This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Animation Production Company Manual

Eligible expenditure: distinguishing development from later stages of production

Television Tax Relief (TTR) for animations is available on production expenditure incurred at all stages except for development. It is therefore important to identify and quantify development expenditure.

The production process for animations may vary significantly between different productions and particularly where different animation techniques are involved. However, in most cases it should be straightforward to distinguish between activities that constitute principal photography (or rendering) or post-production.

The critical distinction is usually between development expenditure and pre-production expenditure.

Development expenditure is essentially speculative. It relates to those activities undertaken with the aim of determining whether the film is a commercially feasible project which might proceed to the later stages of production.

Pre-production expenditure, in contrast, is not speculative. It is incurred on those activities undertaken in the knowledge that a decision has been taken for the film to go ahead. Such activities can, however, be undertaken even where some development activities are still taking place.

Pre-production expenditure can be incurred whilst development activities are still ongoing.

Expenditure incurred in the knowledge that the project may possibly not proceed is not necessarily development expenditure.

For example, development of artwork can be an essential part of an animation project being green-lighted. However, this is also a necessary part of pre-production.

Expenditure attributable partly to development and partly to later stages of production

Some costs relate both to the developments stage of an animation and to other stages of production. Examples of such costs would be those incurred on the script and the producer’s fee.

In each case it is necessary to establish to what extent the expenditure on the script is incurred on establishing whether a programme can be made and how far it is incurred on actually making the programme.

The correct apportionment will vary according to circumstances. There is no definitive apportionment method and any reasonable method may be used. A Television Production Company (TPC) may rely on an estimate used in the production of previous animations, but this will only be appropriate where the facts are similar.

If a producer worked substantially full time on an animation for a year, with the first three months being taken up with development and the remaining nine months with pre-production, principal photography and post-production, it would be reasonable to allocate one quarter of the producer’s fees, for that period, to development. That is, 75% of his annual fee would be treated as core expenditure.

This is obviously a simple example. In most cases there will not be a distinct cut off between development and pre-production, with elements of pre-production occurring in conjunction with development. However, an estimate on such a time-apportioned basis will usually be considered a ‘fair and reasonable’ apportionment, though not necessarily the only ‘fair and reasonable’ apportionment (see APC50110).

A script could likewise be used during the development stage of an animation as well as the later stages of production. If the original script was more or less unchanged through this process then it may be reasonable to allocate a significant proportion of its costs according to how it is used through the various stages of production. This could be evidenced by the extent to which reference is made to it throughout these stages.

It may be the case that the script writer is paid for an initial fee for a first draft of the script for development purposes followed by further instalments as the programme proceeds and refinements are made. It may be reasonable to allocate costs according to the timing of payments and the use to which the various versions are put.

For example, a payment may be made for the initial premise for a script would usually be related purely to development and not be core expenditure. However, once the premise is approved, the development of the synopsis of the script with key plot points (the ‘beat outline’) would likely constitute core expenditure as it relates to the pre-production stage. Each case will need to be assessed on the facts of the case.