Written evidence submitted by Feref

FEREF Petition for Expansion of Film Tax Relief Guidelines:

Film Distribution Activities On Set as Key Activities and Costs

Introduction

Current audio-visual tax reliefs in the UK are awarded to films that conduct 10% of ‘core cost’ activities in the UK, defined as pre-production, principal photography, and post-production activities. The following submission kindly requests the Culture, Media and Sports Committee to consider expanding this definition and include production of creative distribution material that occurs during principal photography as a ‘core cost’ eligible for tax relief.

Effectiveness of the Film Tax Relief thus far

Since 2007, the UK Film Tax Relief (FTR) has been a huge success in boosting film productions in the UK. In 2019, the British Film Institute (BFI) reported that the FTR had injected £13.48 billion into the economy and generated 156,030 jobs in entertainment production.

HM Revenue and Customs’ November 2022 survey of FTR claimants further indicated that 38% of productions would not have gone through without the relief, particularly in domestic production companies. 8 in 10 production companies noted that a smaller amount of relief would have shrunk production budgets significantly.

More recently in 2022, BFI reported significant growth in UK film and High-end Television (HETV) production, with combined spending by the sector amounting to £6.27 billion—reaching record levels and bypassing pre-pandemic numbers. Altogether, the FTR has successfully positioned the UK as an attractive destination for film and high-end television production.

The role of the Film Distribution Sector

However, it should be noted that a large percentage of the film industry’s total gross value added (GVA) to the economy is contributed by the film distribution sector. BFI’s 2019 report on The UK Film Economy indicated that in 2017, the film distribution sector was the single highest contributor to the film industry’s GVA, injecting £3.6 billion into the economy, or 60% of the total. Film, video and TV production and post-production fell behind at 31%, contributing £1.9 billion.

Furthermore, BFI’s 2023 report indicated that film distributors accounted for a significant percentage of the industry’s turnover. In 2021, the film distribution sector contributed 44% of the turnover despite only representing 2% of the film industry’s company. In contrast, film production companies represented 50% of the industry but only 29% of turnover.

The film distribution sector is not only highly profitable, but also steadily growing. Film distribution GVA increased each year between 2013 and 2017, rising from £1.7 billion to £3.6 billion. Between 2016 to 2020, film distribution GVA increased by 25.8%. Film and video distribution turnover grew by 66% from 2017 to 2021.

Exclusion of distribution activities from the FTR

Despite this, the FTR does not accommodate creative activities in the distribution sector. As the aforementioned figures underscore, film distribution is crucial to the commercial success of film productions and thus the prosperity of the industry—and increasingly so in the age of social media and booming advertising.

It should be noted, however, that the top five distributors in the UK as of 2021 are all US-based studios: Universal, Sony, Walt Disney, Warner Bros, and Paramount. UK-based studios Park Circus and STX Entertainment fell behind in 8th and 9th place, according to BFI’s 2022 Distribution Report. 86% of 2022’s record expenditure by the combined UK film and HETV industry also came from inward investment—a dominant majority. Inward investment films delivered £1.74 billion, or 88% of the total expenditure, and US-studio backed films accounted for £1.36 billion of that. While these statistics do reflect the UK’s strengthening position as a global hub for film and TV production, they also indicate that the success of UK productions, and particularly of its distribution, is dependent on US money.

Distribution activities are moving closer to the production process

Since the top distribution studios of UK productions are US-based, key creative activities relating to distribution tend to be locked in US markets—including the immense profit that can be generated from it. More recently, film productions have called upon distribution teams to be part of the production process, by creating assets on set. This major shift creates a tremendous opportunity for UK creatives in the distribution sector to be more intimately involved throughout the process of US-backed productions, with more entry points to draw income back into the UK market.

Recent mega-blockbuster Barbie is a strong example of this. Filmed in Warner Bros Studios Leavesden, the production was located largely in the UK despite being US-backed. While Barbie had a massive production budget of $145 million USD, its marketing campaign budget has been estimated by rival studio executives at an even bigger $150 million USD. An analysis of Barbie’s marketing campaign indicates that most of the assets released were photographs on set or assets relying heavily on on-set photography—for example, this first-look photo of Margot Robbie posing on set, followed by this photo of Ryan Gosling also posing on set, and an accidental leak of on-set photos that nevertheless generated a huge buzz for the film on social media. The campaign also hinged heavily on the gradual release of several teaser trailers and posters generated from principal photography assets.

As demonstrated with Barbie, distributors invest heavily in media (outdoor posters, print media, television, radio and online) in order to raise a film’s profile with potential audiences. Statista reported that the US motion picture and videotape industry spent $1.039 billion USD on advertising in 2022. Out of this advertising expenditure, budgets for on set production of creative distribution materials is around 7% of the total media spend, following typical industry standards. This 7% value is further set to increase as studios commission more social (organic) content creation not linked to media spend. With an extensive campaign such as Barbie’s, this enormous expenditure could have gone to UK creatives instead of being locked in US markets, given that principal photography took place in UK locations. On an average production, we estimate the creative distribution budget could range anywhere from £500,000 to over £1 million—which can be channeled into local agencies and studios.

Current FTR guidelines, however, do not give US studios incentive to hire UK creatives so early into the production and distribution process. Consequently, US studios continue to repatriate film projects and commission US creative agencies to deliver marketing collateral, trailers, posters, and digital content instead.

UK creative agencies, such as Feref, that do get commissioned by US studios, often work to create assets only after all principal photography and a large portion of distribution assets have been created—for example, creating social content from already completed trailers or posters from completed assets. More recently, however, US clients have indicated a desire to commission these agencies to be on set and capture marketing content much earlier on in the process. The Covid-19 pandemic, however, has grounded these plans to a halt, which, coupled with the recent WGA and SAG strikes, have been very slow to revive.

Expanded FTR guidelines can benefit the UK economy

A large number of successful productions across the last year were made in the UK, including many highly-anticipated ongoing productions such as The Batman 2, Sonic the Hedgehog 3, Deadpool 3, Wicked, Heart Stopper (season 3) and The Sandman (season 2). Several of these are set in UK filming studios such as Pinewood Studios, Elstree Studios, Longcross Studios, and Warner Bros. Studios Leavesden. In total, BFI reported that 120 international film productions were produced in the UK in 2022, with 115 international HETV productions made in the UK. With the creative process behind film and HETV distribution becoming embedded within productions, there are brimming opportunities for local creative teams to be the ones on set developing content for distribution materials.

Compared to the US film industry’s advertising spend of $871 million USD in 2021, UK distributors spent just £61 million in the same year. With so many US-backed films and HETV located in the UK, much of their expenditure can be easily transferred into UK markets instead. A review of FTR guidelines to include relief for on set creative distribution projects could give US studios the push to hire UK creative agencies instead. We believe there is great potential for growth on overseas investment into local creative agencies and distribution studios, that require and deserve stronger support.

The UK film distribution sector is the only industry sub-sector to have shrunk from 2017 to 2021, where the number of distribution companies has declined by 5.1%, according to BFI’s Film Industry Companies 2022 report. While the FTR has greatly benefited the production sector, this support should extend to the distribution sector as well. Updated guidelines will incentivise international studios and filmmakers to keep their film projects within the UK throughout the entire process, which will benefit the entire film industry—not just the distribution sector.

In the spirit of helping the entire creative film and HETV industry, we would like to petition for a review of the FTR guidelines to include stronger support for the creative film distribution sector in the UK.