The European Commission has given State Aid approval to the new UK film tax reliefs. Click here for the Commission's press release.

The new tax relief will mean:

For films that cost up to £20 million, the production company will be able to claim an enhanced deduction of 100% with a payable cash element of 25% of UK qualifying film production expenditure.

For films that cost over £20 million, the production company will be able to claim an enhanced deduction of 80% with a payable cash element of 20% of UK qualifying film production expenditure.

The scheme has an annual budget of £120m ($227m; €170m).

As part of the State Aid approval process, the draft Cultural Test as passed by the UK Parliament in April 2006 has been substantially revised in order to satisfy the state aid requirements of European law. The UK Government has therefore been working with the Commission to ensure that the revised test does meet those requirements which allow EU member states to subsidise films for cultural purposes, within the regime established to protect open competition between member states.

The UK Government will receive an official letter from the European Commission, outlining the guidance notes which support the new Cultural Test. Subject to Parliamentary approval of the test, the new film tax incentives will be activated from 1 January 2007.

The most significant revision made by the Commission has been to shift the balance towards cultural criteria - settings, subject, language etc - intended to enhance support for specifically British content . A new section, on "cultural contribution" for the "promotion, development and enhancement of British culture", attracts more points than those allocated to using UK locations and staff. Cultural content alone can now take a film to the target of 16 points out of the maximum 31 points available.

At the same time it has decreased the elements of the tax plan intended to attract particularly US productions to shoot in the UK and use local facilities, no matter what the subject matter of the film.

The cultural test now has four parts, which together measure the extent of a film's British cultural character:

• Cultural Content – is the film set in the UK, does it have British characters, is it based on British subject matter or underlying material and is it filmed in English?
• Cultural Contribution – does the film contribute to the promotion, development or enhancement of British culture relating to cultural diversity, heritage and creativity?
• Cultural Hubs – is the film made in UK studios or on UK locations, does it use British visual or special effects or music recording facilities, does it use British post production houses?
• Cultural Practitioners – are the people who work on the film from the European Economic Area?

Film makers will be awarded points in each of the categories and must score a minimum of 16 points out of a possible 31 to pass the test.