Maximising Your AVEC Claim: Understanding Core Costs

With companies able to claim back up to 39% of production costs (and up to 53% for independent films), understanding what you can and can't include in your Audio-Visual Expenditure Credit claim makes a real difference to your bottom line.

AVEC replaced several previous creative tax reliefs—Film Tax Relief, High-End Television Tax Relief, Children's Television Tax Relief, and Animation Tax Relief—bringing with it new rules that production companies need to get their heads around.

Before we continue, are you new to AVEC?

If so, why not watch our AVEC Fundamentals Webinar? It breaks down the essentials like what the credit is, who can claim, and how to calculate your benefit, all in under 25 minutes.

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What Are Core Costs?

The amount you can claim with AVEC revolves around the concept of "core costs", but what does that actually mean in practice?

Core costs are the expenditure you incur during pre-production, principal photography, and post-production. In other words, the costs directly related to physically making your film or television programme, from the moment you commit to production until it's ready to broadcast.

Whether a cost qualifies depends on when you incur it, and this centres on when your production is “green-lit”.

Early speculative development costs are not eligible. This includes all the activities when you're still working out whether a production makes commercial sense, like conducting market research, creating pitch decks and developing initial concepts.

Once you've made the decision to proceed with production, or it’s been “green-lit”, your costs become eligible.

As soon as your production could be released to the public, any commercialisation activities fall outside scope again. Marketing, distribution, and sales costs don't qualify.

You’ll still need to track all costs related to your production, as you need to demonstrate to HMRC how much of your budget relates to “core costs” and how much doesn’t. To qualify for AVEC, you’ll need to show that at least 10% of your “core costs” relate to UK activities.

The 80% Cap Rule

You can only claim the lower of:

• 80% of total core costs, OR
• The amount of UK core costs

This cap ensures the relief stays proportionate and focused on UK-based production activity.

For example, a company with £1,000,000 total production costs but only £500,000 of which was spent in the UK can only claim AVEC on the £500,000. However, a company with £1,000,000 of production costs that are all based in the UK can claim only £800,000 of those costs.

However, the one exception is for VFX costs: from April 1, 2025, the 80% cap is removed for UK visual effects costs. You can claim on 100% of your UK VFX expenditure at an enhanced 39% rate, making this particularly valuable for effects-intensive productions, as long as your VFX costs are incurred in the UK.

The Four Phases of Production

To work out the eligibility of your costs, it helps to understand how production divides into five distinct phases:

1. Conceptual Development
2. Pre-production
3. Principal Photography
4. Post-production
5. Commercialisation

Conceptual Development - Ineligible

Development happens before you've committed to making the production. Activities here are exploratory and speculative, which is why they don't qualify for AVEC:

• Outlining: Developing themes, style, setting, and plot concepts
• Initial screenwriting: Those first drafts during the exploration phase
• Conceptual artwork: Early visual development work
• Market research: Working out if there's an audience
• Pitch decks: Materials to secure funding or approval

These costs happen when the project is still speculative. You don't know yet whether you'll actually make it, and AVEC is designed to support actual production, not the decision-making process.

Pre-Production, Principal Photography & Post-Production - Eligible

Once you've green-lit your production, costs during these three phases qualify:

Pre-production covers all the planning and preparation after you've committed: casting, location scouting, set design, scheduling, detailed planning…

Principal Photography is filming time. For animation, it includes shooting, visual design, layout, and storyboarding. Voice-over work for animation also qualifies during principal photography.

Post-production encompasses editing, sound design, visual effects, colour grading, and everything else needed to get your production to its final, broadcast-ready form.

However, HMRC has identified several specific cost categories that don't qualify, even during eligible production phases:

• Completion bonds and other forms of insurance
• Entertaining expenses
• Capital expenditure (buying equipment rather than production services)
• Financing, sales and distribution costs
• Audit fees
• Bank interest and charges

Commercialisation – Ineligible

Activities to distribute and market your film or TV show do not qualify for AVEC.

Sometimes, these activities may occur alongside production activities, especially post-production activities. However, the nature of the work is what matters, not when it happens.

Commercialisation activities include press releases, advertising campaigns, merchandising and franchising, as well as distribution activities and expenditure on rights that aren’t necessary for production.

UK Expenditure Requirements

AVEC exists to support UK production activity, which means where you spend your money matters enormously.

The fundamental rule is straightforward: only UK-based expenditure qualifies.

There's also a minimum threshold of at least 10% of total core costs must be UK-based. This ensures AVEC genuinely supports UK production rather than predominantly overseas activity with minimal UK involvement.

Staff and Subcontractors

For personnel costs, the key question is where is the person physically located while doing the work?

