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 when the company retainsÌýrights in the production which generate further incomeÌýand costs.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

The example is based on a TVÌýproduction; the same principles apply toÌýfilms and video games.Ìý
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ExampleÌý

A TV production companyÌýis commissioned by a broadcaster to make a children’s TVÌýseries for transmission on a UK terrestrial network. The total cost of recording, editing and production is estimated at the outset as being £700,000. The broadcaster contracts to pay £1.5m for the right to broadcast the programmeÌýonce it is completed.Ìý

The production company will retainÌýthe residual rights to exploit the programmeÌýin other territories. It has extensive experience of selling programmes overseas and broadcasters in a number of countries express an interest. Based on its previousÌýexperience of selling similar material, the company anticipatesÌýsales of at least a further £1m,Ìýand further legal costs of £100,000 in securing these contracts. The total estimated expenditure for the programmeÌýis therefore £800,000Ìýat the outset.Ìý

At the end of the first accounting period,Ìýthe company hasÌýspent £900,000 on recording, editing and production and hasÌýcompleted the programme. It has spent £50,000 onÌýnegotiating further contracts overseas butÌýit has not yet secured any.Ìý

When computing its profits for Corporation Tax purposes,Ìýthe production company must estimate total income from the programmeÌýand total costs. At the end of the accounting period,Ìýit has aÌýcontract to sell the UK rights for £1.5m,Ìýthat it has fulfilled at a cost of £900,000. Overseas broadcasters have expressed interest, but this does not give the productionÌýcompany a realistic and quantifiable expectation of income. The estimated total income at the end of the first accounting period is therefore £1.5m.Ìý

The estimated total costs at the outset were £800,000,Ìýbut the programmeÌýactually costÌý£900,000 to make and the company still expects that it is going to incurÌý£100,000 in legal costs to secure the overseas contracts. The total estimated costs are therefore £1m. Of this estimated amount £950,000 is represented in work done: £900,000 on completing the programmeÌýitself, and £50,000 incurred so far on securing overseas contracts.Ìý

The profit forÌýthe accounting period is therefore:Ìý