UK Gets Creative With Tax Relief for Research and Development

For many years, people working in UK creative arts such as theater, film, music, and dance have been unaware they might be able to claim research and development tax relief.

How could a theater set technician, a video game designer, or a small UK creative company facilitating one part in a band’s world tour possibly be eligible?

The presumption has long been that employment in the arts would exclude an individual from entitlement for R&D relief, a cost benefit that appeared to exist solely for the technology and science sectors. In my experience, companies and their advisers haven’t always been clear which artistic or creative staff costs can qualify for R&D relief.

New Guidance

These broad misconceptions now have been clarified by a welcome update to the UK tax authority’s R&D guidance on creative industries.

HM Revenue and Customs has updated the Corporate Intangibles Research and Development Manual with illustrative examples on R&D tax relief and conditions to be satisfied to help businesses understand when creative interdisciplinary projects qualify for R&D tax relief.

While the legislation itself hasn’t changed, the decision to iron out ambiguous use cases that previously may have left potential claimants uncertain is a positive step in the right direction.

The new guidance, which applies to all R&D cost categories, sets out more transparently what activities qualify for relief when the creative sectors intersect with technology and science.

The document, updated in February, states in the introduction that “in order that expenditure is treated as being on an R&D project, the project must satisfy certain statutory tests in accordance with published guidelines and legislation on the meaning of R&D. This is one of the more complex areas of the relief, and it is important to give this matter careful attention.”

The recently published directions are especially relevant for interdisciplinary teams on innovative projects where there is an element of artistic or creative expertise when, for example, artists and engineers collaborate.

It further helps to clarify the differences between an individual’s role and the activity they undertake when determining whether their costs are eligible for relief. The amended guidelines go through two detailed examples highlighting qualifying activities and non-qualifying activities.

Detailed Examples

The first example describes the creation of a virtual costume simulation for a film studio, and the second concerns a real-time immersive racing experience in which fans can drive virtual cars on their mobile phones. Both these scenarios illustrate how R&D tax relief works in clearly understandable terms.

In the first, developing the matrix for the fabric to behave realistically based on physical references, which is evidently technologically complex, would qualify, whereas just designing the garment for its visual style wouldn’t.

Similarly, making stylistic adjustments to the garment without addressing technical challenges wouldn’t be encompassed under R&D relief but solving problems to keep the simulation stable would.

The second example is more obviously technological. Nevertheless, not all the work involved would be eligible. Creating the methods to make the visuals behave realistically under strict performance limits would qualify, but simply choosing the color schemes or the layout wouldn’t.

Equally, solving problems to keep the graphics smooth when devices or networks cause delays could be demonstrated as a genuine advance in science and technology, whereas simpler stylistic adjustments wouldn’t.

I have worked with several clients involved with technology in a creative sector who were completely unaware they could claim. In these cases, there were uncertainties around the overall configuration of the particular technology they were involved with, in terms of how much their individual input contributed. People in those roles didn’t claim simply because they didn’t realize they could.

It was possible for them to claim some of their time under R&D tax relief. Without clear guidance, however, identifying the relevant aspects of their work would have been more difficult.

What the examples do is explain which elements of a creative person’s input in changing the way a technology works can qualify for R&D relief, even if not all of their input is relevant. The guidance on how much of their time and effort can be included is helpful demarcation, which we have never had before.

Stage One Case

It follows the 2024 case of Stage One Creative Services, or SOCS, Limited, a company that provides engineering, construction and automation solutions for live events and installations such as music festivals.

The company was successful in its case, in which the main issue was whether the R&D was contracted out to SOCS, with HMRC arguing that such expenditure had been subsidized by its clients. In this case, the First-Tier Tribunal accepted that the R&D wasn’t subsidized.

The tribunal also found in favor of SOCS on the issue of subcontracting, finding that the company’s clients didn’t have an obligation to pay or reimburse it for the expenditure on the R&D, and indeed that many of the clients would have been unaware of the R&D required at the outset of the contracts. The clients had simply agreed to a price for their project to be delivered.

Looking Ahead

The government, via HMRC, has clarified the guidelines to increase the use of R&D across the creative industry, as it’s one of the key pillars of the modern industrial strategy.

This is an encouraging step. It might mean a UK creative company might be chosen as a contractor over an overseas one on the basis that the costs would be eligible for R&D relief.

The recent changes to the guidance have been reviewed by the new R&D expert advisory panel to ensure that the updated version is technically accurate and meets compliance principles. For R&D companies and their representatives, the existence of the panel represents real progress.

Looking ahead, individuals who work in the creative arts sector should have stronger certainty of their eligibility if they wish to submit a claim for R&D tax relief.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Randeep Dhaliwal is director and head of research and development at Andersen LLP’s corporate tax practice in the UK.

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