Written evidence submitted by the Creative Industries Federation

 

The Creative Industries Federation is the independent body which represents, champions and supports the UK’s creators and creative industries. In September 2019, it announced its intention to formally unite with Creative England. The Federation’s membership includes small and large businesses, charitable organisations, education providers, freelancers, trade and sector support bodies from across the creative industries and throughout the UK. We are keen to support our members in the recovery from COVID-19 by ensuring that innovation in the sector is supported.

This submission to the Treasury Select Committee’s Call for Evidence highlights the importance of maintaining, streamlining access to and, where appropriate, expanding creative industries’ tax reliefs to the sector to enable recovery and the opportunity of opening up the definition of R&D to the creative industries to allow the sector to benefit further from R&D tax credits. This would both support the government’s levelling up agenda and drive innovation and inward investment in the sector at a time when it is needed the most following the impact of COVID-19, ensuring our world-leading industry remains at the cutting edge. R&D spending in companies was among the first things to be cut after the 2008 crash, resulting in a longer time for regions outside London and the South East to bounce back.

On taxation more broadly, the announcement of the extension of business rates relief to grassroots music venues and small cinemas in the Conservative manifesto, and the further extension of this in response to the pandemic has helped relieve financial pressures in recovery. While this support has been very welcome, support also needs to be considered for those who do not pay business rates, such as charities and those creative businesses and individuals operating through shared workspaces.

With the appropriate tax relief stimulus, the sector can move forward from the pandemic to not only boost economic growth but also further unlock its potential to help tackle local and global challenges, from the regeneration of our high streets to sustainability and climate change.

KEY STATISTICS - PRE-PANDEMIC

        The creative industries contributed £111.7bn in GVA to the economy at the latest estimate which is larger than the aerospace, automotive, life sciences and oil and gas sectors combined.

        Almost 1 in 8 UK businesses are creative businesses and the sector is creating jobs at three times the UK average with an expected one million more jobs by 2030.

        Before the pandemic, the creative industries were growing at five times the rate of the UK economy as a whole and in all parts of the UK, growing by almost 60% in Scotland and 35% in the West Midlands between 2010 and 2017 (GVA).

        33% of creative workers are freelancers and in some sub-sectors the figure is much higher, such as almost 70% in music, performing and visual arts, 60% in design and designer fashion, and 50% in film and video production.

        95% of creative enterprises are micro businesses with no or limited HR support or financial headroom.

        Creative businesses represent over 5% of the UK economy and are responsible for more than 10%, or £27 billion, of the UK’s annual service exports.

 

The Impact of COVID-19 on the UK’s creative industries[1]

 

        Prior to the outbreak, the UK’s creative industries were set to contribute £122bn in GVA to the UK economy and reach employment levels of 2.15 million by the end of 2020.

        Instead, the sector’s GVA is estimated to reduce by £29bn (26%) in 2020 compared to pre-pandemic levels. This is twice as worse as the predicted 12.8% drop across the UK economy.

        409,000 jobs (including self-employed workers) are expected to be lost by the end of 2020 - a drop of 19%. This is the lowest level of employment in the sector since 2013.

        122,000 permanent workers are expected to be made redundant by the end of the year.

        The impact on employment will be twice as worse for freelancers with 287,000 contracts estimated to be terminated by the end of 2020.

        Of all UK nations and regions, Scotland is expected to suffer the worst GVA impact on its creative industries, with a drop of 39% by the end of the year.

        The West Midlands is anticipating the highest relative loss of employment in the sector - a 43% loss representing 51,000 jobs.

        London is projected to have the worst overall impact - losing 110,900 creative jobs (16%) and seeing a £14.8 billion (25%) drop in creative industries GVA.

 

To overcome these challenges and realise the full potential of the sector to support both our economy and society, we must harness its world-leading strengths. By maintaining and, where appropriate, expanding creative industries’ tax reliefs as well as broadening the scope of R&D tax credits beyond science and technology, we can ensure that the creative industries are able to thrive, benefiting all parts of the UK.

