CREC035000 - Taxation: profit/loss calculation
Chapter 2 Part 14A Corporation Tax Act (CTA)听2009听
For the purposes of the Audio-Visual and Video Games Expenditure Credit (AVEC and VGEC):听
the production of each film, TV programme听and video game is treated as a separate trade (CREC031000), and听
the profits or losses of producing a film, TV programme听or video game are on revenue account听(CREC037100), with听
costs debited as they are incurred听(CREC037200), and听
income credited as it is earned (on a prescribed estimated basis if necessary) (CREC036200).听
Expenditure is deductible earlier than would generally be听the case if the deduction had to await disposal, or part disposal, of a capital asset. This is particularly relevant for any production company that retains听the rights to a production. The company may mainly receive听exploitation income against which the cost of creating the asset might not otherwise be set.听
The method of calculating profits or losses for tax purposes of the deemed听separate production trade broadly听follows the model provided by section 13 of FRS102. This sets out the principles and methodology听for recognising听income and profit arising on construction contracts (or long-term contracts) as activity progresses.听
Construction contracts are defined in FRS102 as:听
`A contract specifically negotiated for the construction of an asset (or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use).鈥�听
The method set out in FRS102 calculates and spreads the profits over the lifetime of a project and recognises听income and expenditure in line with the state of completion of the project. FRS102 envisages alternative methods for doing this depending on whether the work done can be independently valued or whether the proportion of the budget spent provides the best measure of completion.听听
In film, television and video game听production, the total budget for the production听is听generally听agreed听at the outset and costs are then carefully monitored听and controlled to ensure delivery of the production within that budget.听
In contrast, the income that the production is capable of generating can be more uncertain.听This is particularly true where the production has not been commissioned by the person to whom all the rights will be sold,听and the production company retains听rights which it can sell or otherwise exploit.听
Consequently, taxable profits are calculated by apportioning the total expected income to the degree of completion听of the production,听as measured by the proportion of total expenditure incurred and reflected in work done (CREC038000).听
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Calculation of profit or loss听鈥� section 1179BB CTA 2009听
First period of account after trading begins听
In the first period of account following the commencement of trading there are no costs reflected in work done that are attributable to a preceding accounting period because any preliminary听expenditure is treated as work of the first accounting period (CREC034000).听
The expenditure to be taken into account听as a debit in calculating the taxable profit is the expenditure of the first period that is reflected in the state of completion of the production听(CREC037200). The income to be taken into account听as a credit in calculating the taxable profits of the first accounting period is the income that is treated as earned at the end of the accounting period using the formula in section 1179BB 鈥� see CREC038000.听
For those productions which are completed within a听single period and then sold, this will be the normal method for calculating the profit or loss attributable to the production.听
Please see CREC039000 for an example.听
Subsequent听periods of account听
In subsequent听periods of account,听the profit for the period is calculated by comparing the further work done measured by the additional听expenditure and the increase, or decrease, in the income treated as earned by the production.听
The expenditure to be taken into account听as a debit in calculating the taxable profit is the expenditure to date, reflected in the state of completion of the听production, less the expenditure to date at the end of the previous听accounting period. This gives the expenditure for听the current period.听
The income to be taken into account听as a credit in calculating the taxable profits is the income that is treated as earned at the end of the accounting period using the formula in s1179BB (CREC038000), less the income treated as earned at the end of the previous听accounting period. This gives听the income treated as earned in the current period.听
Please see CREC039000 for an example.听
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Expenditure credit added to profit听or loss听鈥� section 1179CB CTA 2009听
Audio-visual and video games expenditure credits are treated as taxable credits听of the production company.听However, they are calculated independently of听other income of the separate trade and do苍鈥檛听count as income for the purposes of the profit/loss calculation in section 1179BB CTA 2009.听
This means that, to reach profits chargeable to Corporation Tax for a separate production trade, the production company should calculate the profit/loss of the separate trade in accordance with听section 1179BB,听not including the credit听in the income formula,听then add the credit on as income at the end.听
Please see CREC039000 for examples of how to do this.听
Note that the expenditure credit must be recognised听as a taxable credit by the production company itself. The production company cannot assign the credit to another company听outright. It can, however, surrender some of the value of the credit to other companies as part of the credit redemption process 鈥� see CREC070100 for that.听
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Non-coincident accounting periods听
Profit/loss is calculated for each period of account. This may not coincide with each accounting period. This could happen if, for example, the period of account is over 12 months long and is covered by multiple accounting periods.听CREC062000 explains what to do in this scenario.