188ÌåÓý

The following example shows how Chapter 2 Part 14A Corporation Tax Act (CTA)Ìý2009 applies in calculating the profits/losses for the separate production trade of a production company whenÌýwork on theÌýproduction spans several years.Ìý

The example is based on aÌýproduction company making an animated film. Animated films, and those using computer-generated imagery (CGI), may take a number ofÌýyears to complete and may have a non-linear cost profile.Ìý

Where other films, TV programmes and video games take several years to complete, the same principles apply as shown in the example.Ìý

In the example, none of the costs are disallowed under the Taxes Acts.Ìý

TheÌýexample shows how expenditure credits should be added to profit/loss once it has been calculated. Round numbers have been used for ease â€� 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.Ìý
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ExampleÌý

An animation company makes a film that costs £30mÌýand takes 4 years to complete. The cumulative costs at the end of each accounting period are:Ìý

The company finances the film by selling some rights to a distributor for £20mÌýat the start of film production. Further rights are sold for £10mÌýin Period 2 and £2mÌýin Period 4. On completion, the residual rights are sold for £2mÌýin Period 5.Ìý

Total costs are therefore £30m, with totalÌýincome of £34 million, giving an overall profit of £4mÌý(before expenditure credits).Ìý

Unlike the examples in CREC039100 and CREC039200, where a contract wasÌýagreed for the sale of the production as a whole (so that, although the payments are received in stages, the overall amount is certain, and must be taken into account from the start),Ìýwe now have a number of separate sales of rights throughout the project.Ìý

Until each sale has been agreed, it is not included in estimatedÌýtotal income inÌýthe (C/T) x I formula.ÌýThis means the incomeÌýis not reflected in the profit/loss until the company can reasonably expectÌýto receive it. This judgement about the amount of income to include in totalÌýestimated income needs to be made at the end of each period.

The calculation of profits for each accounting periodÌýis as follows:Ìý

Period 1

No further rights are sold in this period, so the estimated total incomeÌý(I)ÌýremainsÌýat £30m.ÌýEstimated total costs (T) are £30m, of which £25m are incurred by the end of the period (C).Ìý

Further rights worth £2m are sold in this period, increasing the estimated total income (I), to £32m. Estimated total costs (T) are £30m, all of which areÌýincurred by the end of the period.ÌýC is therefore £30m.Ìý

The budget for the film was £30m and the eventual income was £34m, giving an overall profit on the film of £4m. If we take the trade profit/lossÌýfor each period â€� that is, profit/lossÌýbeforeÌýadding the expenditure credit â€� we can see that their total matches the overall profit:Ìý