Creative Industries Tax Reliefs

Creative industries tax reliefs have been highly effective in driving inward investment and enabling the UK's creative content and services to become both world-renowned and highly profitable. In a time when high growth is needed quickly, it is vital that the incentive that they provide is maintained, streamlined and, where appropriate, extended to encompass more of the creative industries and support faster economic recovery.

Existing tax reliefs in the screen sector have made a significant difference in boosting both production investment as well as the contribution of the sector to the economy and job creation. Since the introduction of film tax relief in 2007, UK production spend on film and high-end television has increased to a new high of £3.6 billion, an increase of 16% from 2018.

Screen sector production supported by tax reliefs produced a total of 137,340 FTE jobs in 2016 and delivered a total of £7.91 billion in GVA. For those tax-relief sectors where trend data is available (film, HETV, and animation), there has been significant combined growth from 2013-2016, a 62% increase in jobs created and a 73% increase in GVA.

Increased levels of production contribute to a higher volume of British content being exported and available to audiences around the world. This enhanced soft power abroad is complemented by tax reliefs that incentivise inward investment to the UK. Inward investment and co-production spend on film and high-end television in the UK has now surpassed £3 billion in 2019 and led to the production of award winning films such as Sam Mendes’ 1917 and distinctly UK brands such as the new James Bond film, No Time to Die[2]. It has accounted for around 27% of total spending on video games supported development from when the tax relief was first introduced in 2014 to 2016.[3]

Protecting and Expanding Creative Industries Tax Reliefs

Given the highly disruptive impact of COVID-19 on growth, employment and income generation in the creative industries, attracting inward investment to the UK and promoting innovation and growth across the whole of the sector is more important than ever. To enable a strong and rapid recovery, we must therefore look to both support existing tax reliefs, ensuring streamlined access that avoid additional bureaucracy, as well as explore opportunities where similar tax reliefs could be expanded to other parts of the creative industries and deliver significant benefits there also. While we present an overview below of the key points to be considered, many sub-sector specific trade and representative bodies will also be inputting into this inquiry with greater detail on their particular industries. Their responses should be read alongside this submission.

Looking at existing reliefs, we should ensure that the Museums and Galleries Exhibition Tax Relief which is set to finish in 2022, is reviewed at the earliest opportunity and receive continued support. This is particularly important given the continued impact of social distancing on the museum and galleries’ sector’s ability to reopen at capacity and generate sufficient revenue. Moreover, tax relief on exhibitions would be even more effective if it were applicable to all types of museums and galleries, including social enterprises, local authority museums and organisations which are commercially funded. This alongside a more streamlined approach to applications would significantly increase the uptake of the relief.

While other sectors such as video games have been less impacted by COVID-19 so far, they are likely to face acute challenges over the next few years. Many games businesses are reporting concern about impacts on their ability to access talent, finance and business deals, especially impacting new UK-made Intellectual Property. If government increased the rate of Video Games Tax Relief from the existing 25% of 80% of core expenditure, to 32% of 80% of core expenditure, this could encourage additional foreign direct investment into the UK and advance the existing £4 GVA return for £1 of tax relief. It would also encourage further investment and job creation on the part of studios already based in the UK. Similarly, increasing the claimable amount of Orchestra Tax Relief from 25% to 50% could make going back going back into production cost-effective and reboot the growth of the industry.

It is also necessary for the implementation of certain existing tax reliefs to be altered due to the impact of COVID-19. For example, despite the current social distancing restrictions it is not possible yet for digital performances to be claimed for under Orchestra Tax Relief and Theatre Tax Relief. Similarly, exhibitions displayed digitally to reach greater audiences in this challenging time cannot be claimed under Museums and Galleries Tax Relief. Indirect expenditure such as storage and legal costs should also be claimable and the minimum threshold of 12 musicians should be reduced given reduced capacity on socially distanced stages.

