BIM56205 - Film and audio products: methods applying to all master versions: revenue nature of income and expenditure

Expenditure on the production or acquisition of the master version of a film or audio product (the ‘original master version’) is generally capital in nature because it is incurred on the provision of a fixed asset. What is meant by expenditure on the production or acquisition of an original master version is explained at BIM56206. What is included in production expenditure on the original master version of a film is explained at BIM56207.

The term ‘original master version’ of a film includes the master negative, master tape or master audio disc of the soundtrack of the film and also includes any rights in the film or its soundtrack that are acquired with the master version.

For tax purposes such expenditure is deemed to be expenditure of a revenue nature. This treatment is mandatory unless an election is made for the asset to be treated as capital for the purposes of claiming capital allowances, but such an election can only be made for qualifying British films, BIM56310.

The legislation at F2A92/S40A only refers to the master version of a film. This legislation was previously found at CAA90/S68 and included a reference to the master version of audio products. This reference was inadvertently omitted when the legislation was amended by FA00. As a result ESCB54 was introduced to rectify the position. Audio products continue to have the benefit of the treatment available under this legislation, BIM56250. For IT purposes ITTOIA corrected this omission for years of assessment from 2005/06 onwards (ITTOIA/S132).

As the expenditure is deemed to be revenue in nature, any receipts from the exploitation of the master version are treated by the legislation as being receipts of a revenue nature.

This applies to sums received not only from the disposal of the master negative but also to sums arising from disposals of any interest or right in or over the master version. This includes any interest or right created by the disposal and any insurance, compensation or similar sums derived from the master version. It will also include any disposal which is part of a larger disposal.

Example

The owner of the master version of a film grants an exclusive licence for 10 years to an American company in respect of the exploitation rights of the film in the USA and Canada. The owner receives a single payment of £2million. The receipt will be a revenue receipt for tax purposes irrespective of its true nature.