BIM56207 - Film and audio products: methods applying to all master versions: production expenditure

There are no formal accountancy rules or guidance on what constitutes production expenditure. Production expenditure should therefore be identified by reference to generally accepted accountancy principles, but see BIM56206 for the restricted meaning of expenditure incurred ‘on the production’. As a rule of thumb production expenditure results in new material reflected in the master version, although we accept that expenditure on scenes that end up on the cutting room floor, or script versions for the same film subsequently amended or rewritten, are part of this process.

It is not possible to provide a comprehensive list of what counts as production expenditure. What follows is, therefore, no more than a guide to the type of expenditure that would normally be included as part of production expenditure:

• the cost of the story and scenario to be used in the film;
• salaries, fees, benefits in kind, travelling and subsistence expenses, and all associated costs such as NIC and payroll taxes, of people involved in the making of the film. This will include payments to foreign nationals and corresponding tax charges imposed by overseas fiscal authorities. These costs will typically include payments to those employed in directing and producing a film, cast including extras, technical staff, etc. A proportion of expenditure on stills photographers and those engaged in processing and titling, etc., may also be included to the extent that the work is directly related to the production stages of the film;
• studio costs and corresponding labour costs related to the production of the film;
• cost of set construction and operations;
• wardrobe and accessories to the extent these are consumed in the production process (see below);
• post production costs (i.e., post principal photography up to completion of the film) and sound synchronisation;
• general production overheads directly attributable to the film;
• location costs, including the rental of facilities on location and costs of transportation to the location;
• Skills Investment Fund contributions.

Not all expenditure incurred by a person making a film will be production expenditure. The cost of raising and servicing finance, including interest on money borrowed to finance production, is not production expenditure (BIM56206). Similarly, certain costs incurred during the final production phase and the release periods of films (sometimes referred to as exploitation costs) should also be excluded from production expenditure. This will cover expenditure on film prints, advertising and general distribution costs.

It is common for a person making a film to purchase a completion bond, which is a form of financial guarantee. A completion bond will enable a film to be completed if, for example, additional costs are incurred as a result of the incapacity or sickness of the principal artists or other essential personnel. A completion bond is usually a condition of obtaining loan finance. Generally, funds will not be advanced until a completion bond is in place. As such the expenditure on a completion bond is an expense of raising finance and is therefore not included in production expenditure.

Other expenditure that should be excluded from production expenditure include:

• pre-existing material such as music and film material (stock footage) used in the film,
• entertainment costs, for example, the wrap party,
• the film’s web-site,
• trade association fees,
• legal fees on non-production activity.

Capital assets used in production

Expenditure on capital assets used in production, but which are not used up in that process, for example, cameras, lighting, sound recording equipment, etc., is not production expenditure for the purposes of these provisions. Relief for such expenditure may be available under the provisions of CAA01.

Payments for pre-existing rights

A producer may need to pay to use rights owned by another person. For example, he may pay an author for the right to use characters or a story line from a book, or may pay a composer or owner of the copyright in music for the right to reproduce that music. Providing these payments for rights only extend to use in producing the particular film in question, they are an allowable cost of production.

Where the payment also extends to immediate exploitation in some other way, such as production and sale of merchandising material relating to the film, then the expenditure must be apportioned on a reasonable basis. However, if the payment is for rights which are not used up in the exploitation and marketing of the film, for example a payment for all the film rights or copyright in a book or characters, then none of that payment is production expenditure for the purposes of these provisions. Relief for such expenditure may be available under the provisions of FA02/SCH29.

Comparison with production expenditure for the purposes of Schedule 1 to the Films Act 1985

The amount of expenditure treated as production expenditure for the purposes of Schedule 1 to the Films Act will frequently differ from the amount of production expenditure deductible for tax purposes.

Schedule 1 gives rules for assessing whether a film is a qualifying British film, and one of its tests depends on the proportion of expenditure incurred on film production activity carried out in the UK. Whilst the Schedule 1 test is concerned with expenditure incurred for the purposes of the production of a film, typically only the original version of a film in particular, it is limited to expenditure that Schedule 1 does not rule out of the test.

Some expenditure ruled out of the Schedule 1 test might be properly included as production expenditure for tax purposes. For example, Schedule 1 disregards all payments for pre-existing rights (other than any labour costs of the screenwriter), some of which may count as production expenditure for tax purposes.

On the other hand, Schedule 1 allows account to be taken of contingent amounts such as deferments and participations to the extent that these are considered likely to be paid: otherwise it might be possible to overstate the proportion of UK expenditure by deferring other expenditure. For tax purposes we are only concerned with actual expenditure incurred. We disregard contingent amounts until such time as they become due and payable (see also BIM56385 and BIM56515).

Therefore, although what counts as production expenditure for Schedule 1 and tax purposes are similar, the two are not necessarily the same. Certificates issued by the Department of Culture, Media and Sport make it clear that their only purpose is to certify that a film is a qualifying British film. A certificate will make a film eligible for the special reliefs for qualifying British films (see BIM56300 onwards) but does not give a guarantee that any amount will be deductible for tax purposes. The amount of production expenditure that is deductible for tax purposes is governed solely by tax law and principles.