CREC061460 - Expenditure credit calculation: additional credit for visual effects costs: negative amounts of additional credit
Source: gov.uk (2025-11-26)


Additional credit and Chapter 3 credit

As the name suggests, additional credit for visual effects (VFX) expenditure is given on top of any ‘regular’ expenditure credit(s) already claimed in respect of relevant VFX expenditure in accordance with section 1179CA Corporation Tax Act (CTA) 2009. These ‘regular’ credits are referred to in this guidance as Chapter 3 credits. The same term is used in the legislation.

When negative amounts can happen

It is possible for a company to claim an amount of additional VFX credit in one accounting period which becomes excessive in subsequent periods.

In some cases where
- a production incurs further relevant global expenditure after making its first claim for additional VFX credit, and
- that further expenditure is mostly non-UK expenditure,
the overall amount of Audio-Visual Expenditure Credit (AVEC) due for the production increases, but, compared to previous periods, a greater proportion of the total is represented by Chapter 3 credit than additional VFX credit.

As a result, the additional VFX credit calculation can produce a result of less than zero (i.e. a negative amount), which corrects the balance between Chapter 3 and additional credit and undoes the effect of the previous, now excessive, additional credit claim.

What to do if you calculate a negative amount

For claims which relate to accounting periods beginning on or after 26 November 2025, negative amounts of credit must be deducted from Chapter 3 credit claimed in the same period, to give the correct net credit amount for the whole production. Deducting negative amounts does not make AVEC less generous overall.

Note: this requirement is included in the Finance Bill 2026, which has not yet received Royal Assent. The legislation is not yet finalised, and it may be amended during the progress of the Finance Bill. However, as the requirement takes effect from 26 November 2025, before Royal Assent, HMRC has published this guidance early to assist companies which may be affected once the requirement becomes law.

For claims which relate to accounting periods beginning before 26 November 2025, there is no requirement to do anything with the negative amount. You can either deduct it from Chapter 3 credit or choose not to make a claim for additional credit for the period in which a negative amount occurs.

The example below demonstrates:
- how a negative amount can occur, and
- why it is necessary to deduct the negative amount from Chapter 3 credit claimed for the period
Example 1 – how a negative amount can occur

Period 1

In period 1, a production company spends £20 million on a film, of which:
- £2m is non-UK expenditure
- £16m is UK expenditure (excluding VFX)
- £2m is UK VFX expenditure
Assume that all expenditure is relevant global expenditure. Because this is a regular film that is not eligible for the higher rates for animations and independent films, the applicable Chapter 3 credit rate is 34%.

Chapter 3 credit is calculated according to the 5 steps explained in CREC060100. Step 3 of the calculation compares UK expenditure to date with 80% of total relevant global expenditure to date. Whichever is the lower figure is qualifying expenditure to date. This is known as the 80% cap.

In this case, there is £18m UK expenditure (since all VFX expenditure is also UK expenditure) and 80% of total expenditure is £16m. The lower figure is £16m. The £2m difference is excluded by the 80% cap.

Because this is the first accounting period, there is no qualifying expenditure to deduct from the previous period. Therefore, Chapter 3 credit = £16m x 34% = £5,440,000

The film is completed in the first accounting period, so the company is eligible to make a claim for additional VFX credit. Additional VFX credit is given on 39% of VFX expenditure, minus any Chapter 3 credit already claimed on that VFX expenditure.

Chapter 3 credit already claimed on VFX expenditure is calculated using the steps set out in CREC061430.
- Step 1: cumulative UK relevant global expenditure in the AVEC period is £18m
- Step 2: total relevant VFX expenditure is £2m
- Step 3: the 80% cap did apply during the Chapter 3 credit calculation, and £2m was excluded by it
- Step 4: not applicable (only applies if the result of step 3 is nil)
- Step 5: £2m (result of step 2) – £2m (result of step 3) = £0
- Step 6: not applicable (only applies if the result of step 5 is above zero)
Chapter 3 credit already claimed is therefore zero. This is because step 4 assumes that VFX expenditure is the first expenditure to be excluded by the 80% cap when calculating Chapter 3 credit. Since £2m was excluded by the 80% cap, all £2m VFX expenditure was excluded and so none of it has already received Chapter 3 credit. As a result, the amount of Chapter 3 credit to deduct is zero.

Therefore, additional credit = (£2m x 39%) – 0 = £780,000

Overall AVEC due for the film = £5,440,000 Chapter 3 credit + £780,000 additional credit = £6,220,000

Overall AVEC claimed = £6,220,000

Period 2

The calculation of Chapter 3 credit is cumulative. The 80% cap is applied to all expenditure to date, before deducting expenditure that was already relieved in period 1.

By the end of period 2, the company incurs a further £3m in contingent compensation, bringing total relevant global expenditure to £23m, of which:
- £4m is non-UK expenditure – an increase of £2m since period 1
- £16m is UK expenditure (excluding VFX) – no change since period 1
- £3m is UK VFX expenditure – an increase of £1m since period 1
80% of total expenditure to date is now £18.4m (£23m x 80%) and UK expenditure to date is now £19m (£16m + £3m). The lower figure is £18.4m. The difference of £600,000 is excluded by the 80% cap.

