BIM56330 - Film and audio products: deductions for qualifying films: write-off over three years: basic rules

F2A92/S42 and ITTOIA/S138 and S138A (‘Section 42 relief’)

This page describes the basic rules for deducting expenditure incurred on the production or acquisition of a film under F2A92/S42 and ITTOIA/S138 and S138A. Although these rules were rewritten for IT in years of assessment 2005/06 onwards, the relief is still generally referred to under its original statutory reference and unless the context otherwise requires ‘Section 42’ should be read as referring to the ITTOIA equivalents in this guidance. New restrictions were applied to Section 42 relief in FA05, effective from 2 December 2004 (see BIM56340 onwards). However, transitional rules mean that not all expenditure incurred on the production or acquisition of a film on or after that date will be subject to the new restrictions. These transitional rules are described at BIM56350, BIM56365 and BIM56370.

Where no election has been made under F2A92/S40D or ITTOIA/S143 ( BIM56310) the rules in F2A92/S40B or ITTOIA/S135 ( BIM56210) apply to determine when expenditure incurred on the production or acquisition of the master version of a film is written off. Alternatively the expenditure may be deducted under Section 42 (or its ITTOIA equivalents). See BIM56317 and BIM56318 for the claims or evidence necessary to establish an entitlement to deduct the expenditure.

To deduct expenditure under Section 42 a person must be carrying on a trade or business that consists of or includes the exploitation of films. Section 42 applies to expenditure incurred by that person on the production or acquisition of the master version of a qualifying film. See BIM56206 and BIM56207 for explanations of what is meant by expenditure incurred on the production or acquisition of a master version.

No relief under Section 42 is available if the master version of the film is held as trading stock ( BIM56255) or an election has been made under F2A92/S40D or ITTOIA/S143 (BIM56310).

There can be no claim or deduction for any relevant period (BIM56210) under Section 42 where the provisions of F2A92/S40B or ITTOIA/S135 have already been applied to expenditure on the film in that period. Any sums claimed or allocated to any relevant period as preliminary expenditure ( BIM56320) must be excluded before computing the amount that can be allocated under Section 42.

Where the expenditure is on the production of a film, up to one-third of the expenditure may be written off in the relevant period in which the film is completed and in any later periods until all production expenditure is written off. In practice, the expenditure is normally written off in the first three years from when the film is completed.

Where the expenditure is on the acquisition of a film, up to one-third of the expenditure may be written off in the relevant period in which the film is acquired and in any later periods until all acquisition expenditure is written off. In practice, the expenditure is normally written off in the first three years from when the film is acquired.

In either case, if the relevant period is less than twelve months the one third fraction of qualifying expenditure that may be written off is proportionately reduced.

Example 1

A qualifying film costing £60 million to produce is completed in the period of account for the year ending 31 March 2003. Throughout that period the producer has been carrying on a trade which includes or consists of the exploitation of films. Accounts are subsequently drawn up to 31 December 2003 and annually to 31 December thereafter. The maximum amounts that can be deducted in each relevant period are as follows:

Example 2

A partnership of individuals is formed on 6 April 2003. It buys its first qualifying film from a producer for £30 million on 6 October 2003, and immediately leases it back to the producer (see BIM56400 onwards). The partnership draws up accounts to 5 April 2004, and then annually to 5 April each year. The partnership must be carrying on a trade or business of exploiting the master version of a film. It cannot carry on such a trade or business until it has first acquired a master version of a film. As the film was not acquired before 6 October 2003, the partnership did not start such a trade until that date ( BIM70505), so the first relevant period is only 6 months. The fastest that expenditure under Section 42 can be deducted is as follows: