188ÌåÓý

Recognition of expenditureÌý

There are rules for determining when expenditure on production is recognisedÌýfor the purposes of the production company’s basic tax computation.ÌýThese are intended to prevent the artificial inflation of the actual level of production expenditure through the inclusion of deferred fees or other contingent costs, such as participations, which might never arise in practice.Ìý

Under these rules,Ìý

Chapter 3 of this manual explains how to apply these rules.Ìý

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Unpaid amountsÌý

Costs which remainÌýunpaid four months after the end of the accounting period in which they are incurred are excluded expenditure, meaning they do not count towards the amount of expenditure credit due to the company. That is the case even ifÌýthere is an unconditional obligation for them to be paid in the future, or the company plans to pay them within the 4-month window but fails toÌýdo so.ÌýThe legislation is in sections 1179DT (for film and TV) and 1179FL (for video games) of the Corporation Tax Act 2009.Ìý

These costs may only be included in relevant global expenditure for the accounting period in which they are eventually paid, or, if they are paid within 4 months of the end of the pervious period, the period before they are eventually paid.Ìý

These costs include deferments or contingent fees which remain unpaid four months after the end of the period.ÌýIt does not matter that theyÌýare subject to an unconditional obligation to pay.

While unpaid amounts do not count as relevant global expenditure, they should still be recognised in the profit/loss calculation for the separate production trade, provided they meet the general requirements for recognising expenditure.

ExampleÌý

A video game development company (VGDC) isÌýcommissioned to produce a VGEC-qualifying video game. Development costs (all UK) are £500°ì. The video game is completed within a single accounting period (Period 1).Ìý

The development agreement provides that the VGDC will be paid:Ìý

A key subcontractor has an agreement with the VGDC that if the target for download figures is met, he will receive an additionalÌý£40,000 from the VGDC.Ìý

The contingent receipt of £50,000 is too uncertain to bring intoÌýthe calculation of the video game’s profits or losses until download figures are known.Ìý

Download targets are met towards the end of Period 2. At that pointÌýthe additionalÌý£50,000 is treated as earned and brought into the calculation of profit or loss for Period 2.Ìý

The obligation to pay the subcontractor is also recognised in Period 2Ìýfor the purposes of calculating the profits or losses of the separate video game tradeÌýunder s1179BB CTA 2009.Ìý

However, the VGDCÌýdoes not receive theÌý£50,000Ìýpayment, and so does not pay out the £40,000 due to the subcontractor,Ìýuntil midway through Period 3. This is more than four months after the end of Period 2.Ìý

Therefore, the £40,000 is excluded expenditure and is not counted towards relevant global expenditure in Period 2 for the purposes of calculating the expenditure credit. It is only included in relevant global expenditure in Period 3.ÌýThis means that no expenditure credit is due in respect of the expenditure until Period 3.Ìý