this doesn’t support scientific or technological research and development in the same way that R&D Tax Credits does for other industries.
What’s the difference between Creative Industries Tax Relief and R&D Tax Credits?
Creative Industries Tax Relief supports the creation of artistic productions as well as the performing arts and cultural instructions. It is available in the form of Corporation Tax relief, but the scheme is in the process of being updated. From 1 January 2024 expenditure credits (similar to RDEC) became available including the Audio-Visual Expenditure Credit and Video Games Expenditure Credit.
Creative Industries Tax Relief generally focuses on the production and cultural elements of projects, rather than underlying scientific or technological research advancements, which are at the heart of the R&D Tax Credits scheme. Film, TV and video game productions must also pass a “cultural test” and be certified as British to be eligible.
What types of creative industry projects might qualify for R&D relief?
Creative industry projects that “directly contribute to the advance by resolving scientific or technological uncertainties” will be eligible for receiving R&D tax relief, which might include breakthroughs in areas like visual effects, sound engineering, AI development, camera and drone technology and other cutting-edge areas of production. As long as the project seeks to make a scientific or technological advancement that can’t easily be worked out by a competent professional, there is a good chance the R&D activity will qualify.
Qualifying costs such as salaries for those directly involved in R&D (e.g., software engineers, game developers, sound engineers, etc.) may be eligible for R&D tax relief. Other qualifying activities like subcontractor costs, consumables, software licences and cloud computing costs will also likely be eligible – opening the door to a significant amount of financial relief for our world-leading innovative arts sector projects.
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