BIM56355 - Film and audio products: deductions for qualifying films: write-off over three years: restrictions on relief on or after 2 December 2004: examples

On this page references to ‘Section 42’ should be read as including both F2A92/S42 and ITTOIA/S138 and S138A, and ‘Section 48’ should be read as including both F2A97/S48 and ITTOIA/S139 and S140.

Example 1

A production company, A, makes a film for £1.6m. Principal photography starts on 1 November 2004 and the film is completed on 1 January 2005. On the same date A starts to trade by exploiting the film, and draws up accounts to 31 December each year. Of the £1.6m incurred by A on the film, £0.6m is not payable until 30 June 2005 (more than 4 months after making the film) – so only £1m can be relieved under Section 48 (see BIM56380). As the film started principal photography before 2 December 2004, the remaining £600,000 can be relieved under Section 42. The maximum relief available is as follows:

Example 2

Another production company, B, makes a film for £1.6m. Principal photography starts on 1 November 2005 and the film is completed on 1 January 2006. On the same date B starts to trade by exploiting the film, and draws up accounts to 31 December each year. Before 2 December 2004 B did not have an unconditional obligation to incur the expenditure. Of the £1.6m incurred by B on the film, £0.6m is not payable until 30 June 2006 (more than 4 months after making the film), so only £1m can be relieved under Section 48 in the year ended 31 December 2006. As the film did not start principal photography before 2 December 2004, and B did not have an unconditional obligation before that date, the remaining £600,000 cannot be relieved under Section 42, but can only be relieved under F2A92/S40B (see BIM56215 and BIM56230) in accounting periods from 2007 onwards.

Example 3

On 30 November 2004 a production partnership, C, makes an unconditional obligation to incur expenditure of £10m on making a film. Principal photography starts on 1 January 2005 and the film is completed on 6 April 2005. On the same date C starts to trade by exploiting the film, and draws up accounts to 5 April in the following year and annually thereafter.

During production the budget overruns and a further £1m in production costs are incurred, but these are not payable until 31 December 2005 (more than 4 months after making the film). So only £10m can be relieved under Section 48 in the year ended 5 April 2005. As the film did not start principal photography before 2 December 2004, and C did not have an unconditional obligation to incur the additional £1m before that date, this amount cannot be relieved under Section 42, but can only be relieved under F2A92/S40B in years ending 5 April 2007 onwards.

Example 4

Company D has been carrying on a trade of exploitation of the master versions of films for a number of years, with an accounting date of 31 December. It acquires the original master version of a film from the producer for £150m on 1 July 2005. The film cost £145m to make and was completed on 30 November 2004. The producer also incurred financing, completion bond and incidental administrative costs of £5m.

As the film began principal photography before 2 December 2004, Section 42 does not restrict acquisition price to the cost of production. Practice before 2 December 2004 was to accept an acquisition price at production cost plus incidental expenditure (see BIM56335). Providing the producer has not already claimed relief for its expenditure on the film (see BIM56360) maximum relief which may be claimed in each relevant period by the company is:

Example 5

Company E has been carrying on a trade of exploitation of the master versions of films for a number of years, with an accounting date of 31 December. It agreed, on 30 November 2004, that it would buy the original master version of a film from the producer for £100m when the film was completed, subject to their being no change in the law for relief under Section 42. The film cost £96m to make, it started principal photography on 2 December 2004 and was completed on 30 June 2005. The producer also incurred financing, completion bond and incidental administrative costs of £4m. E buys the film for £100m on 30 September 2005.

As the film did not begin principal photography before 2 December 2004, and E did not have an unconditional obligation to incur expenditure on the film before that date, relief under Section 42 is restricted to the total production expenditure (£96m) on the film ( BIM56350). Providing the producer has not already claimed relief for its expenditure on the film the maximum relief which may be claimed under Section 42 in each relevant period by E is:

The £4m balance of the acquisition expenditure incurred by E may be claimed under F2A92/S40B in the years after this.

Example 6

Partnership F buys a film for £1m on 5 April 2005 and immediately leases it back to the producer. The film started principal photography on 1 December 2004 and cost £50k to make, but the producer agreed to pay the staff and crew up to a further £950k in deferred fees if the film is successful.

F is entitled to relief under Section 48 of up to £50k (the amount of the total production expenditure incurred on the film – see BIM56340). As the film began principal photography before 2 December 2004 there is no cap under Section 42 on relief for acquisition expenditure. However, the film has been acquired at far more than its actual cost of production and probably well above its market value. The case should be referred to CT&VAT (Technical) in accordance with BIM56335.

Example 7

A film starts principal photography on 1 January 2005 and is completed on 31 March 2005. The film production company incurred £10m on making the film, but £1m of this is payable to the lead actor on 31 December 2005 under an agreement made on 1 December 2004, and so had an unconditional obligation before 2 December 2004 to incur this expenditure. The production company does not claim relief under Section 48 or Section 42.

A film partnership, G, buys the film on 6 April 2005 for £10m.

(a) If, before 2 December 2004, G had an unconditional obligation to incur this expenditure, then it can obtain relief for £9m under Section 48, and may claim relief for the remaining £1m under Section 42.

(b) If G did not enter an unconditional obligation, before 2 December 2004, to incur this expenditure, then it can obtain relief for £9m under Section 48, but may only obtain relief for the remaining £1m under the income matching or cost recovery methods in F2A92/S40B – notwithstanding that the producer had, before 2 December 2004, an obligation to incur the £10m of expenditure (see BIM56350).