UK VFX sector sounds alarm on exclusion of generative AI from additional tax relief (exclusive) | News

The UK’s VFX sector is pushing back against a surprise government decision that generative AI will not qualify for the additional tax relief for visual effects.

The sector received a major boost in the March budget with the announcement UK VFX costs on film and high-end TV productions will receive a 5% increase in tax relief within the UK’s new Audio Visual Expenditure Credit (AVEC), for an overall net rate of 29.25%.

The government is also removing the AVEC’s 80% cap on qualifying expenditure for UK VFX costs. These changes will take effect from April 1, 2025.

However, in a recent Treasury consultation document seen by Screen, generative AI has been excluded from the additional tax relief on the grounds that “it does not involve filmed footage and therefore does not meet the basic principle of the BFI’s guide definition of visual effects.”

Neil Hatton, CEO of UK Screen Alliance, the organisation representing post-production, VFX and animation studios, warned: “We could be the only country in the world that had exclusion for AI in VFX tax credits and therefore that would make us less competitive and would undo some of the advantages of the uplift.”

Hatton questioned the rationale behind the exclusion and noted what he describes as “inaccurate” language in the consultation document. “To say that AI does not involve the manipulation of filmed footage is completely wrong because that is entirely what AI is. Everything that AI is trained on is filmed footage. The output of an AI algorithm is entirely the alteration of filmed footage.”

“Ironic”

Hatton noted the “irony” in the decision to exclude generative AI from the relief at a time when extensive public support has already gone into AI via UK Research and Innovation’s (UKRI) Convergent Screen Technologies And Performance in Realtime (CoSTAR) programme. This is led by Royal Holloway University of London and with “core” partners including Pinewood Studios and the National Film and Television School (NFTS). One of CoStar’s aims is to support creative AI.

“It would be a very British thing to do, pouring money into R&D with one hand, creating AI tools that would be revolutionary in the film industry but then not being able to exploit them in our own country because of the tax credit. It doesn’t look a coherent policy decision to exclude AI.”

The UK’s VFX industry has been using generative AI for many years, long before models and programmes like Sora, Stable Diffusion and Midjourney were developed.

Hatton also warned that excluding generative AI from the tax relief would be “impractical” and would cause immense auditing difficulties. “The burden of administration to separate out AI costs and non-AI costs would be absolutely crippling even if it could possibly be done…and they would also have to do that at the beginning of a project, in order to predict what tax credit a client is going to get as that is part of the budgeting process. [But] at that stage, unless you know how you’re going to achieve the shots, you don’t know whether you’re going to use AI or not – and so it becomes impossible to budget, impossible to audit, impossible to administrate.”

“The burden of proof on businesses, government and the BFI, which is under-resourced to do this work, would be counter-productive because the whole point of using an AI application is that it’s cheaper than using traditional methods,” Hatton warned.

Earlier start

This is not the only worry UK Screen Alliance has about the new relief. Hatton and his team are pushing for the VFX “uplift” announced in March’s budget to be brought forward to January 2025 or earlier amid fears that productions are delaying effects work until the reform takes effect.

Hatton said the organisation is asking for the relief “to be advanced until January 1 because we don’t want to have the unintended behaviour of clients holding back VFX spend in order for it to qualify.”

The VFX sector is still in recovery mode following last year’s Hollywood writers and actors strikes, and uncertainty has been exacerbated by the forthcoming UK General Election due to take place on July 4. The election was announced on May 22, the same day that HM Treasury’s consultation on the VFX uplift came to an end.

The government was expected to publish draft legislation for the additional tax credit later this summer – but that timetable has been thrown into doubt by the forthcoming election. The VFX “uplift” is yet to pass into law.

“We were always going to have a General Election that would disrupt the Visual Effects uplift,” Hatton acknowledged. “[But] I definitely know now that people are still losing work for this year because our visual effects tax credit is not sufficiently competitive against international territories.”

The election was called earlier than many anticipated. “While we have got a great case, well stated, and have convinced the Treasury and Chancellor to go ahead with this, there is nothing put in legislation yet,” Hatton said.

UK Screen Alliance will shortly be publishing a VFX and post-production manifesto detailing its current concerns and “what we want the next government to do”. The organisation’s calculations suggest that if the VFX uplift goes ahead as planned, there will be an extra £175mn of VFX spend in the UK requiring 2,000 extra jobs.

“It will not cost the Treasury anything because the increased economic activity…will create its own tax receipts that will completely cover the cost of the incentives,” Hatton claimed.

Screen has contacted the Treasury for comment. The BFI is unable to comment in the pre-election period.