BIM56206 - Film and audio products: methods applying to all master versions: meaning of expenditure on the production or acquisition

As explained in BIM56205 expenditure on the production or acquisition of an original master version would, in the absence of the rules in F2A92/S40A and ITTOIA/S134, be expenditure on the provision of a fixed asset subject to the capital allowances rules for plant. Expenditure incurred ‘on the production’ or ‘on the acquisition’ of an original master version should therefore be construed in the same way as expenditure ‘on the provision’ of plant and machinery for capital allowance purposes.

This means that the qualifying expenditure incurred ‘on the production’ or ‘on the acquisition’ of an original master version should be interpreted narrowly. The case of Ben-Odeco Ltd v Powlson 52TC459 showed that remote or indirect expenditure does not satisfy this condition, and therefore does not qualify for treatment under the special rules in F2A92/S40A – S43 or Chapter 9 of ITTOIA (CA20060).

As a result expenditure, such as interest paid on a loan taken out to obtain funds which are then used to help finance the production or acquisition of a film, is not expenditure on the production or acquisition of a film. It is expenditure on obtaining funds. This remains the case even if the interest costs are properly capitalised under UK GAAP.

On the other hand, costs such as the legal costs of drawing up a contract to acquire a film is part of the expenditure on the acquisition. Similarly, direct legal costs of hiring actors or others providing production services are part of the expenditure incurred on the production. However, legal costs such as the costs of setting up a film partnership or drawing up a finance lease or film licence agreement, are not part of the expenditure on the production or acquisition.