Workers physically based in the UK are eligible expenditure for AVEC. This includes UK office workers doing their work in the UK and remote workers working from UK locations. Nationality and company location don’t matter; a US citizen working in the UK qualifies, as does an American subcontracted company that is actively working from the UK.

The reverse is true too; UK citizens based overseas or British companies carrying out work abroad don’t qualify.

Services "Used and Consumed" in the UK

For services, you can only include those "used and consumed" in the UK. This allows for more nuanced treatment of services that cross borders.

For example:

• A US-based voice coach training a UK-based actor via video call. The service is consumed in the UK (where the actor is), so it qualifies.
• A script used 50% for UK filming and 50% for overseas filming. Half the script qualifies (the proportion used in the UK).

Similarly, costs consumed abroad will not qualify:

• A British scriptwriter whose script is used only for overseas production. Even though the writer is British, the service is consumed outside the UK.
• A voice coach training a US-based actor. The service is consumed in the US (where the actor is), regardless of where the coach is based.

This test ensures AVEC supports productions that genuinely use services in the UK, rather than simply buying from UK providers for use elsewhere.

What Kinds of Costs are Eligible For AVEC?

Let's look at some examples of qualifying costs.

Computer-Generated Imagery (CGI) and VFX

CGI and VFX work qualify if you carry out the activity in the UK.

For work you contract to external providers, you need to work out what proportion was developed in the UK. If a VFX house splits work between its UK and overseas offices, only the UK portion qualifies.

From April 1, 2025, UK VFX costs get enhanced treatment:

• A 39% relief rate (compared to 34% for standard film/TV costs)
• No 80% cap on qualifying costs

This enhancement recognises the UK's world-leading VFX industry and provides extra support for VFX-intensive productions.

Production Rights

Rights costs can be eligible, but there's an important distinction: only rights you actually need to make the production qualify.

Eligible rights include:

• Rights to use a story or book as the foundation for your production
• Music, songs, literary works, and stock footage rights needed for the production itself

The test is necessity: if you couldn't make the production without acquiring these rights, they're eligible.

However, payment for an option over the right to use a book or story would be speculative (and therefore ineligible), while purchasing the rights needed to make the production is a core expenditure.

Key Personnel Costs

Personnel costs, when physically in the UK, will likely be your largest eligible expense category, including:

• Directors, producers, and scriptwriters
• Cast and crew
• Heads of department (cinematographers, production designers, editors, etc.)
• Subcontractors doing production work

Many key people work across multiple phases. A director might be involved from development through post-production. How do you work out what portion of their fee is eligible?

For personnel involved across multiple phases, the most common approach is time-based apportionment. For example, the Art Department head spends 3 months during development (ineligible) vs. 9 months during production (eligible), therefore 75% of the fee qualifies.

You can use other apportionment methods as long as they're fair and reasonable. The key is documenting your methodology clearly for HMRC review.

Connected Party Transactions

Special rules apply when you incur costs through transactions with connected companies (companies where the same people control both entities).

Costs are excluded up to the amount of the connected party's profit, unless you price the transaction at arm's length (i.e., at market rates).

If you pay £100,000 to a connected company that makes a £30,000 profit, only £70,000 might qualify for AVEC (unless you can demonstrate arm's length pricing).

You must disclose all connected party transactions to HMRC via the Additional Information Form, including:

• The connected party's name
• Date and value of transactions
• Description of goods or services
• Whether amounts are at arm's length or adjusted for profit

This transparency requirement helps HMRC ensure you're not artificially inflating the relief through non-market transactions.

Animation-Specific Rules

For productions claiming the animation uplift (39% rate), you need to prove that at least 51% of core costs were spent on animation.

Animation activities include:

• Animation work itself (including, but not limited to hand-drawn illustrations, 2D or 3D digital rendering and stop motion)
• Voice artists for animated characters
• Motion capture work

Some productions combine animation and live action. For these, you need a "fair and reasonable apportionment" of shared costs.

Example: A director working on both live-action and animation sequences. You might apportion their fee based on:

• Time spent on each type of work
• The ratio of animation to non-animation costs in the production
• Any other reasonable methodology

Key takeaways

1. Only costs from green-lit to broadcast-ready qualify; development and commercialisation costs are outside scope
2. Work must be performed/consumed in the UK to count
3. The 80% cap and 10% UK minimum are critical thresholds
4. Proper documentation and apportionment are essential
5. Connected party transactions need special attention

With claims potentially worth up to 39% of qualifying costs (or 53% for independent films), understanding these distinctions represents a significant financial opportunity. Get it wrong, though, and you risk denied claims, HMRC enquiries, and potentially having to repay credits you've already received.

For more information on the Audio-Visual Expenditure Credit, download your free copy of our eBook. If you’d like to chat with our AVEC experts about your production, get in touch – we’re always happy to talk creative sector tax reliefs.