BIM56325 - Film and audio products: deductions for qualifying films: write-off over three years: overview

F2A92/S42, ITTOIA/S138 and S138A (‘Section 42’)

Section 42 contains the main relieving provisions for expenditure incurred on the production or acquisition of the master versions of qualifying British films. It was introduced in F2A92 for qualifying films completed on or after 10 March 1992. The intention of the relief was to assist producers of British films by accelerating the rate at which expenditure could be deducted. Before this, expenditure on qualifying British films was relieved through plant and machinery capital allowances or the income matching or cost recovery methods (see BIM56200 onwards).

There is often an interval between the completion of a film and its release during which no relief for expenditure is due under either the income matching or cost recovery methods. Section 42 was intended to be more beneficial by allowing a producer to begin to write off expenditure as soon as the film had been completed and trading had commenced, at a rate of one third of the cost each year. In practice, this deduction is rarely of direct use to the producer, who has no income to set it against. Instead, the relief is usually accessed by selling the master version of the film to a third party which does have taxable income to shelter (usually a bank or partnership of wealthy individuals, and sometimes an associated company), and leasing the film back over a period of up to 15 years (see BIM56400 onwards). Unfortunately this has been accompanied by extensive tax avoidance.

In 1997, for films with a production cost of £15 million or less, Section 42 relief was enhanced by F2A97/S48, ( BIM56380). This allows a full write off of the expenditure incurred immediately after the film is completed or acquired, rather than the one third annual deduction allowed under Section 42. Although ‘Section 48’ is commonly referred to as a separate relief, claims for that relief are made under the provisions in Section 42.

There have been a number of film anti-avoidance measures introduced since 1997 and these are listed in BIM56015. The changes which directly affect relief under Section 42 are:

• FA00, which ensured relief under Section 42 could not be obtained on the acquisition of films completed before 10 March 1992;
• FA02, which restricted relief to films genuinely intended for theatrical release ( BIM56115);
• FA05, which came into effect from 2 December 2004 and prevented double dipping ( BIM56360), imposed restrictions on the amount of production and acquisition expenditure that could be relieved under Section 42 ( BIM56340 and BIM56345), and clawed back relief under Section 42 where the relief is used in a scheme to defer tax for more than 15 years (BIM56750).

This guidance first covers Section 42 before 2 December 2004 ( BIM56330) and after that (BIM56340 onwards).

For IT in years of assessment 2005/06 onwards Section 42 has been replaced by ITTOIA/S138 and S138A, and Section 42 applies only for CT now.