UK parliament calls for high-end tax relief reform, terms of trade review

The Crown S3

The UK’s high-end tax relief for drama should be reformed and producers’ Terms of Trade with broadcasters should be reviewed, according to a far-reaching report into the country’s TV industry.

The UK’s House of Lords Communications and Digital Committee has been reviewing the impact of SVOD services on the UK’s public service broadcasters (PSB’s) such as the BBC, ITV, Channel 4 and Channel 5, with execs including Apple’s Jay Hunt, Netflix’s Anne Mensah, All3Media’s Jane Turton and Amazon’s Georgia Brown providing evidence over the past six months.

The resultant report, titled Public Service Broadcasting: As Vital As Ever, said the committee did not support proposals to put a levy on SVOD services such as Netflix and Amazon, and warned against changing the licence fee model for public broadcaster the BBC.

Tapering back on tax relief

Jay Hunt

It did, however, call for high-end tax relief to be changed amidst concerns that there is now “a serious risk” of the production sector “reaching full capacity and overheating.”

The changes were introduced in 2013 and allow producers to claim 25% tax relief on projects that cost more than £1m ($1.3m) per hour. While the committee admitted the relief had “encouraged high levels of inward investment” it argued the £1m threshold “creates an incentive for productions with a budget over £800,000 to spend more to receive up to £200,000 in tax relief.”

“This makes it less attractive to produce mid-budget drama, which is crucial to the development of skills in the production sector. High-end TV Tax Relief should be tapered in from £800,000 to remove the incentive to spend more to reach a cost of £1m per hour.”

The report also criticised the UK’s Apprenticeship Levy, designed to bring young talent into all industries, saying it had “failed” the creative sector in particular. The committee welcomed attempts to improve the TV sector via the ScreenSkills pilot scheme, which invests in training and education, adding that the government should make contributing to the ScreenSkills fund a condition of receiving high-end TV tax relief.

Tackling terms of trade

The report also called on UK media regulator Ofcom to explore the future of the Terms of Trade, which are enshrined in the Communications Act of 2003 and hand producers secondary and international rights to their shows.

The report said that while it “supports the continuation of the regulated Terms of Trade between PSBs and independent production companies” the current arrangement should be “reviewed.”

“As part of its review of public service broadcasting, Ofcom should consider whether the Terms of Trade unfairly disadvantage public service broadcasters in a competitive market,” the report stated.

“The Terms of Trade were originally introduced to protect independent production companies from the dominance of public service broadcasters. Given the degree of consolidation in the market, in order to uphold their original purpose of protecting small and medium sized independent production companies, Ofcom should review whether the Terms of Trade should still to apply to larger companies.”

John McVay, CEO at UK producer body Pact, told TBI his organisation welcomed the support for the Terms of Trade, adding that they were vital for the country’s indie sector.

“The findings of this report echo previous reviews undertaken by Ofcom and Parliament, which found the system to be functioning effectively and confirmed that the indie sector has played a vital role in securing the UK’s position as a major global content creator and exporter,” he said.

“We are pleased that the Terms of Trade continue to receive such support as they are key to maintaining – and the future growth of – the indie TV sector.”

SVOD levy and co-productions

Anne Mensah

The House of Lords report also distanced itself from calling for the introduction of an SVOD levy, something producers including Colin Callender and Peter Kosminsky have previously argued in favour of, but it did note the potential threat of rising production costs on PSB’s.

“Public service broadcasters have benefited from record levels of third-party funding: from co-productions with SVODs, coproductions with non-SVODs and deficit financing,” the report said.

“However, we heard concerns from industry figures that third-party funding could decline in future once broadcasters have become dependent on it. Losing this funding would pose a serious danger to public service broadcasters and impair their ability to produce high-quality programmes. It would also damage the independent production sector.”

Apple’s creative director for Europe Jay Hunt and Amazon Studios’ director of European originals Georgia Brown had earlier talked up their companies’ openness to coproductions while giving evidence to the review, as had Netflix’s Anne Mensah, but the committee called for change if this situation changed.

“In a fast-changing market public service broadcasters’ access to third-party funding for programmes for UK audiences should be kept under review. We do not support proposals for a levy on SVOD subscriptions at this time, but we would expect Ofcom to assess the merits of a levy if the situation changes and to make recommendations accordingly.”

PSB prominence

Elsewhere, the report said the BBC should be given “the power to innovate at speed without undue regulatory burdens” to avoid becoming “a minor player in the face of dynamic, well-resourced global competitors.”

It also said the licence fee was a “guarantor of the BBC’s financial independence and underpins its unique quality,” arguing that a subscription model – mooted by some as a potential replacement for the licence fee – “would undermine the fundamental principle of universality that the BBC should be free-to-air.”

Lord Gilbert of Panteg

The report called for the creation of a Funding Commission to oversee the process for setting the licence fee, in an attempt to ensure an “independent and transparent process”, and supported Ofcom’s recommendation to improve the prominence of PSB’s as viewers move away from linear channels.

“The right to be displayed prominently is a key privilege of public service broadcasters. The current regime is centred on linear TV, which will increasingly devalue over time.

“We believe that it is more important that PSBs are easy to find in a fragmented media environment, not less. We welcome and endorse Ofcom’s recommendation that the prominence regime be updated for the digital age to reflect new ways of accessing content. The government should introduce legislation to implement a new prominence framework in line with Ofcom’s recommendations. The regime should be based on principles so that it can adapt as technology changes.”

The report also called for an expanded number of protected sports events, recommending a “modest increase in the number” of listed events which must be shown free to air.  This could include, the report said, The Ashes and The Open Golf Championship, both of which air on Sky at present.

Chairman of the committee, Lord Gilbert of Panteg, said: “For many people, especially young people, watching TV in real-time is now the exception rather than the norm. While the arrival of SVODs has created exciting opportunities for the creative sector and for audiences, particularly in drama, we are concerned by the unpredictability of future developments. PSBs provide a stable investment platform for a diverse range of content, made for UK audiences, and freely available on a reliable over the air platform.

“At a time of polarisation, public service broadcasters play a role in unifying the country through shared experiences. Our recommendations will ensure that public service broadcasters are able to continue to serve us and afford to make world-class programmes. If we fail to support our public service broadcasters, audiences would miss them when they’re gone.”