BIM56320 - Film and audio products: deductions for qualifying films: preliminary expenditure

Preliminary expenditure is, in broad terms, expenditure incurred before it is clear that a film will actually be produced, and which can reasonably be said to have been incurred with a view to enabling a decision to be taken as to whether or not to make a film. For this reason, it is often referred to as development expenditure.

The expenditure must be expenditure of a revenue nature ( BIM56205). Most of this expenditure will also be production expenditure (e.g., costs of preparing the scenario and script), see BIM56207. However, preliminary expenditure is not restricted to production expenditure and may also, exceptionally, include other revenue costs provided these can reasonably be said to have been incurred with a view to enabling a decision to be taken as to whether or not to make a film.

Under the main relieving provisions in F2A92/S40B or ITTOIA/S135 ( BIM56210) preliminary expenditure which is also production expenditure would be added to the general costs of producing the film and would be written off under one of the two permitted methods. Where the film is a qualifying film, or is expected to be a qualifying film once completed, the rules in F2A92/S41 and ITTOIA/S137enable preliminary expenditure to be written off, at the earliest, in the relevant period (BIM56210) in which it is payable.

To qualify the claimant must have been carrying on a trade or business that includes the exploitation of original master versions of films in the relevant period to which the claim relates. This condition is important as a person who is planning to make a film, or is making a film, may not have started trading in the relevant period when the preliminary expenditure is payable. In such circumstances, a claim can still be made to deduct the expenditure in a later relevant period after trading has commenced. For guidance on when a trade commences see BIM70505.

The following conditions must also be met.

1. If the film has been completed at the time that the claim is made it must be a qualifying film (see BIM56105).
   
2. If the film has not been completed at the time that the claim is made or deduction is sought there must be evidence that the film is, or on aborted films would have been, reasonably likely to be a qualifying film. This will depend on the plans of the person making, or intending to make, the film and in particular whether that person was using best endeavours to ensure that the film would meet the necessary conditions. Provided it was reasonably likely to become a qualifying film, the fact that a film subsequently does not achieve qualifying status (either because the film is never completed or, exceptionally, because the conditions for certification of the completed film are not ultimately met) will not of itself prevent this test from being satisfied.

The rules governing certification of films as qualifying British films can be found on the Department of Culture, Media and Sport (DCMS) web-site at http://www.culture.gov.uk/creative_industries/film/. Where you are uncertain whether a film which has not yet been completed might qualify you should consult CT&VAT (Technical), not DCMS. The main conditions governing whether a film is a qualifying British film are summarised below.

(i) Where the film is made by a company that company must have been registered and centrally managed and controlled in the UK or in another member-state of the EU throughout the period the film is being made.

(ii) An unincorporated filmmaker must be ordinarily resident in the UK or another EU member-state.

(iii) 70% of the total production cost of the film must be spent on film production activity carried out in the UK.

(iv) 70% of the labour costs must be payable to British citizens, citizens of other Commonwealth countries or citizens of EU member states or to ordinary residents of these countries.

Alternatively, where a film has provisional approval from DCMS that it meets the conditions of one of the UK’s bilateral film co-production agreements, or of the European Convention on Cinematographic co-production, it may be accepted that the film is reasonably likely to be a qualifying film for the purposes of giving relief for preliminary expenditure.

3. The expenditure must be incurred to enable a decision to be taken whether or not to go ahead with the film. For this purpose the earliest time at which a decision to go ahead can be taken is the point where all the necessary elements, and particularly finance, are in place.

It is not necessary for the person laying out the expenditure to be the person actually making the film. A contribution towards the preliminary expenditure may itself qualify provided the person making the contribution is carrying on a trade or business of exploiting the original master versions of films. For example, a person may commission a film which they later hope to acquire and exploit. If that person makes a contribution towards the preliminary expenditure on that film a claim under F2A92/S41, or deduction under ITTOIA/S137 may be available.

4. The expenditure must be incurred in the relevant period for which the claim is made (or deduction is sought) or in an earlier period, but must also be payable before the first day of principal photography. Principal photography is a well understood term in the film industry and begins when the main filming project gets underway. This date is used as a trigger for a number of contractual arrangements. If, exceptionally, it is necessary to seek evidence of when principal photography commenced a review of the contractual arrangements in place for making the film may provide that evidence. If the date still cannot be agreed, you should refer the case to CT&VAT (Technical).
   
5. The total amounts of preliminary expenditure deducted in respect of a film for all relevant periods must not exceed 20% of the film’s budget at the start of principal photography. This cap on relief relates to the film, not to the persons incurring the expenditure, so that if, exceptionally, more than one person incurs preliminary expenditure on a film, their relief will be restricted to the total relief given. In practice this is highly unlikely to occur as preliminary expenditure will rarely account for more than 20% of the cost of a film. Where there is any doubt over whether the 20% cap may have been exceeded, reference should be made to CT&VAT (Technical).

Exceptionally, cases may arise where the relief already given for preliminary expenditure in previous periods exceeds 20% of the budget at the start of principal photography. Where the claimant can show that the earlier over-claim was based on a reasonable estimate of the likely budget of the film, the excess can be recouped by means of an appropriate reduction in relief for production expenditure costs in the first period of account in which those sums are deducted.

For the purposes of applying the 20% test, you should exclude from the total budget any deferments and participations, or other contingent amounts. Deferments and participations are sums which are only payable if the film is successful and generates certain levels of income from exploitation (see BIM56515).

6. The expenditure must not be payable in circumstances where it is repayable if the film is not made. For example, a ‘commitment fee’ paid to a lead actress will be excluded from preliminary expenditure if the fee is refundable in the event that the film does not go ahead.
   
7. Relief for the expenditure must not have already been given. The legislation provides that expenditure already relieved under any other provisions cannot be relieved as preliminary expenditure. It also provides that expenditure relieved as preliminary expenditure cannot be relieved under other provisions. For IT years of assessment 2005/06 onwards, if any preliminary expenditure is allocated to a relevant period under the normal rules for allocating expenditure on all master versions ITTOIA/S135 or F2A92/S40B (see BIM56200 onwards) then no preliminary expenditure can also be allocated to that relevant period under ITTOIA/S137.