BIM56715 - Film and audio products: avoidance: tax deferral beyond 15 years: Section 42 claims made after entering deferred income agreement

On this page references to a claim under ‘Section 42’ should be read as including a claim under F2A92/S42 ( BIM56330) and a claim under that section as amended by F2A97/S48 ( BIM56380), and to the making of a deduction under the equivalent sections at ITTOIA/S138 to ITTOIA/S140.

Where a person makes a claim under Section 42, and one or more deferred income agreements ( BIM56710) exist to which that person is or has been party, the amount of relief under Section 42 is restricted.

Note that the claimant does not have to still be a party to a deferred income agreement at the time the claim is made, or in the relevant period ( BIM56210) to which the claim relates, but does have to have been a party to, and entered into, a deferred income agreement on or after 2 December 2004.

The restriction works, not by reducing the amount claimed under Section 42, but by deeming that the person has received an amount of trading income equal to the excess relief in the relevant period in respect of which the claim is made. This may seem a rather strange approach but is legislatively considerably simpler than directly reducing relief under Section 42 which can be claimed over a number of accounting periods and is itself subject to a number of other restrictions (see BIM56330 onwards). By nominally allowing the Section 42 claim, and then effectively clawing part back through excess relief, there was no need to amend the other rules and restrictions applicable to Section 42.

The excess relief is an amount given by the formula:

D x [1 – (T1 ÷ T2)],

where:

• D is the amount which the person is entitled to deduct under Section 42 (note that if, exceptionally, a person claims less than the maximum amount permitted under Section 42 in any relevant period, D is the actual amount deducted not the maximum amount that could have been claimed);
• T1 is the number of days in the period of 15 years from the operative date as defined in BIM56710 (note that this will vary slightly depending on the number of leap years in this period); and
• T2 is the number of days in the period beginning with the operative date and ending on the last date under which income will or may arise under the deferred income agreement (or the latest of such dates if there is more than one agreement).

The excess relief is in addition to any other income that the person may receive in the relevant period.

By itself, this will have the effect of giving the person less net relief than the expenditure he has incurred. Therefore, to balance this out, the person is treated, for the purposes of F2A92/S40B (see BIM56215 and BIM56230) as having incurred expenditure:

• equal to the amount of the excess relief,
• on the production or acquisition of the master version of the film,
• 15 years and one day after the operative date,
• providing the person is still carrying on the same trade of exploitation of the master version of films at that time.

This is broadly equivalent to the relief that would have arisen for the excess amount if relief had only been available under F2A92/S40B – that is, without the benefit of the accelerated relief under Section 42.

See BIM56725 for examples.