What is a Special Purpose Vehicle (SPV) and Why Do Production Companies Need One for Audio-Visual Expenditure Credits (AVEC)?

Without careful planning, many companies find their Audio-Visual Expenditure Credit (AVEC) trapped until their production completes. This delay can last multiple accounting periods, leaving qualifying expenditure locked away when you need it most.

The solution? A Special Purpose Vehicle (SPV). These separate legal entities ensure you receive your full AVEC entitlement and accelerate cash receipt from HMRC. Here's how they work in practice.

Why does AVEC cash get delayed?

The delay comes down to how HMRC requires you to report AVEC claims. Under Section 1179 of the Corporation Tax Act, each qualifying production must be reported as a separate trade. If you've got multiple productions, you'll need to split out your tax computations into multiple trades.

This is where the issue typically arises. While a production is still in progress, it is almost inevitable that it will be loss making as little or no income has yet come in. However, until the production is completed, any losses arising from that production cannot be offset against other trades, including other AVEC productions.

As a result, where an interim claim is made on an incomplete production, those losses become effectively trapped in that accounting period. This means the losses cannot be surrendered against profitable trades, leaving the company exposed to a corporation tax charge on those other activities.

When that production eventually finishes, yes, you can offset those trapped losses against other trades. But that could be multiple accounting periods away.

What is a Special Purpose Vehicle (SPV)?

In its simplest form, an SPV is a separate legal entity set up for a specific production. Each production has its own SPV, which makes reporting considerably easier.

The structure is straightforward. You have a parent company (or multiple companies) with a controlling interest in the production SPV.

Typically, you'll find that a production not completed in the accounting period has incurred costs but has no income to show. The SPV structure solves this by transferring costs and creating income flows that balance each other out, which typically means you are operating breakeven.

SPVs work for TV, film, animation, and video games claims. Whether you're making one production or managing multiple projects, the principle remains the same: each production gets its own SPV.

With an SPV structure, the credit amount remains the same, but HMRC pays it out to the SPV much quicker than it would to a normal company structure.

How does an SPV structure work in practice?

The mechanics of an SPV structure typically follow a clear seven-step process:

1. Parent provides working capital loan to production company (SPV) up to the expected AVEC amount. This gives the SPV the autonomy it needs to operate independently.
2. Parent transfers any management and services costs to the production company. These transfers must be at arm's length under transfer pricing rules.
3. Production company pays staff, contractors, and suppliers using the working capital loan. The SPV is now handling the day-to-day production expenses.
4. Production company invoices parent a commissioning fee. The parent is commissioning the production, so the SPV raises an invoice for the work. This commissioning fee balances out the costs incurred, bringing the SPV to break-even.
5. AVEC payment to SPV received from HMRC once you make the claim through your corporation tax return.
6. Working capital loan repaid to parent by SPV with the AVEC payment from HMRC.
7. Any production income remains with parent because the SPV's income is generated from the commissioning fee charged to the parent.

This structure ensures the SPV maintains real economic activity. It's making key decisions, handling contracts, and taking on risk, which is exactly what HMRC requires (more on this below).

What's the financial impact of using an SPV?

Let's look at a real example. Company A has income of £10.5 million and expenditure of £10 million. Without making an AVEC claim, they'd have a taxable profit of £500,000, resulting in corporation tax of £125,000 at 25%.

Without an SPV structure:

Now, let's say they have a high-end TV production that's incomplete at year-end, with £1 million in production costs (£950,000 core expenditure, £50,000 non-core).

When claiming AVEC without an SPV, part of your usual company total trade gets moved into a separate trade. In this case, Company A’s main trade now shows £1.5 million taxable profit (because £1 million has been moved to the separate AVEC trade). That's £375,000 corporation tax due.

The AVEC trade calculation looks like this:

• 80% of £950,000 core expenditure = £760,000
• 34% AVEC rate = £258,400 gross income
• Less 25% corporation tax on AVEC = £193,800 net AVEC

For more information on calculating your AVEC, check out our blog: What is the Audio-Visual Expenditure Credit Worth?

However, £250,000 of corporation tax is trapped in the AVEC trade because there's no income to offset it against (25% of the £1 million AVEC trade).

Company A receives £193,800 from HMRC for their AVEC claim but owes £375,000 on their main trade. Net position: they're paying HMRC £181,200.

