BIM56240 - Film and audio products: methods applying to all master versions: leases and licences

A common way of exploiting the master version of a film is to lease or license the film to another person, usually a distributor who in return will pay rentals or fees, normally spread over a number of years. Usually the amount of the rental payments or licence fees are guaranteed, sometimes supplemented by a share of profits. This is the most common way in which the accelerated reliefs for qualifying British films are accessed, and these arrangements are discussed in more detail at BIM56400 onwards.

Commonly the form of the lease (or licence) will be that of a finance lease. Under these arrangements the lessor or licensor is effectively providing finance to the lessee or licensee to enable him to obtain the asset. The accountancy treatment seeks to reflect the reality of this financial arrangement treating the rentals as part payment of interest, part repayment of capital on a loan. However, this is not relevant for tax purposes where the entirety of the expenditure and income is treated as revenue.

Where the accelerated deduction for qualifying films is not applicable or is not claimed, and there is no election for capital allowance treatment, then the income matching or cost recovery rules will apply. In particular, the full amount of the rentals or fees are taxable as they become due, and the expenditure will either be matched against the income receipts using the income matching formula described in BIM56220 or under the cost recovery method described in BIM56235. Usually, it will be beneficial to invoke the cost recovery method because the income matching method will spread the expenditure so as to lead to taxable profits every year, whereas the cost recovery method will ensure that no taxable profits arise until all the expenditure has been deducted.