BIM56340 - Film and audio products: deductions for qualifying films: write-off over three years: restrictions on relief on or after 2 December 2004: production expenditure

On this page references to ‘Section 42’ should be read as including both F2A92/S42 and ITTOIA/S138, and ‘Section 48’ should be read as including both F2A97/S48 and ITTOIA/S139.

Until 2 December 2004, the total amount of relief that could be obtained for expenditure on the production of a film completed after 16 April 2002 (see BIM56385) was different under Section 42 and Section 48 (see BIM56335). Section 48 ( BIM56380) excluded expenditure by reference to the time it was incurred and was payable, whereas Section 42 relief could be obtained on all production expenditure providing it had been incurred. FA05/S59 and Schedule 3 removed these differences subject to transitional rules ( BIM56350), the most important of which is that the changes do not affect any film which started principal photography before 2 December 2004.

There are three changes affecting production expenditure.

1. Restriction on amount of production expenditure relievable under Section 42

No relief under Section 42 is available for production expenditure incurred on the production of the original master version of a film which, at the time the film is completed:

• has not been paid, and
• is not the subject of an unconditional obligation to pay within 4 months after the date of completion.

Relief for any production expenditure excluded by this rule can only be obtained under F2A92/S40B (see BIM56215 and BIM56230) and only in a relevant period ( BIM56210) in which there is no deduction under Section 42.

2. When expenditure is incurred

The rules in CAA01/S5 are imported to determine when expenditure is incurred (see BIM56385). In practice these rules are only significant in relation to acquisition expenditure because of the restriction on the amount of production expenditure above.

3. Definition of total production expenditure

Total production expenditure includes all expenditure incurred in making the film except for any expenditure excluded by the restriction on production expenditure described above. In particular, it includes any expenditure incurred on the production of the film at any time before the film is completed, and by any person (i.e., not just the person claiming the deduction). So, if a film is co- produced by two producers, each of whom incurs £10m on production expenditure, the total production expenditure on the film will be £20m.

Total production expenditure is important for two reasons:

• it is used to set the £15m limit which determines whether relief is given under Section 42 or Section 48; and
• it sets the limit on the amount of acquisition expenditure relievable under Section 42 ( BIM56345).

The overall effect of these changes is that, for a film whose total production expenditure is £15m or less, relief for production expenditure can only be obtained under Section 48 or F2A92/S40B. Relief under Section 42 can only apply to films with total production expenditure in excess of £15m.

See BIM56355 for examples.