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The anticipated Creative Sector Tax Relief anti-abuse measures, announced in the Spring Budget, are set to have significant implications for businesses operating in the creative sector. These measures aim to address potential abuse and clarify the rules surrounding tax relief claims. In this article, we will explore the potential impact of these measures, including the use of Special Purpose Vehicles (SPVs) and the guidance provided by HMRC on arm’s length transactions.
The Use of Special Purpose Vehicles (SPVs): Special Purpose Vehicles (SPVs) have been commonly utilized in the creative sector to maximize tax relief claims. By including costs charged by fellow group companies into the SPV at higher rates, businesses have been able to increase their claims under the existing rules. However, the new anti-abuse measures are expected to scrutinize this practice and potentially restrict the ability to uplift core expenditure through marked-up intra-group charges.
Clarification of Arm’s Length Transactions: In June 2023, HMRC updated their manuals for Video Games Development, Television Production, and Film Production companies to clarify further what constitutes an ‘arm’s length transaction. This guidance addresses potential abuse and clarifies expenditure treatment from connected parties within the creative sector.
HMRC’s updated stance requires claimant companies to conduct transfer pricing analysis or identify suitable third-party comparable transactions. The claimant company must demonstrate that their method produces a just and reasonable markup rate, reflective of an arm’s length transaction between unconnected parties. If charges are inflated without a valid arm’s length justification, they may be deemed a disqualifying purpose.
Disclosure and Processing of Claims: To facilitate the processing of claims, HMRC encourages businesses to provide additional disclosures in their creative sector claims. This includes detailing the markup rates used for connected party transactions and disclosing the underlying direct costs and overheads. These disclosures provide transparency and ensure claims are based on genuine arm’s length transactions.
Insights into the New Anti-Abuse Measures: The updated guidance from HMRC raises questions about the forthcoming anti-abuse measures announced in the Spring Budget. While published legislation is still awaited, the guidance suggests that claims may continue to increase to an ‘arm’s length’ amount, provided they adhere to the newly clarified guidelines. It remains to be seen whether the new measures will restrict these types of transactions entirely or impose further limitations.
The introduction of HMRC’s anti-abuse measures and the updated guidance on arm’s length transactions are expected to impact businesses in the creative sector significantly. The use of SPVs and inflated charges between connected parties may face stricter scrutiny, while the requirement for transparency and compliance with arm’s length principles will become more important. As we await the publication of detailed legislation, businesses must stay informed and adapt their practices to ensure compliance with the new guidelines and any forthcoming anti-abuse measures.
If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.