Compare this to their original position (no AVEC claim at all), where they only owed £125,000. The interim AVEC claim has actually made their cash position worse because of the trapped losses.

However, when the production is finished, all the trapped benefit is unlocked (i.e., the total losses from the period and the trapped credit that is carried forward). This results in a total of £250,000 being carried forward. Considering the £181,200 that is paid to HMRC in this period, the company will receive £68,800 net from this period when the production completes.

With an SPV structure:

Now let’s rework this scenario with an SPV to carry out the AVEC trade.

The SPV (Company B) operates at break-even through the commissioning fee arrangement explained above. The production costs are balanced by income from the parent (Company A), so there are no trapped losses. The cross-charges between Company A and Company B are crucial to this working.

In this instance, Company A pays its Corporation Tax as it would if there were no AVEC trade, as the cross-charges have allowed those costs to be incurred then repaid (£125,000). Company B, operating at break-even, receives its AVEC immediately (£193,800).

The group cash flow improves immediately as they receive a net benefit of £68,800 from HMRC, considering Company A’s £125,000 tax bill and Company B’s net AVEC of £193,800.

What agreements do you need to support an SPV structure?

HMRC's Creative Unit in Manchester is increasingly asking for documentation to support SPV structures. You'll need the following legal framework in place:

Working capital loan agreement: This intercompany loan agreement is straightforward but essential for showing how the SPV is funded.

Production agreement: This is the foundation of your structure. It details the commissioning fee, clarifies who pays for costs, and demonstrates that decision-making sits with the production company. This ties directly into HMRC's compliance requirements.

Transfer pricing policy: Any pricing between the parent and production company must be at arm's length under OECD principles. You need to be able to support your pricing with evidence. Avoid transferring profits across unless justified by increased value through benchmarking.

Management, admin and service agreement: This makes clear what services the parent provides to the production company.

We can't stress enough how important proper documentation has become. As scrutiny increases, having these agreements in place from the start protects your claim.

For more information on making your Audio-Visual Expenditure Credit claim, check out our blog: AVEC Claims: A Step-by-Step Guide to Securing Your Credit

What are the compliance requirements for SPVs?

HMRC has specific criteria that your SPV must meet. These come from both legislation and HMRC guidance, and they're designed to ensure SPVs reflect real economic activity.

Your SPV can't simply act as a pass-through lacking control or risk. It needs to be involved in production decisions, handle contracts directly, and take on genuine risk. This is all covered under Section 1179 of the CTA.

Connected parties and transfer pricing is another area where HMRC focuses heavily. The principles under OECD guidelines are clear: transactions must be at arm's length pricing. You'll see this referenced in the Additional Information Form that accompanies your claim.

Timing is critical. You must set up your SPV before costs are incurred. You can't transfer pre-SPV costs into the structure because the SPV didn't exist as a legal entity at that time. The exception is if it's an asset (like rights) that's been built up, which can sometimes be transferred. However, you can include preliminary work as defined by HMRC.

If you set up an SPV halfway through production, you cannot include the first half of the production work. This is why we recommend setting up SPVs as early as possible. Even if you later decide it's not viable for cost or other reasons, having the entity in place means it's there when you need it. The administration to keep it live is minimal.

Do SPVs work for co-productions?

Yes, the same structure applies to co-productions. Your UK company would be the SPV, and this gives you some legal protection by separating your parent company from the SPV that's part of a co-production with other companies.

Multiple ownership is possible through equity shares in the SPV. Profits or AVEC can be split to each of the controlling parties through dividends, gift aid or other agreed arrangements.

However, you can only claim costs consumed in the UK. You won't be able to claim costs consumed outside the UK, which is likely with international co-producers. The SPV structure works perfectly for this, but your claim is limited to UK consumed expenditure only.

There are currently around 18 different co-production treaties, including a generic European one. The SPV structure we've outlined will work for any of these arrangements, as long as you're clear about which costs qualify for your UK claim.

Using SPVs to unlock trapped losses

Whether you're producing TV, animation, or films, this structure ensures you receive your relief when you need it most. The key is planning ahead, setting up the proper legal framework, and ensuring your SPV demonstrates real economic activity from day one.

If you'd like us to review your AVEC structure and help set up an SPV, get in touch.

Want to understand the fundamentals of AVEC first? Watch our AVEC fundamentals webinar, which covers eligibility, qualifying costs, and how to make your first claim.