BIM56725 - Film and audio products: avoidance: tax deferral beyond 15 years: examples

On this page references to a claim under ‘Section 42’ should be read as including a claim under F2A92/S42 ( BIM56330) and a claim under that section as amended by F2A97/S48 ( BIM56380), and to the making of a deduction under the equivalent sections at ITTOIA/S138 to ITTOIA/S140.

The following examples illustrate the measures to counter film tax deferral schemes greater than 15 years which are described at BIM56710, BIM56715 and BIM56720.

Example 1

Partnership Z is carrying on a trade of exploiting the master versions of films, and draws up accounts annually to 31 March. It acquires a film for £12m on 1 January 2005 (which is therefore the operative date – see BIM56710). On the same date it leases back the film to the producer under a finance lease for a period of 20 years (the last lease rental payment is due on 31 December 2024). It claims a trading deduction under Section 42 for all of its expenditure on the acquisition of the film for the relevant period ending on 31 March 2005.

Z is entitled to deduct £12m in computing its trading profit for the year ended 31 March 2005. However, at the time of making a claim it has entered a deferred income agreement in respect of that film. That agreement was entered into on or after 2 December 2004. FA05/S60 therefore applies so that Z is deemed to receive income from the trade in the amount of the excess relief (BIM56715) which is:

D x [1 – (T1 ÷ T2)],

where:

• D is £12m,
• T1 is the number of days in the period of 15 years from 1 January 2005, and
• T2 is the number of days in the period of 20 years from 1 January 2005.

For simplicity here we will carry out the calculation in whole years, which gives excess relief of £3m.

Z will be deemed to have incurred additional expenditure of £3m, 15 years and one day after 1 January 2005, if it is still carrying on the same trade at that time: that is, on 2 January 2020. This expenditure can be deducted under F2A92/S40B (see BIM56215 and BIM56230) thereafter.

Example 2

Partnership Z amends the terms of the finance lease on 31 March 2006, extending the period of the lease to 25 years, so that the last lease rental payment is now due on 31 December 2029. Z is deemed to have entered a new deferred income agreement.

As the lease term has been extended and relief has already been claimed, the claw back provisions at ITTOIA/S142C will apply (see BIM56720). Z is deemed to have received an amount of income, equal to the net excess amount, from its trade in the relevant period that it entered into the new (amended) deferred income agreement, namely the year ended 31 March 2006.

The net excess amount is given by the formula:

D x [1 – (T1 ÷ T2)] – RA,

where:

• D is £12m,
• T1 is the number of days in the period of 15 years from 1 January 2005,
• T2 is the number of days in the period of 25 years from 1 January 2005, and
• RA is the excess relief already charged – and is equal to £3m (see example 1).

Again, for simplicity making the calculation in whole years, the net excess amount is £1.8m.

Z is deemed to have received income from its trade of £1.8m in the year ended 31 March 2006.

Z will be deemed to have incurred a further amount of additional expenditure of £1.8m, 15 years and one day after 1 January 2005, if it is still carrying on the same trade at that time: that is, on 2 January 2020. This will bring the total expenditure deemed to have been incurred on that date to £4.8m. This expenditure can be deducted under F2A92/S40B (see BIM56215 and BIM56230) thereafter.