BIM56215 - Film and audio products: methods applying to all master versions: income matching method

The income matching method is one of the two methods applying to all master versions which are permitted for writing-off revenue expenditure on production or acquisition. There are other methods available for qualifying British films (see BIM56300 onwards). The income matching method is mandatory for any relevant period in the absence of a claim to use one of the other methods in that period or an election for capital allowance treatment ( BIM56310).

For IT only, in years of assessment 2005/06 onwards, formal claims for deduction of expenditure under methods other than income matching are no longer required by ITTOIA, (although for capital allowance treatment an election is still needed - see BIM56310). Instead, expenditure is allocated to a relevant period in a return. It is important that the statutory provision under which the allocation is made is clearly identified in the return as this will affect the amount which can be deducted in any relevant period.

The income matching method provides for expenditure to be allocated to a relevant period ( BIM56210) on a just and reasonable basis having regard to the following:

• the amount of expenditure yet to be written-off at the beginning of the relevant period;
• the proportion which the value of the film realised in the period bears to that value plus the estimated residual value at the end of that period;
• the amount of any new expenditure incurred in the period on the production or acquisition of the master version (e.g., contingent amounts which have become payable after completion or acquisition); and
• the need to bring the whole of the expenditure into account over the time during which the value of the original master version is expected to be realised.

The amount of expenditure yet to be written-off is calculated by excluding from the total expenditure sums that have been written-off in earlier periods. This includes all expenditure already written-off under this method or any other method.

The value of the master version realised in the period will be the receipts arising from the exploitation of the master version in that period. The estimated residual value will generally be the gross amount of the estimated future income from exploitation of the master version. Estimates of future income will inevitably be revised over the life of the film as its success or otherwise becomes apparent.

Examples of the application of the income matching method are given at BIM56220.

The criteria for what is a just and reasonable allocation of expenditure may be different where, for example, a television film is being exploited because the income is not derived directly from the showing of the film ( BIM56245).

Different criteria also apply where a film is exploited by way of a finance lease or fixed licence fee where the lessor’s or licensor’s return is not dependent upon the commercial success of the film ( BIM56240).