188ÌåÓý

Section 1179BB Corporation Tax Act (CTA)Ìý2009Ìý

Where the separate trade rules in Chapter 2 Part 14A CTA 2009 are applied to a production, income is recognisedÌýand expenditure is incurred in line with current accounting principles. This is the case evenÌýwhere the production expenditure would not usually be recognisedÌýonÌýthe profit and loss account because the company is creating a capital asset for exploitation (CREC037100).Ìý

For more details on theÌýmatching of income to expenditure,Ìýsee CREC038000.Ìý

This treatment results in profits being recognisedÌýas production progresses and not just at completion.Ìý

The amount of income to be recognisedÌýat the end of an accounting period is given by a formula (CREC038000). This measures the state of completion of the production by reference to the production expenditure incurred to date compared to the total production expenditure expected to be incurred overall.ÌýFuture income shouldÌýbe discounted before being brought into this formula.Ìý

When the productionÌýis complete,Ìýthere will generally beÌýno further expected expenditure on its development. If the rights in the production are sold outright,Ìýthere will also be no further expenditure on its exploitation. All the known estimated income will have been recognisedÌýand any further income should be recognisedÌýas it is earned.Ìý

If the production is retainedÌýand exploited there will be further expenditure on exploitation.Ìý
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Estimating incomeÌý

The treatment for calculating taxable profits of the productionÌýactivities of a production company may involve estimating the total income and total costs of a film, TV programmeÌýor video game. The rules set out the basis on which such estimates are made.Ìý

The aim of these rules is to ensure that the income that is recognisedÌýis in accordance withÌýthe substance of transactions in the same way that would be expected for statutory accounts.Ìý

To be income, sums should be recognisedÌýusing the same principles that are set out in FRS5 Application Note G and IAS18. These require that revenue should be recognisedÌýas the seller carries out itsÌýcontractual obligations and so earns itsÌýrights to the revenue. This is on the basis that it is probable that the revenue will flow to the company and that the expected revenue can be measured reliably.Ìý

For production companies, the estimate to be made is at the end of the accounting period using all the information available at that time, on a just and reasonable basis and taking into consideration all relevant circumstances. It follows, under the principles in FRS5 and IAS18, that speculative income, where potential buyers have not yet been identified, would not be brought into account.ÌýBut where a seller has entered intoÌýa transaction with a buyer, revenue should be recognisedÌýin accordance withÌýthe substance of that transaction.Ìý

If the revenue does not ariseÌýuntil the occurrence of a critical event, it is not recognisedÌýuntil that event occurs only if the occurrence is outside the control of the seller. The delivery of a completed productionÌýis regarded as an event that is within the seller’s control, andÌýdoes not delay recognitionÌýof income. Similarly, the mere fact that the buyer has to accept the completed productionÌýdoes not delay recognition.Ìý

Speculative productionsÌý

While many productions are commissioned and will have a measure for estimated total income from the outset, some productionsÌýapplying the Chapter 2 PartÌý14A CTA 2009 legislationÌýmay be highly speculative. There may be little, if any, income that can be brought into account in calculating profits for an accounting period.Ìý

Nevertheless, it is likely that there will be a reliable estimate for the estimated total cost and so the costs to be debited in each accounting period will be the additionalÌýcosts reflected in the work done,Ìýwhile the income may well be zero.Ìý

Example 1 â€� sales forecastsÌý

At the start of development,Ìýincome and expenditure for Video GameÌý1Ìýis estimated as:Ìý

ÌýAs development commences, the income to be brought into the computations under the PartÌý14AÌýrules is the money which the development companyÌýexpects to receiveÌýor already has; this is the grants and equity investments of £50°ì,Ìýplus the pre-orders of £100°ì.Ìý

The forecast of £120°ì is the company’s judgement of how much income might be expected if the remaining rights are sold. It is speculative, with no buyer identified. The estimate, in this instance, is not considered to be sufficiently just and reasonable for the purposes of Part 14AÌýCTA 2009 and is not included in the company’s estimated income.Ìý

Example 2Ìýâ€�Ìýcontracts under negotiationÌý

A TV production company is commissioned by a major broadcaster to make a programmeÌýfor broadcast on a national channel. It is estimated that the programmeÌýwill take three years to make and will have a total development budget of £1,500,000,Ìýwhich will be incurred on a straight-lineÌýbasis over the three-year period (i.e.,Ìý£500,000 a year).Ìý

Under the terms of the commission contract, the production company will receive income of £2,100,000 in two equal tranches - the first after 18 monthsÌýand the second on delivery of the programme.Ìý

During the second year of development, the company enters intoÌýnegotiations with a film company for the sale of the film rights in respect of one of the characters in the programmeÌýfor £600,000. Although initial discussions were promising, negotiations fallÌýthrough early in a third year of development and both parties decideÌýnot to proceedÌýwith the deal.Ìý

The negotiations do not give the production companyÌýa realistic and quantifiable expectation of income and the income remainsÌýat £2,100,000. The income isÌýspread over the three years of development in the form of £700,000 per year, following the straight-lineÌýexpenditure of £500,000 per year. This gives taxableÌýincome of £200,000 per year.Ìý

If the negotiations were brought to fruition in the third year, and the contract agreed as described, then the additionalÌýincome of £600,000 would beÌýrecognisedÌýin Year 3.Ìý

Example 3Ìýâ€� speculative productionÌý

A film production company has purchasedÌýthe rights for a book series and hopes to produce a film using them. The total cost of pre-production, shooting, editing, advertisingÌýand exploiting the filmÌýis reliably estimated as £10m. The company has establishedÌýtheatrical release deals for the filmÌýand intends to retainÌýall the underlying rights itself. This includes selling digital copies of the film for home viewing, following the release in cinemas. From the company’s experience of producing similar home releases,Ìýit expects sales of not less than £60m.Ìý

In the absence of contracts to sell the digital copies or the rights, the company has no reliablyÌýpredictable income which it must estimate.Ìý

Consequently, although expenditure on the digital copies needs to be fed into the calculation inÌýChapter 2 Part 14A CTA 2009Ìýand will be deductible, there is no income to bring in until sales are made.Ìý