Navigating the transition to AVEC and VGEC

September is for many a favourite month of the year. The heat of summer is over, kids are back at school, and soup season begins. But for many tax professionals working with December year ends, it’s also the time when deadlines for compliance start to feel very real.

This year, the key focus for many production companies across film, TV and gaming will be the creative sector claims being made within the returns. Some will be preparing claims under the UK's new creative industry incentives, the Audio-Visual Expenditure Credit (AVEC) and Video Games Expenditure Credit (VGEC).

Others will still be claiming under the legacy Film Tax Relief (FTR), High-End Television Tax Relief (HETV), Animation Tax Relief (ATR), Children's Television Tax Relief (CTR) and Video Games Tax Relief (VGTR) regimes as part of the transition period.

For finance teams, producers and developers, this year's compliance cycle presents an important opportunity to review project portfolios, understand which regime applies, and ensure claims are optimised.

The introduction of AVEC and VGEC represents one of the most significant changes to the UK's creative sector tax incentives in recent years. The new credits can be claimed on qualifying expenditure incurred from 1 January 2024 and were initially optional. However, from 1 April 2025, new productions are required to enter the new regime, with the legacy reliefs being fully withdrawn from 1 April 2027.

As a result, many businesses will find themselves managing productions across both systems simultaneously. A studio may have one project still within the legacy HETV framework while a newer production falls squarely within AVEC.

The starting point is confirming which regime applies to each production. Eligibility depends on factors that include when production commenced and whether key milestones, such as principal photography or game production phases, began before the relevant transition dates.

Creating a detailed production-by-production analysis can help avoid errors and ensure the appropriate claim methodology is used.

One of the most significant changes is the move from relief being recognised below the line through the corporation tax calculation to an above-the-line taxable expenditure credit model.

AVEC and VGEC operate in a similar manner to the Research and Development Expenditure Credit (RDEC) framework, with qualifying companies receiving a taxable cash credit based on eligible expenditure.

The headline credit rate is 34%, broadly equating to 25.5% after corporation tax for many claimants. Enhanced rates may also be available for certain categories of production.

This change may affect:

• Financial statement presentation

• Forecasting and budgeting

• EBITDA and operating profit metrics

• Investor and lender reporting

• Internal performance measurement

Businesses should ensure that finance, tax and commercial teams understand both the accounting and cash flow implications of the new model.

There is also an important consideration for larger groups regarding quarterly instalment payments. The increased taxable profits resulting from the mechanical operation of the credit may affect corporation tax payment profiles, creating potential cash flow impacts if not modelled in advance.

While many of the underlying principles have been carried across from the legacy regimes, companies should not assume that the rules remain unchanged.

The new legislation includes revised definitions, updated compliance requirements and strengthened anti-abuse provisions. As a result, businesses should take the opportunity to review:

• Cost categorisation processes

• Production accounting systems

• Supporting documentation

• Evidence supporting UK qualifying expenditure

• Internal controls and governance procedures

Robust documentation remains critical to supporting claims and managing compliance risk.

It should also be noted that, while the changes introduced to AVEC are largely administrative in nature, there are more substantive eligibility changes under VGEC. Most notably, qualifying expenditure has moved from an EEA-based test to a "used and consumed in the UK" test. This brings VGEC into closer alignment with AVEC and its predecessors and may significantly affect the expenditure that video games companies are able to include within their claims.

Video games companies should therefore carefully assess the impact of the transitional rules, particularly where they have historically incurred significant levels of non-UK EEA expenditure and are considering entering the new regime.

The transition should not be viewed purely as a compliance exercise. The new framework also introduces several enhancements designed to improve the UK's competitiveness as a destination for creative investment.

These include:

• A higher 39% rate for qualifying animation and children's television productions

• Enhanced support for qualifying independent films

• Additional incentives for visual effects expenditure from 2025

Businesses should revisit project economics and future production plans to ensure these opportunities are fully considered.

In some cases, projects that previously generated only modest levels of relief may benefit more significantly under the new framework, influencing future investment and production decisions.

While the administrative aspects of the transition require careful attention, it is important not to lose sight of the broader success story behind the UK's creative industry tax incentives.

Over the past two decades, creative sector reliefs have played a significant role in attracting inward investment, supporting highly skilled employment and helping establish the UK as a global centre for film, television and video game development.

AVEC and VGEC were introduced with the clear objective of modernising the existing system and ensuring that the UK's incentives remain internationally competitive in an increasingly mobile global marketplace.

The UK's creative production ecosystem now supports world-leading studios, visual effects businesses, technology specialists and game developers. These incentives help underpin investment decisions that bring productions to the UK, generating economic activity far beyond the screen, through supply chains, infrastructure investment and regional employment.

The move to AVEC and VGEC should be viewed not simply as a legislative change, but as the next stage in the evolution of a highly successful policy framework. By providing greater visibility and alignment with international tax credit models, the new regimes have the potential to further strengthen the UK's position as one of the world's leading destinations for creative production.

Those who take the time to navigate the transition carefully will not only reduce compliance risk but also position themselves to maximise the benefits available under a modernised and internationally competitive creative industry tax framework.

With many businesses expected to manage projects across both regimes for the next two years, early planning, careful modelling and proactive review of existing claims will be essential to ensuring a smooth and successful transition.

Approval code: BTS092656