CREC039200 - Taxation: examples: costs exceed initial budget
The following example shows how Chapter 2 Part 14A Corporation Tax Act (CTA)听2009 applies in calculating the profits/losses for the separate production trade of a production company when costs increase during production, with the final expenditure exceeding the original estimate.听
In the example, none of the costs are disallowed under the Taxes Acts.听
The听example shows听how expenditure credits should be added to profit/loss once it has been calculated. Round numbers have been used for ease 鈥� in reality, the amount of credit due will vary depending on how much expenditure is qualifying expenditure, and the proportion of UK expenditure. For guidance on how to calculate the amount of expenditure credit due for an accounting period, please see Chapter 6 of this manual.听
The example is听based on a video听game听production; the same principles apply to films and TV programmes.
Example
A video game development company is听commissioned by a third party to make a video game for an agreed budget of 拢1.52m. It also agrees to sell the rights to the game to the commissioner for 拢1.55m.听
At the end of the first accounting period, the development company has spent 拢1m and still expects to complete the game for 拢1.52m. In the second accounting period, the company spends听a further 拢620k, taking it 拢100k over budget.听It anticipates听that it will need to spend another 拢50k in the third accounting period to fulfill the commission.听
The development company completes the game in the third accounting period, spending the estimated further听拢50k. The estimated income remains听the same.听
The development company intends to claim Video Games Expenditure Credits (VGEC) in relation to the game, so it must apply the separate production trade rules.听
The profits in each accounting period are therefore calculated as follows:听
Period 1听
-听 |
Amount听(拢)听 |
Notes听 |
Expenditure incurred by end of period听 |
1,000,000听 |
Out of total expected costs of 拢1.52m听 |
Income treated as earned by end of period听 |
1,020,000听 |
Expected total income of 拢1.55m. The extent to which this is allocated听to Period 1 mirrors the extent to which total expected costs fall within Period 1.听 (C/T) x I = (拢1m/拢1.52m) x 拢1.55m = 拢1.02m听 |
Trade profit听 |
20,000听 |
-听 |
Plus听expenditure credit听 |
270,000听 |
This must be added on at the end 鈥� it should not be included as income in the (C/T) x I formula听 |
Profit chargeable to tax听 |
290,000听 |
-听 |
Period 2
Costs incurred to date听(C) are 拢1m from period 1 plus 拢620k from period 2 = 拢1.62m.听
-听 |
Amount听(拢)听 |
Difference听(拢)听 |
Notes听 |
Expenditure incurred by end of period听 |
1,620,000听 |
-听 |
-听 |
Increase in expenditure incurred over previous听period听 |
-听 |
620,000听 |
拢1.62m less 拢1m听 |
Income treated as earned by end of period听 |
1,504,000听 |
-听 |
(C/T) x I = (拢1.62m/拢1.67m) x 拢1.55m = 拢1.504m听 |
Increase in income treated as earned over previous听period听 |
-听 |
484,000听 |
拢1.504m less 拢1.02m听 |
Trade loss听 |
-听 |
(136,000)听 |
-听 |
Plus听expenditure credit听 |
-听 |
160,000听 |
Added at end, as in Period 1听 |
Profit chargeable to tax听 |
-听 |
24,000听 |
-听 |
Period 3听
All estimated costs have now been incurred, so C and T are both 拢1.67m.听
-听 |
Amount听(拢)听 |
Difference听(拢)听 |
Notes听 |
Expenditure incurred by end of period听 |
1,670,000听 |
-听 |
-听 |
Increase in expenditure incurred over previous听period听 |
-听 |
50,000听 |
拢1.67m less 拢1.62m听 |
Income treated as earned by end of period听 |
1,550,000听 |
-听 |
(C/T) x I = (拢1.67m/拢1.67m) x 拢1.55m = 拢1.55m听 |
Increase in income treated as earned over previous听period听 |
-听 |
46,000听 |
拢1.55m less 拢1.504m听 |
Trade loss听 |
-听 |
(4,000)听 |
-听 |
Plus听expenditure credit听 |
-听 |
17,000听 |
Added at end, as in Period 1听 |
Profit chargeable to tax听 |
-听 |
13,000听 |
-听 |