References on this page to ‘Section 42’ should be read as including both F2A92/S42 and ITTOIA/S138 and S138A, and ‘Section 48’ should be read as including both F2A97/S48 and ITTOIA/S139 and S140. ‘Claims’ to relief should be read as including allocations of expenditure under ITTOIA/S138 to S140 (see BIM56318), and references to claims under Section 42 include claims under that section as amended by Section 48.
Most films in production on 2 December 2004 were being funded in
part by double dipping schemes. If the new double dipping
provisions (
BIM56360) had been introduced with
immediate effect some of those films might have found it difficult
to access alternative forms of finance and might have been forced
to stop. Transitional provisions were therefore introduced so that
films in production on and before 2 December would not be
immediately affected by the new rules. So, if any of the then
existing arrangements satisfy the requirements of the previous
legislation, the change would not have an immediate impact on them.
However, it is questionable whether the double dipping schemes
worked under the pre-existing legislation, and the transitional
provisions do not give an amnesty from application of that
legislation.
Most of the double dipping schemes involved one claim for
production expenditure and another for acquisition expenditure.
Section 48 relief (for films costing £15m or less to produce
–
BIM56380) for multiple acquisitions was
already prevented by FA02/S101 (see
BIM56530). In order to prevent the
transitional rules for films in production being exploited with new
multiple acquisition schemes on large budget films, similar (but
not identical) restrictions on relief for acquisition expenditure
were introduced for films in production on 2 December 2004 (see
BIM56370).
The transitional rules give two exemptions from application
of the new rules:
A film is in production on 2 December 2004 if principal
photography had started, but the film had not been completed,
before that date. This is the main exemption and if a film meets
this test then there is no need to consider the next test.
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.
A film is
completed when it is first in a form in which it
can reasonably be regarded as ready for copies of it to be made and
distributed for presentation to the general public. This time is
also well understood and is likely to be well documented.
In either date cannot be agreed, you should refer the case to
CT&VAT (Technical).
This test is only relevant for films which were not in
production before 2 December 2004.
In order to satisfy this test the person who incurs the
expenditure must have entered a contract before 2 December under
the terms of which he had an unconditional obligation to incur the
expenditure and had no choice other than to incur that expenditure.
For this purpose the legislation regards a person as having
an unconditional obligation where:
This test is most likely to be relevant where a film has already
been completed before 2 December 2004 and the money already spent
on the production or acquisition, but where the claim is not made
until 2 December 2004 or later.
In practice it is unlikely that there will be many other
situations where a person has an unconditional obligation to incur
expenditure on a film where principal photography has not yet
commenced. The ‘person’ seeking tax relief under
Section 42 is almost invariably a film financier – usually a
partnership of wealthy individuals or a subsidiary of a bank -
whose incentive to invest in the film arises from that tax relief.
Most well drafted agreements are therefore likely to contain a
‘change of law’ clause (usually found amongst
conditions precedent) which allows a person the option to withdraw
from the obligation to incur expenditure if there is a change in
the relevant legislation. As there was a change in the law with
effect from 2 December, the unconditional obligation test would not
be met in this situation.
However, not all persons with such an obligation will
necessarily be exempted from the new legislation. If the person who
had an unconditional obligation before 2 December 2004 makes a
claim after another person who did not have such an obligation,
then he will not be able to claim relief under Section 42. This
condition is necessary as otherwise a person without an obligation
to incur expenditure would still be able to double dip providing a
person who had a pre-existing obligation at 2 December 2004 agreed
to delay his claim.
The unconditional obligation must relate to all of the
expenditure incurred by the claimant on the production or
acquisition of the film. So, if a person has an obligation before 2
December 2004 to incur a certain amount of expenditure but
subsequently incurs more than this, then none of the expenditure is
deemed to have been made under an unconditional obligation (see
FA05/SCH3/PARA1 (9) and FA05/SCH3/PARA32 (3)).
See
BIM56375 for examples of how the
transitional rules work.
