HMRC update anti-avoidance guidelines for Creative Sector Tax Reliefs

Does HMRC’s updated avoidance guidance indicate what to expect following the Spring Budget anti-abuse rules announcement?

Creative Sector Tax Relief guidance updated

The anticipated Creative Sector Tax Reliefs anti-abuse measures announced in the Spring Budget could potentially change the approach creative sector businesses have previously taken in structuring their claims. Whilst the mechanics of how these anti-abuse measures will work in practice is yet to be published, it was initially thought these rules would crack down on creative sector businesses being able to increase their claims using Special Purpose Vehicles (SPVs) by being able to uplift core expenditure via marked up intra-group charges of staff costs and other production services. On 20 June 2023, HMRC updated their manuals for Video Games Development, Television Production and Film Production companies to clarify further their stance on what constitutes an ‘arm’s length’ transaction. With the anti-abuse measures yet to be published, does HMRC’s updated avoidance guidance give an indication of what to expect? Or are HMRC merely clarifying their stance on the existing rules?

SPVs are often used across the creative sector industry to ensure the maximum tax relief available under the rules is claimed. Groups are able to include in their claims costs charged by fellow group companies into the SPV at higher rates.

There are existing rules in place that prevent businesses artificially increasing their claims by disallowing transactions with a disqualifying purpose. In this case, a disqualifying purpose includes an arrangement that provides a greater amount of relief than that which the business would have otherwise been entitled to. However, this can be open to different forms of interpretation and there are no specific rules on the treatment of expenditure from connected parties (unlike with the Research & Development (R&D) tax relief rules where such rules do exist).

HMRC’s updated guidance seeks to clarify further their stance on what constitutes an ‘arm’s length’ transaction referring to claimant companies having conducted either transfer pricing analysis or identifying a suitable third-party comparable transaction. In both cases, HMRC expect the claimant company to be able to demonstrate that its method produces a just and reasonable mark-up rate, such as may be expected between unconnected parties in an arm’s length transaction. HMRC consider that charges which are inflated at a rate that cannot be shown to be reflective of an arm’s length value by transfer pricing or third party comparable, would then be considered a disqualifying purpose.

To help with the processing of claims, HMRC encourage businesses to make additional disclosures in their creative sector claims where possible, detailing the mark-up rates used for connected party transactions and the underlying direct costs and overheads.

The timing of this updated guidance from HMRC is interesting, as it follows the new anti-abuse measures that were announced in the Spring Budget, where it was stated in HM Treasury’s summary of responses to the audio-visual tax reliefs consultation that: “The government will be introducing an anti-abuse measure on payments between connected parties to restrict qualifying expenditure to the costs incurred by the group.”

Whilst we await published legislation to understand how these measures will work in practice, it is possible that the measures would look to restrict claims to the underlying costs incurred by the group (i.e. remove any possibility for businesses to increase claims on costs charged between connected parties).

Does HMRC’s updated guidance provide insight on what we can expect from the new anti-abuse measures announced in the Spring Budget (thus allowing claims to continue to be somewhat increased up to an ‘arm’s length’ amount as highlighted above), or will the new measures look to restrict these types of transactions completely?