The company deducts the qualifying expenditure already relieved in period 1 to get the qualifying expenditure for period 2: £18.4m - £16m = £2.4m

Therefore, Chapter 3 credit for period 2 = £2.4m x 34% = £816,000

Next, the company calculates its additional VFX credit for period 2. First, it calculates the Chapter 3 credit already claimed on VFX expenditure. It uses the same six steps as in period 1:
- Step 1: cumulative UK relevant global expenditure in the AVEC period is £19m
- Step 2: total relevant VFX expenditure is £3m
- Step 3: the 80% cap did apply during the Chapter 3 credit calculation, and £600,000 was excluded by it
- Step 4: not applicable (only applies if the result of step 3 is nil)
- Step 5: £3m (result of step 2) – £600,000 (result of step 3) = £2.4m
- Step 6: £2.4m (result of step 5) x 34% = £816,000
Chapter 3 credit already claimed is therefore £816,000. In this period, £2.4m of VFX expenditure was not excluded by the 80% cap and has received Chapter 3 credit at 34%. Therefore, as step 6 calculates, Chapter 3 credit already claimed on VFX expenditure = £2.4m x 34% = £816,000. This must be deducted.

Additional credit = (£3m x 39%) – £816,000 = £354,000

The additional VFX credit available on the film has therefore reduced from £780,000 in period 1 to £354,000 in period 2. This is because, in period 2, more of the overall VFX expenditure has received relief as Chapter 3 credit. As a result of this drop from period 1 to period 2, when the company deducts the additional VFX credit already claimed in period 1 from the total additional VFX credit due, there is a negative result:

£354,000 – £780,000 = –£426,000

The company deducts the negative amount from the Chapter 3 credit to calculate its net credit claim for period 2:

£816,000 Chapter 3 credit – £426,000 negative credit = £390,000 net credit

This £390,000 is the maximum amount of credit which the company can claim and redeem for period 2. See CREC070000 onwards for the credit redemption process.

Example 1 continued – why the deduction is required

This negative result arises to correct the additional credit claim in period 1 down from £780,000 to £354,000. To show how this works:

Overall AVEC due for the film is £6,610,000. This is made up of:
- £6,256,000 Chapter 3 credit: £5,440,000 in period 1 plus £816,000 in period 2
- £354,000 additional credit: £3m relevant VFX expenditure, of which £600,000 is relieved at 39%, and the remaining £2.4m at 5% (to top it up to 39%, having already been relieved at 34% by the Chapter 3 credit calculation)
Without the negative amount, the overall AVEC claimed by the company would be:

£5,440,000 Chapter 3 credit in period 1 + £780,000 additional credit in period 1 + £816,000 Chapter 3 credit in period 2 = £7,036,000

This is more than the company is properly entitled to.

If the negative amount is netted off, the overall AVEC claimed is the correct figure:

£5,440,000 Chapter 3 credit in period 1 + £780,000 additional credit in period 1 + £816,000 Chapter 3 credit in period 2 – £426,000 negative additional credit in period 2 = £6,610,000

The total amount of credit due still increases, from £6,220,000 in period 1 to £6,610,000 in period 2. The company does not lose out overall by deducting the negative amount.

What to do in subsequent periods

If a company deducts a negative amount of additional credit from its Chapter 3 credit for a given accounting period, in subsequent periods:
- When calculating the additional credit due for the period, it must reduce the amount of additional credit claimed in previous periods by the negative amount
- When applying step 4 of the adjusted VFX portion calculation (see CREC061430), it must ignore the effect of the reduction on the sum of Chapter 3 credits previously claimed
Note: these requirements are included in the Finance Bill 2026, which has not yet received Royal Assent. The legislation is not yet finalised, and it may be amended during the progress of the Finance Bill. However, as the requirements take effect from 26 November 2025, before Royal Assent, HMRC has published this guidance early to assist companies which may be affected once the requirements become law.

Example 2

Following on from example 1 above, in period 3 the company incurs more expenditure and wants to make another additional credit claim.

When the company calculates its additional credit for this period, it will need to use the same six steps as in periods 1 and 2 to find the Chapter 3 credit already claimed in respect of VFX expenditure. At step 4 (assuming it applies), the company must not reduce the sum of Chapter 3 credits by the negative amount.

The sum of Chapter 3 credits for step 4 purposes is therefore £5,440,000 (period 1), plus £816,000 (period 2, before the £426,000 deduction), plus any Chapter 3 credit claimed for period 3.

To calculate the additional credit due for period 3, the company also needs to know the amount of additional credit already claimed in previous periods. It must reduce this amount by the negative amount from period 2. The additional credit already claimed would therefore be £780,000 (period 1 claim) minus £426,000 (negative amount from period 2) = £354,000.