BIM56350 - Film and audio products: deductions for qualifying films: write-off over three years: restrictions on relief on or after 2 December 2004: transitional rules

On this page references to ‘Section 42’ should be read as including both F2A92/S42 and ITTOIA/S138 and S138A.

The restrictions on the amount of relief under Section 42 described at BIM56340 and BIM56345 do not apply to all expenditure incurred on the production or acquisition of films on or after 2 December 2004. These provisions are subject to detailed transitional provisions set out in Part 2 of FA05/SCH3. You should note that:

• these transitional rules only apply to these restrictions: the other anti-avoidance measures announced on 2 December 2004 have very different commencement and transitional rules;
• even if the transitional rules apply to expenditure incurred on or after 2 December 2004, that expenditure must still meet the requirements existing before that date to obtain relief under Section 42 (see, in particular, BIM56335).

The transitional rules give two exemptions from application of the new rules:

• the first relates to the film and whether principal photography had started before 2 December 2004;
• the second relates to the person who incurs the expenditure and whether that person had an unconditional obligation to incur the expenditure before 2 December 2004.

Exemption 1: Did principal photography start before 2 December 2004?

Any expenditure incurred on a film on which principal photography had started before 2 December 2004 is exempted from the new rules. It does not matter whether the film was completed before that date. This is the main exemption and if a film meets this test then there is no need to consider the next test.

Principal photography is a well understood term in the film industry and begins when the main filming project gets underway. This date is used as a trigger for a number of contractual arrangements. If, exceptionally, it is necessary to seek evidence of when principal photography commenced, a review of the contractual arrangements in place for making the film may provide that evidence. If the date still cannot be agreed, you should refer the case to CT&VAT (Technical).

Exemption 2: Did an unconditional obligation to incur expenditure exist before 2 December 2004?

This test is only relevant for films which had not started principal photography before 2 December 2004.

In order to satisfy this test the person who incurs the expenditure must have entered a contract before 2 December under the terms of which he had an unconditional obligation to incur the expenditure and has no choice other than to incur the expenditure.

For this purpose the legislation regards a person as having an unconditional obligation where:

• the contract is conditional on someone else doing something over which the person has no control (e.g., a person is obliged to buy a film from a producer providing the producer completes the film, and the person has no control over whether or not the producer does so);
• the contract is conditional only on the film being certified as a qualifying film (e.g., even if it is the responsibility of the person himself to make the application for certification) – see BIM56105.

In practice it is unlikely that there will be many situations where a person has an unconditional obligation to incur expenditure on a film where principal photography has not yet commenced. The ‘person’ seeking tax relief under Section 42 is almost invariably a film financier – usually a partnership of wealthy individuals or a subsidiary of a bank - whose incentive to invest in the film arises from that tax relief. Most well drafted agreements are therefore likely to contain a ‘change of law’ clause (usually found amongst conditions precedent) which allows a person the option to withdraw from the obligation to incur expenditure if there is a change in the law. As there was a change in the law with effect from 2 December, the unconditional obligation test would not be met in this situation.

Acquisitions and transitional rules on ‘total production expenditure’

Where, exceptionally, an unconditional obligation to incur acquisition expenditure exists before 2 December 2004 on a film which had not started principal photography by that date, there is no statutory limit on relief for acquisition expenditure under Section 42 (see BIM56335).

Where there is no such unconditional obligation, relief for acquisition expenditure under Section 42 is limited to total production expenditure as defined in BIM56340; that is, it does not include amounts paid or payable more than 4 months after the film is completed. This rule applies even if there was an unconditional obligation on another person to incur production expenditure of an amount greater than this. However, the double dipping rules will also apply in this circumstance to prevent both the producer and acquirer obtaining relief under Section 42 (see BIM56360 onwards).

There are examples showing how the transitional rules work in BIM56355.