There are other high-growth components within the creative industries that could benefit significantly from being included within the scope of sector tax reliefs. New reliefs will play a key role in encouraging inward investment into the UK’s creative industries, in support of the high number of SMEs, micro businesses and sole traders that operate within it, as well as all regions and nations of the UK. They would be designed to incentivise expenditure in UK based companies dedicated to developing the next generation of world class creative talent. New tax reliefs will also be important to mitigate the loss of cash flow due to COVID-19 and reinvigorating and recapitalising industries which have been particularly hard hit.

Policies are currently being developed by the music sector to create a tax relief in line with that provided to the screen sector to maintain the UK’s position as one of the few net exporters of music in the world. The global music market is set to grow from USD 22bn to USD 45bn by 2030 and the UK should act now to claim as large as possible a share of that growth driven by the adoption of streaming. We should aim to capitalise on the UK’s strength in music, given our world class music talent and facilities, and attract inward investment to advance both the sector’s growth and that of the wider economy.

Given the particularly severe impact of the outbreak on music venues, a new tax relief should ideally be combined with an extension of VAT relief on tickets until 2022 to protect the sector’s contribution to the economy.

With the right incentive and an already-established professional sector, the UK is also in a good position to become one of the major global centres of audio production. A tax relief will help empower audio production companies to court inward investment to help develop and expand audio content (e.g. audiobooks and podcast drama) for commercial exploitation in the domestic and global audio market.

Similarly strong growth can be seen in the fashion sector, which has experienced 11% year on year growth to reach over £32bn in GVA. The pandemic has highlighted demand for on-shoring, which will reduce climate change and increase UK made manufacturing. The global fashion industry could be incentivised to significantly expand its UK presence through reliefs being provided for UK design and manufacturing of garments or through the use of sustainable manufacturing practices.

 

Policies are also being considered for a tax relief for UK publishing. UK publishing was set to be worth £10bn by 2030, but the impact of COVID-19 has impacted this projection. The aim of a tax relief for UK SME publishers would be to incentivise the production of British creative works, which drive export sales and UK soft power around the globe.

R&D Tax Credits

Investment in R&D will provide a key means by which the creative industries can maintain their pattern of high growth and job creation while ensuring that these benefits are spread fairly across the country. As we look to restart and recover, we need to learn the lessons of the 2008 financial crisis. New research by Cambridge Econometrics, released by the Creative Industries Policy and Evidence Centre and Creative England, reveals that prior to the last recession, the creative industries were growing in all parts of the country - urban and rural - but under economic duress, those burgeoning clusters shrunk, and concentration focused back on London and satellite clusters in the South East.[4] A significant opportunity for job-creation and growth in all parts of the UK was lost. Leaving recovery to the market will entail a major setback in the levelling up agenda - we must ensure that R&D investment can be accessed by the creative industries to mitigate against this risk.

In the last year for which government data is available (2017-18), £4.26 billion was spent on R&D tax credits by HMRC across schemes for SMEs and large companies, encompassing 48,385 claims. These claims have been principally made by the digital and technology sector with companies categorised by government as falling within ‘Information and Communication” having made 11,635 claims totalling £820 million in 2017-18. However, R&D goes far beyond the purely digital and has a significant place within the creative industries where the working model of many organisations is built around delivering long-term innovation rather than simply meeting demand as and when it arises. It is vital therefore that we consider the existing definition of R&D applied to tax credits and ensure that there is room for the research being carried out in the creative industries to be properly recognised and financially supported.

Currently, HMRC only considers a narrow version of the OECD Frascati definition which restricts R&D to activities advancing science and technology. A forthcoming (pre-COVID) DCMS-funded survey, nearing completion, is expected to show that a large proportion of creative businesses report that they already undertake some R&D activities which could qualify for relief if the scope was slightly widened, but do not do so currently. Given the huge potential for innovation within the creative industries, it makes sense to consider a broader definition of R&D.

