BIM56243 - Film and audio products: methods applying to all master versions: sale of the master version

Sale for a fixed sum

When the master version of a film or audio product is sold for a fixed sum the seller will have thereby realised the full value of that master version. So, under the income matching method ( BIM56215), the seller is able to immediately write off, against the sale proceeds, the balance of production or acquisition expenditure that has yet to be deducted.

The cost recovery method ( BIM56230) has no application here as it only applies where it can increase the deduction above the income matching method. But the entire expenditure is already deductible under income matching.

In theory the seller could claim to use the accelerated relief for qualifying British films ( BIM56300 onwards), however there would be little point in doing so unless the trader is continuing to trade in exploitation of films and wishes to deduct some of the expenditure in later relevant periods: in other words to decelerate the deduction.

The proceeds of the sale of the master version are also revenue ( BIM56205) and, where the sale is for a fixed sum, will be taxable in full when the sale is made. Normally this will be the same as the accountancy treatment, but with the exception of sale and lease back transactions where the accountancy treatment may sometimes differ significantly from the statutory tax treatment.

In a typical sale and lease-back of a film (see BIM56400 onwards), the producer will place a large proportion of the proceeds of the sale on deposit in order to guarantee future lease rental payments. In some circumstances accountancy treatment may validly recognise only the net benefit as a receipt – the difference between the sale proceeds and the deposit. This is not appropriate for tax purposes.

For tax purposes the full disposal proceeds of the master version must be taken into account as a receipt when the master version is sold. Future rental payments under a lease are not costs of production or acquisition of the master version and cannot be offset against this. Often this will have no tax consequence as the income simply matches the expenditure. However, the point may be relevant in tax avoidance schemes involving deferments ( BIM56515), where the receipt has no matching deduction, and in ‘double dipping’ ( BIM56360) where the receipt cancels out a contrived loss.

Sale for contingent amounts

Sometimes a film may be sold for a fixed sum plus an additional amount contingent on future profits from the film, or for a wholly contingent amount – where any proceeds only arise if the film is profitable. Here, the appropriate treatment under the income matching method will be the same as if ownership had been retained. That is, account must be taken of likely future receipts as well as actual sums received.

Sales of this type are most commonly seen with deductions using the accelerated reliefs for qualifying British films ( BIM56300 onwards). These arrangements are often wholly commercial but are also commonly seen in ‘double dipping’ (BIM56360) or partnership loss manipulation schemes ( BIM56535).

Master version held as trading stock

In some circumstances the master version may more appropriately be regarded as trading stock rather than a fixed asset of the trade. This is most likely to arise where there is a pre-existing intention to dispose of the master version before the film is produced or acquired. In these situations the normal computational rules for trading profits apply rather than the special rules for films and audio products - see BIM56255.