CREC031100 - Taxation: separate trade: introduction
Chapter 2 Part听14A Corporation Tax Act (CTA)听2009听
If a company听intends to听claim an expenditure credit under Part 14A CTA 2009听for a film, TV programme听or video game, the production of each film, TV programme听or video game is treated as a separate trade. This means that profits and losses should be calculated separately for each production, and the rules applying to a trade should be applied to each production.听
In producing their statutory accounts, production companies may account for their costs and income in a number of ways.听This will vary according to their operating model and how they think best represents听a true and fair view of the business. The rules in Chapter 2 Part 14A CTA 2009 therefore set out a consistent approach to calculating taxable profits of production companies.听
This approach is important when considering relief for losses. There are special provisions which restrict the ways in which losses arising from a separate production trade can be used听(CREC040100)听and this will vary depending on whether听the production has been completed and the trade has ceased (CREC031300).听
The Part 14A CTA 2009 basis applies a revenue treatment to income and to certain types of expenditure that would otherwise be treated as capital expenditure听(CREC035000).听
听
Election to apply separate trade treatment 鈥� section 1179B CTA 2009听
If a company intends to claim Audio-Visual Expenditure Credit (AVEC)听or Video Games Expenditure Credit (VGEC)听in relation to a production, it must elect听to apply the separate trade rules. It may make this election in its tax return, by accounting for the production as a separate trade in its Corporation Tax computations.听
The accounting period covered by the tax return in which an election is made is called the 鈥榦pt-in period鈥�.听
AVEC and VGEC are not available to companies which do not apply the separate trade rules.听
听
What counts as a separate production听鈥� film听
The definition of a film can link听a number of听parts of a self-contained work and treat them as a single film (CREC021000) with a single separate trade.听
What counts as a separate production 鈥� TV programmes听
A TV programme听includes all episodes and series produced within an individual contract for that programme. There can be a number of parts of a self-contained work, and these are treated as a single programme听(CREC022000) with a single separate trade.听
Television programmes are often commissioned by broadcast companies which agree to buy exclusive time-limited transmission rights within their territory. Following the Communications Act 2003, a UK production company retains听the overarching rights to a programme听commissioned by a UK public service broadcaster. The production company can exploit the programme听outside the boundaries of, or after the expiry of, the exclusivity agreement.听
Programmes may be commissioned as individual episodes or as a series. Generally, production听companies will contract for and maintain听detailed management accounts for the series. For the purposes of the tax rules, that series will treated听as a single programme听because it will be contracted for delivery as a self-contained work.听
A long-running series will normally be contracted for (or `picked up鈥�) in discrete seasons for commercial reasons. The normal rules will apply to treat each season听contract as a separate programme.听
Where a programme听is performing well, it might be that additional听episodes are commissioned part-way through a season or series. If these episodes are commissioned by an extension or amendment to the existing contract, then the production of the additional听episodes may be considered as part of the existing trade.听This will be considered on the basis of the facts of each case.听
What counts as a separate production 鈥� video games听
A video game includes the core programme听and any additional听software produced within an individual contract for that video game. There can be a number of听different parts听of a game which are supplied separately, and these are treated as a single video game (CREC027000) with a single separate trade.听
Video games are usually sold directly by the development company to the public. This may be done in a number of ways, either stored on a physical media or via the internet.听The development company usually retains听the rights to the video game, though they may sell the rights at a future time. This is common with 鈥榗lassic 驳补尘别蝉鈥�.听
Video games are typically developed as stand-alone products. However, it is now common to produce enhancements in the form of additional听levels and features which are added to the core programme. This is particularly common practice听for games played over the internet or those that are downloaded as apps.听
Depending on the facts, the enhancements may be considered to be part of the original video game trade or a new video game trade in its own right.听This will normally depend on whether there are any improvements made to the underlying game engine.听
Where additional听levels are created and released as an 鈥榚xpansion pack鈥�,听but do not fundamentally change the underlying game code or functionality, these will be typically seen as part of the original game. Future costs are therefore part of the same trade. This is simply an increase in content made available through the game.听
However, it is conceivable that such development goes into an expansion pack that it could be regarded as a new game. Also, a sequel may involve such limited development that it merely represents听a continuation of the same trade. Each case will be decided by its particular facts.听
听
Transfer of separate production trade听
Separate production trades cannot be transferred between companies. Once a separate production trade has commenced, it is impossible for a second company to succeed to听the trade in relation to the production. Please see CREC045000 for more details.听