The legislation governing the methods for writing-off expenditure incurred on the production or acquisition of the original master version of a film or sound recording is found at:
The legislation requires that any revenue expenditure on the
production or acquisition of an original master version of a film
or sound recording must be allocated to a relevant period.
Identifying the relevant period in which the completion or
acquisition of a film occurs is also needed when allocating
expenditure under the special rules for qualifying British films -
see
BIM56325 onwards.
A relevant period is a period for which the accounts of the
trade or business of exploiting the master version are made up. If
no accounts are made up for a period the relevant period for CT
purposes is the accounting period of the company (see CTM01400
onwards). In any other case the relevant period is the period of
profits or gains taken into account in assessing the income of the
trade or period for a year of assessment.
A common situation where accounts are not drawn up for a
relevant period is where a partnership is formed but does not start
trading until some time later, and the first partnership accounts
include a period before trading commences. The relevant period only
starts when trading commences. For a partnership trading in the
exploitation of the master version of films the start of trading is
a question of fact, but will not normally begin until the
partnership has acquired a film and begun to exploit it, for
example by leasing or licensing it to someone. For guidance on when
a trade commences see
BIM70505.
A partnership of individuals is formed on 1 May 2005 with a view to trading in the exploitation of the master version of films through sale and leaseback. It first acquires an original master version of a film on 21 March 2006, and immediately leases the film back to the producer. Partnership accounts are submitted for the 11 months to 31 March 2006, and annually to 31 March thereafter. As trading only starts on 21 March 2006 and partnership accounts cover periods before and after trading commenced, no accounts of the trade or business are drawn up for a period (i.e., there is no period matching the period of trading). Therefore the relevant period is the basis period for the year of assessment, which is 21 March 2006 to 5 April 2006. (The length of the relevant period is primarily of relevance to relief under ITTOIA/S138, ITTOIA/S138A and F2A92/S42 - see BIM56325.)
The legislation provides rules for allocation of revenue
expenditure on the production or acquisition of a film or sound
recording to relevant periods and over-rides accountancy practice.
For qualifying British films (
BIM56105) there are rules allowing
accelerated write-off of expenditure (see
BIM56300 onwards). For all other films,
and for qualifying films where accelerated write-off is not claimed
and there is no election for capital allowance treatment (
BIM56310), there are two alternative
methods of allocating expenditure; the
income matching method (
BIM56215) and the
cost recovery method, (
BIM56230). These methods will usually
produce results similar to the normal accounting practice of
matching income with the expenditure necessary to earn that income.
Under the income matching or cost recovery methods
expenditure cannot normally be deducted until the value of the film
or sound recording starts to be realised, which is when income
begins to arise from exploitation of the master version. This may
be when a film starts to generate income on release or by the
outright sale of the master version, and will often coincide with
the commencement of trading.
Quite often film producers receive grants, subsidies or other
contributions towards the costs of production. As these are
contributions towards a revenue expense, they are normally taxable
receipts, and may be matched against the expenditure to which they
relate. Occasionally, under some distribution agreements a
non-refundable advance of royalties may be received and properly
brought into account prior to release. In such cases expenditure
may be deducted from the period in which the advances are first
brought into account.
