Revenue has been taking heat from film and TV producers over the administration of the Section 481 tax relief.

The scheme, made for movie makers and TV content creators, was moved to a self-assessment system, a move that put the onus on producers to figure out what part of their budget is eligible for tax credit. But they are having trouble with the complex self-assessment, arguing that the system is convoluted. 

For two years, the industry has been lobbying Revenue to get some clarity over self-assessment. New guidelines were just released yesterday. Will they finally get the happy ending they were looking for?

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Section 481 offers a payable 32 per cent of corporation tax credit and is available for eligible spend on a film/programme produced in Ireland. 

It has been an important pillar of the film industry in Ireland. Some of the most acclaimed movies in recent times have benefited from it. Amongst them are Cartoon Saloon’s ‘Breadwinner’ starring Angelina Jolie, the harrowing depiction of the famine in ‘Black 47’ and ‘Star Wars: The Last Jedi’ which brought international fame to the island of Skellig Michael.

Recent amendments to the scheme, making it more self-assessment focused, caused confusion for producers around what is eligible and what is not. Which is what led to the demand for new guidelines to provide clarity.

“The problem with the self-assessment at the moment is that everything comes back on the producer. Basically if we don’t claim on the right things, or are seen to over claim, there are penalties, or interest penalties, and that can all come back on us and that can come back anytime over the next five years in the form of an audit,” said animation producer Colm Tobin. “The problem is we haven’t been told what is eligible and what isn’t.”

The current process of getting the tax credit

According to film and television financier John Gleeson, the new guidelines are expected to make this process simpler.

Gleeson, who is also a tax partner with Saffery Champness Chartered accountants, said the guidelines were created during a series of meetings between the Tax Advisory Liaison Committee (TALC) of the Irish Tax Institute and the Revenue over the course of six months. 

“Revenue to date haven’t issued guidelines on what’s demonstrably eligible spend and not eligible spend,” said Gleeson prior to the release of the guidelines. 

Publication of these guidelines was planned before the end of September 2019, according to a Comptroller and Auditor General (C&AG) report on the accounts of the public services. 

After weeks of this being referred to as “imminent” by several individuals, some of which wished to remain off the record, the guidelines were finally released yesterday (October 31).

It wasn’t a trick the audio-visual industry got this Hallowe’en, but a treat. A 42 page Tax and Duty manual giving explicit detail on how to get the tax credit was published by Revenue yesterday. It can be accessed on the Revenue’s website.

Animation studios are hit hardest. Three-year-old Irish animation start-up, Turnip & Duck, did not experience the accelerated process promised.

“Those new guidelines will provide the clarity that’s required” and “once we have the new guidelines and everyone’s getting the certificates faster, the system should be fantastic,” said Gleeson.

Why did the old system change?

Section 481 is part of the Taxes Consolidation Act 1997 and was amended by the Finance Act 2018. Although the changes implemented sought to improve the scheme, it backfired and caused numerous problems. Especially for small production companies. 

The 2018 act introduced two changes to Section 481. The first one impacted the “legislative basis for time-limited increase to the rate of the credit for qualifying films substantially made in an assisted region,” known as the Regional Film Development Uplift. This issue with the Regional Film Development Uplift is that it’s a form of State aid, so changes could only come into effect with EU approval. 

The second change made the scheme more self-assessment based. This is the source of most of the confusion with the new system. Producers have to navigate the scheme and figure out what is eligible spend in their budgets themselves. 

The 2018 Act necessitated a change to regulations, in turn. The Film Regulations 2019 were signed on March 27, 2019, and the Commencement Order for the related Finance Act 2018 amendments took effect on the same day.

To get the tax credit, you need a certificate. To get the certificate, a budget must be created for both the global spend and the Irish spend associated with the production. Then an application is sent to the Department of Culture, Heritage and Gaeltacht to be processed. It examines the cultural and employment aspects of the scheme. The other body that processes the applications is the Revenue, which evaluates the quantum of the credit available. 

Producers have problems with self-assessment. But from the Government’s perspective, it’s more efficient. “The move to self-assessment returns the responsibility to the claimant to ensure that they make a valid claim and places the film tax credit on the same footing as other tax reliefs,” said a Revenue spokesperson.

