BIM56415 - Film and audio products: tax deferral schemes for qualifying films: tax treatment of lessor

Expenditure incurred on the production or acquisition of the master version of a film is deemed to be revenue by F2A92/S40A ( BIM56205). Where a person is carrying on a trade or business of exploitation of the master versions of films, then there are a number of ways in which that expenditure may be deducted in computing the profits. These are:

• the income matching method ( BIM56215), although this will not generally be appropriate for finance lessors and production licensors ( BIM56240),
• the cost recovery method ( BIM56230),
• under the capital allowances regime ( BIM56310),
• by writing-off the cost over three years ( BIM56325), or
• where the cost of producing the film is no more than £15 million, write-off in one year ( BIM56380).

The lessor in a sale and leaseback tax deferment scheme will normally seek to use one of the two latter methods, which are the accelerated deductions for qualifying British films.

In order for the lessor to be able to benefit from the reliefs, it is necessary for it to be not only trading, but also carrying on a specific trade of exploitation of master versions of films. The accelerated deductions can only be made when the trade of exploitation of master versions of films has commenced. It is not sufficient for a person to be trading generally, there must be a trade which includes the exploitation of master versions of films. Such a trade can only exist when an acquirer has acquired a master version (or, in the case of a producer, the producer has a completed film to exploit).

Notwithstanding the accounting treatment of the lease rentals (which may be shown as part repayments of loan capital – see BIM56410), the lease rentals are fully taxable as revenue receipts under F2A92/S40A (see BIM56243).