Netflix & A Chill: HMRC is Getting to Grips with New Broadcast Media

Not too many years ago that the viewing choice for those British homes with a television was limited to three terrestrial channels.

Back in the early 1980s, in fact, there were commentators who maintained that the existing networks of BBC 1 and 2 and ITV were more than sufficient for everyone’s taste. The addition of Channel Four, they argued, would provide too much choice for audiences.

Nowadays, though, even those critics would be hard-pressed to deny that an explosion in the number of channels available via satellite, cable and the internet has provided what viewers really want: a breadth of choice and a lot of quality programming.

Some of that output has been supported by successive Governments keen to harness the economic potential represented by the creative industries in Britain.

They have introduced – and successively refined – a variety of tax reliefs which allow qualifying companies to reduce the amount of Corporation Tax which they pay.

As part of those arrangements, they must meet what is described as “a cultural test”, overseen by the British Film Institute (BFI), which is designed to ensure that those applying for such assistance fully justify the benefits.

The system requires that, along with video games, film and television productions can be classed as British for taxation purposes.

However, it’s a test which is being – if you pardon the pun – put to the test, if media reports are correct…

A number of newspapers have remarked on suggestions that the UK tax affairs of one of the most popular, profitable and high-profile producers – Netflix – are apparently being investigated by HMRC.

Even setting aside the inference that the company’s full British subscriber income isn’t reflected in its last full-year financial accounts, the document makes for interesting reading.

Despite the fact that domestic sales rose by 21 per cent to more than €26.8 million and profits were also up – by nearly 25 per cent, to more than €1.26 billion – in the 12 months to December last year, it ended up receiving a tax credit of €199,313 under the sort of Treasury protocols which I’ve outlined above.

The previous year, it had paid more than €268,000 in tax to HMRC.

Now, Netflix could argue that its productions and co-productions, including the glossy royal drama ‘The Crown’, clearly have a considerable British element, ensuring that it meets the culture test criteria.

That’s even allowing for the fact that its UK-based operations are rather small in comparison to domestic broadcasters. Its accounts detail how Netflix employs just 14 staff (four in administration and 10 in marketing) here.

Nevertheless, it has raised eyebrows at a time when various jurisdictions are grappling with the issue of how – and where – they can best tax enormous digital corporations.

In October’s Budget, the Chancellor of the Exchequer, Philip Hammond was accused of jumping the gun on his EU counterparts by proposing the introduction of a digital sales tax from April 2020.

Based on the revenue rather than profits of “established tech giants” which generate “at least £500m a year globally”, the two per cent tax rate would, he reckoned, bring in £400 million by 2021-’22.

Of course, if digital companies object, they can relocate their activities elsewhere but, in doing so, they might jeopardise their interaction with audiences and their lucrative tax reliefs available.

There are no indications that what Netflix has itself described as a “standard review” is connected to the Treasury’s crackdown on new media finances.

Even so, the process underlines the tensions which have developed between the authorities and many recently established media enterprises.

It begs the question about whether many a millennial household’s favourite recreation of “Netflix and chill” is being challenged by HMRC’s cold hand extending over the operations of the broadcaster in an effort to claim a greater share of its income? The saga makes for interesting viewing of its own.

Whatever the outcome, I doubt it’s the kind of entertainment which Netflix originally envisaged.

 

If you have any queries on the issues highlighted in this blog, or any other tax matters at all, then please feel free to get in touch.

 

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