“The problem with the self-assessment at the moment is that everything comes back on the producer.”

Colm Tobin, Co-Founder of Turnip & Duck

Revenue originally audited the submitted budgets at the start of the application stage. Due to a lack of resources and a delay in issuing certificates, the amendments were introduced. They now audit the budgets at the final stage of the project by the production company.

A spokesperson for Revenue stated that “multiple layers of checks were necessary to ensure that only correct and eligible claims were approved. As well as being an inefficient use of Revenue resources, it was also not in line with how other tax reliefs are administered.”

Gleeson added that from his perspective this is  “what caused a major slowdown in the processing of applications and issuing of certs. Revenue couldn’t issue a certificate until they had audited the application and so it was taking up to nine months for an application to issue a certificate.”

Self-assessment has made the process easier for officials. Gleeson says “they’re processing the applications much faster and so the issuing of certificates are now happening in a timely fashion.” 

However, producers have struggled to navigate the process. The net result is fewer projects getting relief: 2018 saw the lowest number of audio-visual projects granted relief in recent years, totalling at 52. In contrast to 99 in 2017, 113 in 2016 and 73 in 2015 according to the C&AG report. 

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Certain companies are more vulnerable to changes in Section 481: smaller companies, those with full time staff, those that work in smaller studios and produce more homegrown content.

Animation studios are hit hardest. Three-year-old Irish animation start-up, Turnip & Duck, did not experience the accelerated promised. They got their tax relief 12 months after they originally submitted their application. 

Colm Tobin and his business partner began developing their own intellectual property (IP) and projects while the amended Section 481 regime was in place. 

Turnip & Duck’s first pitch aired on the 28th of October. Their RTÉjr programme, Critters TV, is a children’s show that has a similar premise to Gogglebox and Creature Comforts (2D-animated animals watching live-action nature documentaries).

This success did not come without obstacles.

Publication of these guidelines was planned before the end of September 2019… It is now the first of November and the publication of these guidelines is still being referred to as “imminent”.

First, they went in with a tight cash flow, based on an expected five-month turnaround of 90 per cent of Section 481 rebate. Plus, their budget was not huge by industry standards. They did this while expecting an easier process with the tax scheme.

“The reality is we cash flowed the series ourselves by deferring fees and through the goodwill of our production partners and other financiers,” said Tobin. 

They were able to claim at the final stage of the project meaning they had to stretch their cash flow for the entire year in the absence of the tax break and were “just about” able to keep everyone on who worked on the show. 

Secondly, he highlighted that there is currently no way for someone in his position to be 100 per cent sure that the items he has in his budget to do with production are eligible in the context of Section 481. 

Tobin stressed the point that if the desired effect of the tax break is to encourage new producers to create projects “then it needs to be much more straightforward.” 

“Small companies like ours are the future of the screen industries and, while we are extremely thankful the Section 481 scheme exists to help encourage more entrepreneurial activity in the sector and generate hi-tech jobs, coming up against such uncertainty has the potential to significantly stunt our growth and discourage innovation,” he continued. 

Tobin was quick to emphasise the positives of the scheme for the industry also.

“The tax break is kind of an invaluable part of the funding model,” said Tobin, adding that it would not be possible to get some projects off the ground without it. 

Section 481 is not the only source of funding for film and TV content makers in Ireland. Other bodies such as Screen Ireland regularly provide financial support. 

Although recognising faults within the tax relief, Tobin said the money producers get back from the scheme is “brilliant”.

Note of caution

Speaking of the new guidelines, independent chair of Animation Ireland John Phelan said they will give “clarity on some of the issues that were kind of fuzzy for producers around different areas of what 481 does”.

Although there is an air of optimism within the audio-visual industry around the guidelines which were greatly anticipated, Phelan still believes reverting back to the old system is the best option.

The Economic Analysis of the Audiovisual Sector in the Republic of Ireland, a report published in late 2017 by Olsberg SPI with Nordicity, recommended an increase in support be given to more inward production for movie and TV content creators. 

A producer in the animation industry, who wished to remain anonymous, has a similar view to Phelan on who the amendments have hurt the most. 

