CREC037100 - Taxation: expenditure: nature

Where the separate trade rules in Chapter 2 Part 14A Corporation Tax Act (CTA)听2009 are applied to a production, the expenditure to be brought into account in calculating the profit or loss will be:听

  • all the expenditure on producing the film, TV programme听or video game, and听
  • expenditure on activities to exploit the production. This can arise where rights are retained听by the production company.听

The legislation is in section 1179DX CTA 2009 for films and TV programmes, and section 1179FP for video games.听

The normal rules determining听whether particular items听are allowable for tax purposes in computing the profits of a trade still apply (see BIM42051听辞苍飞补谤诲蝉).

Capital expenditure 鈥� section 1179BE CTA 2009听

Expenditure which would otherwise be treated as capital because it relates to the creation of the production听(rights in which would be reflected as an asset on the balance sheet) is treated as revenue expenditure.听

This treatment extends only to costs that relate to the creation of an asset (the qualifying film, TV programme听or video game). It听does not apply to expenditure on the acquisition of plant听and machinery,听since听that would be capital regardless of the creation of the production.听This includes (but is not limited to) cameras, lighting equipment, computers听and software with an enduring benefit.听

Capital expenditure听that is not within the scope of section 1179BE听is prohibited as a deduction for tax purposes by section 53 CTA 2009.听Capital allowances will be available where appropriate.

Interaction听with other tax regimes听

The rules听in Chapter 2 Part 14A CTA 2009听take precedence over the intangibles regime for expenditure which is related to making the film, TV programme听or video game (section 807A CTA 2009).听

Where income or expenditure is not related to making the production听and is subject to a specific tax regime (for example because it is proper to the loan relationships or intangibles regimes),听the computational rules in those regimes will take priority, as they do for other trades. Any trading debit or credit arising from those regimes will then be brought听into account in addition to those for听Part 14A.听

For more information on the loan relationships legislation in particular,听see CFM30000听辞苍飞补谤诲蝉.听

贰虫补尘辫濒别听

Company A is carrying on a trade in relation to a video game. In the year, income听from the video game to be brought into account as a credit is 拢200,000. Costs听of the video game to be brought into account as a debit are 拢150,000, which include 拢5,000听spent on entertaining. The video game is financed by a loan on which interest of 拢10,000 is payable. The cash from the loan is deposited in the bank and interest of 拢5,000 is receivable.听

The credits and debits for the year are therefore:

-听

颁谤别诲颈迟蝉听(拢)听

顿别产颈迟蝉听(拢)听

Income from video game听

200,000听

-听

Production expenditure听

-听

150,000听

Interest received听

5,000听

-听

Interest paid听

-听

10,000听

听
The loan is a trading loan relationship while the deposit with the bank is a non-trading loan relationship. The debit for interest paid is therefore deducted in computing the profit on the video game-making activity,听while the credit for interest received will be a non-trading loan relationship credit听and is not part of the separate production trade.听

A computational adjustment is needed to disallow the expenditure on entertaining. This听gives a net debit for costs of the video game of 拢145,000.听

The computation of the profit or loss on the video game-making activity will therefore be made up of the following debits and credits:听

-听

Amount听(拢)听

Income from video game听

200,000听

Costs of video game听

(145,000)听

Interest paid听

(10,000)听

Profit听

45,000听

听
No double deductions听

Expenditure is not deductible under Part 14A听CTA 2009 if it has been relieved under the reliefs available for Research and Development (R&D) expenditure (see CIRD80000). Video game development in particular may听qualify for R&D,听especially where the development involves work on an underlying software engine.听

Where expenditure has not been relieved under one of the R&D reliefs, it can be included as a deduction of the separate production trade.听However, if that expenditure could theoretically be relieved under one of the R&D reliefs, it is excluded expenditure and does not count towards qualifying expenditure for the Audio-Visual or Video Games Expenditure Credit (AVEC听or VGEC). Please see CREC051000.

Interaction of AVEC and VGEC听with听Research and Development reliefs听

Some听production companies听may be carrying on research and development and or may have claimed research and development (R&D) tax relief in the past.听AVEC and VGEC are not State Aids, which means that R&D 鈥榖ubbles鈥� within film, TV and video game projects are not precluded from receiving any of the R&D tax reliefs and/or expenditure credits.听

The R&D legislation on the interaction between the creative industries reliefs and R&D reliefs is in s1040ZA CTA 2009.