Creative thinking to maximise the benefit 

Media Ltd develops and publishes multi-platform computer games.  Turnover for the year is £30m, with total costs of £14m (profit therefore £16m).   Core production expenditure, which is assumed to be all UK expenditure in this example, totals £5m.  For the purposes of this example, it is assumed the accounting profit is equal to the taxable profit as calculated for tax purposes and in line with the new creative sector legislation.

	£m	£m
Total Income		30.0
Total expenditure		(14.0)
Pre tax profit		16.0
Core expenditure	5.0
Additional deduction *		(3.2)
Taxable profit		12.8

   

Note * this is calculated as being 80% of the lower of 

• UK expenditure or
• 80% of total expenditure 

In this case, core expenditure is £5m.  Therefore, the core expenditure is restricted to 80% (£4m) and the additional deduction is calculated at 80% of this (£3.2m)
 
By claiming creative sector tax relief, the company has reduced its taxable profits by £3.2m.  Assuming a tax rate of 24%, this gives rise to a cash tax saving of c£770k for this year. 

Media Ltd again develops and publishes multi-platform computer games.  Again, turnover for the year is £30m, but this time the total costs are £40m (loss of £10m therefore arises).   Core production expenditure totals £5m (it is assumed that this is all UK expenditure). For the purposes of this example, it is assumed the accounting loss is equal to the taxable profit as calculated for tax purposes and in line with the new creative sector legislation.
  

	£m	£m
Total income		30.0
Total expenditure		(40.0)
Pre tax loss		(10.0)
Core expenditure	5.0
Additional deduction *		(3.2)
Taxable loss		(13.2)

Note * this is calculated as being 80% of the lower of 

• UK expenditure or
• 80% of total expenditure

In this case, core expenditure is £5m.  Therefore, the core expenditure is restricted to 80% (£4m) and the additional deduction is calculated at 80% of this (£3.2m)

By claiming creative sector tax relief, the company has increased its trading loss by £3.2m.  The company can either use this loss in the normal manner, for example via current year group relief or carrying this forward to use in the future.  It is worth noting that when carrying this loss forward,  it may be possible to treat the element of the relief that  is not attributable to video games relief as a current year loss in later periods.

Alternatively, the company could opt to claim tax credits; this is based on the core expenditure  (as restricted to the lower of either UK expenditure or 80% of total expenditure).  In this example, this would result in a payment to the company of £1m (being £5m total expenditure at 80% i.e. £4m, with the credit being 25% of this).  However, any loss surrendered cannot then be carried forward for future offset.

Media Ltd produces high-end drama programmes for television.  Turnover for the year is £30m, with total costs of £14m (profit therefore £16m).   Core production expenditure totals £5m (it is assumed that this is all UK expenditure).  In addition, £2m was spent developing a tool to help with DVD authoring (the company also releases DVDs of their drama programmes).  It is assumed that for R&D tax relief purposes, the additional uplift is 30%. For the purposes of this example, it is assumed the accounting profit is equal to the taxable profit as calculated for tax purposes and in line with the new creative sector legislation.

	£m	£m
Total income		30.0
Total expenditure		(14.0)
Pre tax profit		16.0
Core expenditure	5.0
Additional deduction *		(3.2)
		12.8
R&D expenditure	2.0
Additional deduction **		(0.6)
Taxable profit		12.2

Note * this is calculated as being 80% of the lower of 

• UK expenditure or
• 80% of total expenditure

In this case, core expenditure is £5m.  Therefore, the core expenditure is restricted to 80% (£4m) and the additional deduction is calculated at 80% of this (£3.2m)

Note ** being 30% of £2m  
 
By claiming both creative sector and R&D tax reliefs, the company has reduced its taxable profits by £3.8m.  Assuming a tax rate of 24%, this provides a cash tax saving of c£910k for this year. 

It should be noted that it is not possible to claim both forms of relief on the same expenditure.  In the above example, if the R&D spend of £2m related to digital production and was included within the eligible production costs, then it would appear that it would be more beneficial to claim all costs under the creative sector tax regime.  However, this would need to be reviewed on a case by case basis.