BIM56515 - Film and audio products: avoidance: deferments and participations: films completed before 17 April 2002
As explained at
BIM56385, the legislation at FA02/S100
(F2A97/S48 (6A)) excludes from the computation of production
expenditure, for films completed on or after 17 April 2002, any
sums not paid before the film is completed or, where the
unconditional obligation to pay arises on or before completion, are
not payable within 4 months of completion. This means that
production expenditure for the purposes of F2A97/S48 could no
longer increase after the date of completion of a film if
deferments (monetary amounts payable out of receipts from the film)
and participations (percentage amounts payable out of receipts)
became due.
For films completed before 17 April 2002 deferments and
participations which are contractually due to producers, directors,
actors, and so on, become part of the production costs of a film.
However, this
only applies to deferments and participations
which are (that is, have become) contractually due.
A number of avoidance schemes were devised before FA02 in
which it was argued that Section 48 relief could be obtained on
acquisition expenditure greater than the total production
expenditure incurred on the film, and that contingent deferments
and participations should be added to the actual costs in setting
this limit, despite the explicit exclusion of contingent amounts
contained in F2A97/S48 (9).
The argument used to substantiate this is that SP1/98 (the
predecessor to this guidance) stated that deferments and
participations that are contractually due are part of the
production costs of a film. It was then argued that these sums were
contractually due even if (as was almost invariably the case) the
sums were never actually paid because the contingency was never
met, and the amounts never became due.
There are two points here. Even though deferments and
participations may be costs associated with producing a film when
they become due, the statement of practice did not override the
clear and explicit wording of the statute. Secondly, an amount
payable under a contract in the event that certain conditions are
met is not contractually due unless those conditions are met.
Commercially, deferments and participations are not given
generally to everybody involved in making a film. They are usually
restricted to the main participants such as the producer, director
and leading actors. As such, commercial deferments and
participations generally make up a relatively small proportion of
the overall cost of making a film.
Where acquisition expenditure is incurred on a film completed
before 17 April 2002, and the price paid includes the amounts of
commercial deferments and participations such as these, then relief
under F2A97/S48 can be given up to the amount of actual production
costs incurred. Relief for the excess can be given under F2A92/S42
(see
BIM56335).
Otherwise, a report should be made to Anti-Avoidance Group
(see
BIM56505) in any case where:
- deferments and/or participations have not been paid but the
conditions at CAA01/S5 (previously CAA90/S159) are claimed to have
been met, or
- deferments and/or participations are claimed to be payable
widely to all or most of the cast, crew and other participants
involved in making the film, or
- deferments and/or participations make up more than 10% of the total cost of making the film.