In the months following a recommendation made by Nesta and the Creative Industries Policy and Evidence Centre (PEC) to use a wider definition of R&D in tax incentives,[5] the Conservative Party Manifesto promised a review of the R&D definitions. The official definition of R&D used by the UK government excludes the arts, humanities and social sciences, unlike some other OECD countries like Brazil, Czech Republic, Denmark, France, Italy and Korea[6]. Consequently, much R&D in the creative industries – which is reliant on the arts, humanities and social sciences – is not recognised and does not qualify for targeted R&D support. The review of R&D definitions promised by the Conservative manifesto should be used to ensure that R&D definitions are widened and do not neglect areas like the creative industries, which have been hard hit by COVID-19 and where the UK has international strengths.

The incorporation of the OECD Frascati definition in a more holistic manner within HMRC’s tax credit criteria would allow for R&D “comprising of creative and systematic work” to also be included. This would provide an avenue by which innovation in the creative industries can be properly recognised. Fundamentally, we must move away from the image of research as something that takes place in a lab funded by large corporates and instead look to embrace the potential of creativity through “individuals, SMEs, collaborations and networks”.[7]

It is vital that we look to achieve a targeted expansion of R&D tax credits to encompass more of the activities within the creative industries and protect levels of innovation investment at a time when firms would otherwise struggle to afford it. As an initial point of urgent intervention to support a strong recovery, a one-year broadening of the tax credit definition should be considered. This could then be evaluated for retention over a longer period based on its effectiveness to maintain our creative industries’ world-leading status.

The Benefits of R&D in the Creative Industries

Existing R&D schemes have been highly successful in advancing innovation in the creative industries and generating economic benefits across the UK. UKRI investment in research and innovation has immense societal impact. Creative Clusters and Audience of the Future (funded through the Creative Industries’ Sector Deal) are two of the world’s largest R&D programmes for the creative industries, harnessing new digital and immersive technologies to create new markets, services and products across fashion, film, gaming, museums and theatre.

Creative Clusters has provided an unprecedented £80 million to innovative creative projects across the UK. It has built collaborations across a wide range of areas from looking at the future of story forms through StoryFutures (leveraging £1 million in additional funding and creating or protecting 29 jobs versus a target of 14) to delivering growth and technical development to the Northern Irish sector through Future Screens NI (supporting 14 live projects and involving more than 200 companies in the cluster).

Looking forwards, the £33m Audience of the Future challenge fund will bring together creative businesses, researchers and technology experts to create striking new experiences that will captivate the public’s imagination. By capturing the world’s attention, their work will help grow the UK’s leading market position in creative content. As part of this, a £16 million demonstrator programme is funding industry-led consortia in the creative industries to create new immersive experiences and test them with 100,000 people from summer 2020 onwards. Using R&D to reach new audiences in different ways will become all the more important as the sector adapts to social distancing.

Case Studies of Creative R&D with Audience of the Future Funding

 

The Open Access Smart Capture project, led by The Royal National Theatre, will increase accessibility in theatres for patrons with accessibility needs, deaf, non- and partially sighted would-be theatre goers, who need additional support technology. The project is developing pioneering speech-following technology and augmented reality glasses, which will deliver immersive translation captions for non-English speakers and personalised sign-language displays for BSL users and audio description for the visually impaired. The work carried out here will help bring the creative industries to whole new audiences and build social cohesion across the UK.

 

The HAPPIE project is developing a ‘Haptic Authoring Pipeline’ to produce immersive experiences, enabling haptic content to be created faster and more efficiently, and providing the software infrastructure to allow smooth and reliable content distribution. After the project, training experiences will become more kinesthetic and the cost of creating haptic content will be reduced. One current application of this is in assisting visually impaired artists with remote classroom experiences, enhancing access to the creative education that will be vital to the future of our society and economy.

 

The EETE project, led by Tangio in partnership with Gravity Sketch, takes a major step forward for creative technology towards making VR more immersive by facilitating finger movement in virtual environments through the use of hardware and software. It will improve human-computer interaction through an emphasis on cutting-edge, touch-sensitive materials technology, signal processing, UI/UX, and design. This will remove barriers to VR interaction by enabling people to interact with the virtual world as they do with the physical world. A recent application of this technology has been on design processes - the project recently attracted £320k of investment from Boeing HorizonX to move their design process from cardboard VR to immersive.

