CREC038000 - Taxation: matching income to expenditure

Section 1179BB Corporation Tax Act (CTA)听2009听

Chapter 2 Part 14A CTA 2009 sets out how the profits and losses of a separate production听trade are calculated for tax purposes.听

The method is modelled on the way in which profits are recognised听in construction contracts (or long-term contracts). This means recognising听expected income in line with the state of completion of the production, as measured by the proportion of total costs to date that has been expended.听

It operates听by:听

  • calculating what proportion of the production's estimated total costs have been incurred (and are reflected in work done) within each accounting period, and听

  • allocating听the pro诲耻肠迟颈辞苍鈥檚 estimated total income to each period in similar proportions.听

This method will adjust for both changes to the estimated total income from the programme, (for example, sale of further rights) and to changes in the estimated total cost (due, for example, to a change of plans during shooting听or testing).听

In the calculation:听

  • the estimated total cost of the production will be the expected cost of making the production, plus any expected exploitation costs (CREC037100), and听

  • the听estimated total income will be all the expected income from the production听(CREC036100).听


Estimated costs and income听

A production company听may need to estimate both total expected costs and total expected income to be able to operate听the formula to determine听taxable profits or losses.听

Where actual income and costs are known, this estimate is not necessary. For example, if a production听has been sold and no rights to further income from that production retained, then the income is the proceeds of the sale.

Estimated total costs听

The estimated total cost will generally be听the total estimated allowable costs shown by the most recent and reliable estimate in the production budget, plus a realistic estimated cost to the production听company of exploiting any rights in the production that it retains.听

Budgets of this sort are generally maintained听by companies both as a management tool and because their existence is generally a听condition imposed by the completion guarantor and the financiers or commissioning broadcaster.

Estimated total income听

The estimated total income from the production听is the total income, received or expected, from the production听over its life.听

The estimate of income should include income from all sources (CREC036100),听but it should only include income that the production听company is in a position to realistically expect and quantify.听This does not include hypothetical or potential income merely because a prediction of that income has been made such as by a sales agent. The realistic expectation of income is closer to that included in the statutory accounts.听

So,听the estimated income should broadly include that income which the company would be confident enough to include in its Profit & Loss account were the production to be treated as being on revenue听account.听

Whether any particular contract or agreement gives the company rights such that income should be recognised听under these rules will be a question of fact. See below for further detail of how estimates are to be made.

Calculating total income earned at the end of an accounting period听

At the end of any accounting period,听the amount of income treated as earned is calculated听using the formula听

(C/T)听x I听

where:听

  • C = total to date of costs incurred on the听production听and reflected in work done听

  • T = estimated total costs of the production听

  • I = estimated total income of the production听

See CREC039000 for examples of these calculations.听