BIM56380 - Film and audio products: deductions for qualifying films: write-off where production expenditure is £15 million or less

F2A97/S48 and ITTOIA/S139 and S140 (‘Section 48’ relief)

The accelerated rate of deduction for expenditure on the production or acquisition of the master version of qualifying films provided for by F2A92/S42 (‘Section 42’, see BIM56325 onwards) was amended for qualifying films with total production expenditure of £15m or less by F2A97/S48. For IT, this was consolidated into ITTOIA/S139 and S140 for years of assessment 2005/06 onwards, but the relief is still generally referred to as Section 48 relief.

Section 48 piggy backs on Section 42 (although in ITTOIA the relevant sections are separate), and the underlying requirements for Section 48 relief are the same as for Section 42 (see BIM56330). The main differences are detailed below.

Instead of allowing expenditure to be written off over 3 years, Section 48 enables a person carrying on a trade or business that consists of or includes the exploitation of the master versions of films to write off up to 100% of the expenditure incurred on the master version of the film in the relevant period that the film is completed (see BIM56365 for an explanation of what is meant by completed). This is an immediate deduction and, unlike Section 42, the amount that can be deducted does not depend on the length of the relevant period. However, there are a few points to note:

• a person must be carrying on a trade or business (normally the deduction will only be sought for a trade, so in other words trading must have commenced);
• the expenditure must have been incurred in or before the relevant period for which the deduction is sought, so an acquirer cannot deduct expenditure in a period before he has acquired the film.

Section 48 relief only applies to expenditure incurred on or after 2 July 1997 on films completed on or after that date.

Section 48 relief is time limited and is only available for films which commence principal photography (see BIM56365) before 1 April 2006 and are completed before 1 January 2007. On films which meet this criterion, Section 48 relief for acquisition expenditure is only available where the film is acquired before 1 October 2007 (FA05/S58).

Section 48 applies to all qualifying films where the total production expenditure incurred in making the film does not exceed £15million. To prevent films costing more than £15m obtaining relief under Section 48, total production expenditure:

• included (until 2 December 2004) expenditure whenever incurred; this ensured that expenditure incurred before 2 July 1997 or after 2 July 2005 was included in arriving at the £15m limit (originally, Section 48 relief was time limited by when expenditure was incurred rather than the time of principal photography and completion, so this condition also ensured expenditure incurred after the relief expired would be included in total production expenditure); from 2 December 2004 ‘whenever incurred’ is replaced by ‘incurred before 2nd July 1997’ in the legislation as the phrase has no other application;
• includes expenditure whether or not incurred by the claimant, so that if, say, a film is co- produced by two producers, each of whom incurs £10million on production expenditure, relief will not be available under Section 48 because total production expenditure exceeds £15million;
• must include the arm’s length cost where goods or services are provided by a connected party (as defined in ICTA88/S839) at less than the arm’s length amount. Any case where it is considered that the arm’s length rule should be applied should be referred to CT&VAT (Technical).

For films completed on or after 17 April 2002 ( BIM56385), total production expenditure does not include any amounts of production expenditure which, at the time the film is completed:

• has not been paid, and
• is not the subject of an unconditional obligation to pay within 4 months after the date of completion.

Any amounts payable after this will not affect the £15million limit, but also cannot be deducted under Section 48.

Exceptionally, for films completed before 17 April 2002, the payment of deferments or participations (see BIM56385) may take the total production expenditure over £15million after relief has already been given under Section 48. Where this occurs the original relief given should not be withdrawn unless it was clear at the time the relief was claimed that further payments were likely. The additional payments would, however, not be subject to relief under Section 48.

The total production expenditure incurred also sets the limit for relief for acquisition expenditure that can be claimed under Section 48. An acquirer can only obtain relief under Section 48 up to an amount equal to the total production expenditure.

If a person acquires the master negative of a qualifying film for less than £15million where the total production expenditure in making the film is more than £15million no relief is due under Section 48, but may be relieved under Section 42.

Until 2 December 2004 any production or acquisition expenditure incurred on a qualifying film that could not be deducted under Section 48 might be deductible under Section 42 (see BIM56335). However, from 2 December 2004, apart from expenditure exempted by the transitional rules ( BIM56350), any expenditure incurred on a film with total production expenditure of £15million or less, which cannot be relieved under Section 48, can only be relieved under the income matching or cost recovery rules in F2A92/S40B (see BIM56215 and BIM56230). See BIM56355 for examples.

The provisions in FA05/SCH3 preventing double-dipping of the film tax reliefs (see BIM56360 onwards) also apply to relief under Section 48. Before this, FA02/S101 prevented relief under Section 48 for multiple acquisitions of the same film (see BIM56530).

Finally, Section 48 also contains specific rules to determine when expenditure is incurred. Additional anti avoidance measures were also introduced in FA02 to prevent the relief being inflated by deferred expenditure. These rules are described in BIM56385.