Recent changes to the scheme “literally wouldn’t work for animation”.

The audio-visual industry is experiencing considerable turmoil, but some are confident that the new guidelines will put people at ease.

“They haven’t finalised the new guidelines yet but we’re looking forward to it,” said the producer ahead of this week’s announcement.

There is a mood of cautious tension around speaking about the guidelines and possibly rocking the boat on something so vital for the industry.

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The self-assessment system is more efficient, from the tax authority’s perspective. It lets certificates be processed more quickly. But self-assessment is not easy. Small companies, such as animation studios, have trouble navigating the forms. Bigger production companies with more resources are more adept at the self-assessment process. From their perspective, the system works great. It results in faster certification.

“Section 481 is a cornerstone piece of financing for our productions and has allowed us to develop and grow the company,” said Mark Byrne, the group head of business affairs at Element Pictures, a renowned production company led by Andrew Lowe and Ed Guiney.

“Projects such as The Favourite, Room, The Lobster and most recently Dublin Murders and Normal People have availed of Section 481 and allowed us to do all or part of the production in Ireland,” he continued. 

The Favourite and Room were so well received that the leading ladies in both films (Olivia Coleman for The Favourite and Brie Larson for Room) won Oscars for their performances. 

Byrne welcomed the amendments to the scheme which he believes helps speed up the process. He mentioned that there were “significant delays in processing the tax credit payment. But thankfully changes earlier this year to the administration of the system have helped remedy this.” 

The lack of guidelines was the main issue for those trying to get the tax credit. In reality, there are other systemic problems with the Section 481 scheme. These issues were recognised in the past by a third party report and recommendations were given to the Government to deal with them. Little has happened.

For example, the development of Ireland’s games sector is stunted by the lack of access to reliable funding, which is available in neighbouring nations. The Olsberg SPI with Nordicity report recommended the extension of the Section 481 Tax Relief to the games sector to help its growth. The Department of Culture, Heritage and Gaeltacht did not comment on whether there were any plans to address this when asked. 

There are other restrictions connected with Section 481 such as the 21-month rule.  A producer company seeking Section 481 tax credit is required to have traded as a film production company for a period of 12 months and filed a corporation tax return within the nine-month period after that year-end, according to Screen Ireland. 

The report also highlighted that following Brexit, broadcasters licensed in the UK might consider setting up in Ireland, however, with the blanket ban on broadcasters being able to avail of the tax relief they may be discouraged to do so. 

Government intervention

Although these problems still exist, the Government has intervened in the audio-visual industry in other ways. 

Section 481 was extended last year until 2024, where it will be revised again. This was not the Government’s only intervention in the audio-visual industry in recent years.

A long-term commitment to film culture with a funding allocation of €200 million between 2018 and 2027 was warmly welcomed by the industry.

The audio-visual industry did receive some support in this year’s Budget to the value of a €1 million funding increase for Screen Ireland, bringing the agency’s annual capital budget to €17.2 million for 2020.

The present Government commented about strengthening Ireland’s presence in key markets such as Los Angeles. The Taoiseach Leo Varadkar stated he will reinforce the Government’s commitment to growing the film industry. One of the ways of achieving this is through the Section 481 tax break and incentives for filming in the regions. This arose after An Taoiseach’s recent visit to the US.

It is not surprising that the Government takes an active role. Direct employment on the film, TV and animation sector is 7,070, according to data provided by Screen Ireland. Employees working on production for film, TV and animation number approximately 4,480.

In 2017, Irish films, television and animation productions produced in Ireland had combined budgets of over €590 million and spent over €292 million on local employment, according to Screen Ireland. 

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The struggle with Section 481 is an unfortunate scenario that Irish animators have found themselves in. Especially as over the years they have showcased Ireland’s unique folklore, language, culture and humour through their work.

Cartoon Saloon and Brown Bag Films are no strangers to the Academy Awards with multiple nominations between them. 

Despite some funding increases, the main talking point continues to be around flaws around accessing the Section 481 tax credit. 

“From a producer’s perspective, all we want is clarity so that we can build our budgets based on the best practice going forward,” said Tobin.