 

R&D and the Future Economy

R&D has had a significant impact in boosting the development of artificial intelligence technology within the UK, leading to a subsequent impact on large swathes of the creative industries which are content-driven. Digitisation is enabling ever greater quantities of creative content, from images to sound and text, to be created, distributed and consumed digitally. This then paves the way for artificial intelligence to analyse this data beyond what a human could achieve and produce insights that could be commercially and socially valuable. AI can both help creative companies better understand their users and make recommendations on music, books and films but it can also spotlight trends and movements within society and build cultural awareness.

AI can not only enable understanding what has already been created but also be a creative tool in itself. Two prominent examples of this within the creative industries are Generative Adversarial Networks (GANs) and Neural Style Transfer (NST). GANs can enable new images to be created based on data input and has had uses in interior, fashion and video game design. NST allows for one image to take on the style of another and has been used effectively in developing new pieces of artwork.[8] While both of these technologies are behind the scenes from the consumer, R&D can bring new experiences directly to audiences and visitors as well.

This has particularly been the case with museums, galleries and heritage sites who have successfully integrated immersive experiences into their visitor experiences. This has helped these institutions with the storytelling around their artefacts and history and to present visitors with a more active experience where they can more closely engage with objects as part of a spatial and emotional experience.[9] A prominent example is the partnership between the Serpentine Gallery and Acute Art who have created a digital re-visualisation of a giant, floating sculpture made physically in 2018. With the limitations of COVID-19, virtual reality has also become crucial in reaching audiences. Modern Art Oxford for instance has used the room-capture technology of Matterport to embed an immersive three-dimensional model of an exhibition into their website.[10] 

The creative industries are both highly innovative and resilient to automation, with Nesta estimating that 87% of highly creative roles in the UK are at low to no risk of being automated.[11] The sector is a UK success story growing five times faster than the wider economy and cementing our soft-power and place on the world stage. However, there is much more untapped potential in the creative industries for wider social, environmental and of course economic benefit.

As well as broadening the R&D definition, this potential can be unlocked by building connections between the higher education sector and creative industries, particularly through specialist departments and universities undertaking research closely aligned with the creative industries. The benefits of such partnerships could be harnessed through further Innovation Vouchers targeted at SMEs to work with knowledge providers, including universities and Independent Research Organisations, on ventures to explore potential new ideas. We must ensure that the inherent strengths of the creative industries are supported by expanding our vision of research and development and providing tax reliefs and other incentives where they can make a significant difference in driving forwards our society and economy.

 

The Creative Industries Federation is the independent body which represents, champions and supports the UK’s creators and creative industries. Its membership includes small and large businesses, charitable organisations, education providers, freelancers, trade and sector support bodies from across the sector and throughout the UK.

 

 

September 2020

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[1] Report: The Projected Economic Impact of COVID-19 on the UK Creative Industries, Creative Industries Federation, 2020

[2] BFI statistics for 2019 show film and high-end TV generates £30% uplift for UK economy, British Film Institute, 2020

[3] Screen Business: How screen sector tax reliefs power economic growth across the UK. Summary Report, British Film Institute, 2018.

[4] The importance of a UK-wide recovery plan for the creative industries, Creative Industries Policy and Evidence Centre, 2020

[5] How evidence should guide manifesto promises on the creative industries?, Creative Industries Policy and Evidence Centre, 2020

[6] OECD Compendium of Information on R&D Tax Incentives, OECD, 2019

[7] Defining R&D for the Creative Industries, Hasan Bakshi and Elizabeth Lomas, 2017

[8] The art in the artificial, Creative Industries Policy and Evidence Centre, 2020

[9] Immersive experiences in museums, galleries and heritage sites: a review of research findings and issues, Creative Industries Policy and Evidence Centre, 2019

[10] Three-dimensional lift off: The Art Newspaper launches reviews of virtual art, Louis Jebb, The Art Newspaper, 324, June 2020

[11] Creativity Vs Robots, Hasan Bakshi, Carl Benedikt Frey, Mike Osborne, Nesta, 2015