BIM56720 - Film and audio products: avoidance: tax deferral beyond 15 years: claw back of relief on entering new 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.

Usually a person will enter into a deferred income agreement ( BIM56710) before making a claim under Section 42. For example, usually the lease back follows immediately after a film has been acquired. However, it is possible for a new deferred income agreement (which includes an amended agreement where there is a later date on which the last amount of guaranteed income will or may arise – see BIM56710) to be entered into after a Section 42 claim has been made. In such circumstances the legislation provides for a claw back of relief already given (FA05/S62 and ITTOIA/S142C).

The claw back applies where:

• a person is carrying on a trade or business which includes the exploitation of the master version of a film, and
• enters a deferred income agreement in respect of that film on or after 2 December 2004, and
• before that person entered into that agreement a Section 42 claim had been made to deduct expenditure for a relevant period ( BIM56210) of the same trade or business, and
• the claim was in respect of expenditure incurred on the same film.

Note that there is no requirement that the person entering the deferred income agreement is the same person who made the claim. However, the claim must have been in respect of the same trade or business, and that claim may have been made before 2 December 2004.

Where this applies, the person entering the agreement is deemed to have received an amount of income from the trade:

• equal to the amount of the net excess relief,
• in the relevant period in which he has entered into the (new) deferred income agreement.

The net excess relief is an amount given by the formula:

D x [1 – (T1 ÷ T2)] – RA,

where:

• D is the amount which the person is entitled to deduct under Section 42;
• 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 the 15 year period);
• 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; and
• RA is the recovered amount.

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

The recovered amount is the total of:

• any amount of excess relief in relation to the claim (see BIM56715) deemed to have already been received as income of the trade or business by the person entering the new deferred income agreement, plus
• any amount of net excess relief in relation to the claim that the person is deemed to have received as income of the trade or business on entering any previous deferred income agreements.

In other words, the legislation acts to impose a claw back, but only to the extent that there has not already been a claw back or deemed receipt of excess relief.

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 net excess relief,
• on the production or acquisition of the master version of the film,
• which is in addition to the amount of any other excess relief or net excess relief treated as so incurred,
• 15 years and one day after the operative date,
• providing the person is still carrying on the same trade of exploitation of the master versions of films at that time.

More than one claim

Where deductions in respect of expenditure on a film are claimed under Section 42 in more than one relevant period (for example, because the film costs more than £15m to produce, or claims less than the maximum amount are made on films costing less than this), you should note that these provisions must be applied separately to each claim.

See BIM56725 for examples.