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The following example illustrates how a film production company (FPC) that sustains a surrenderable loss can surrender that loss in return for a payable tax credit (FPC55100). In this case the production runs over two periods.

As with the additional deduction (FPC55050), the calculation of the payable credit is cumulative where the film takes more than one period to complete.

Example

An independent film production company (FPC) makes a film with total core expenditure of £10³¾, all of which UK expenditure. The film was commissioned by an unrelated distributor which pays £9m for it.

The film takes two periods of account to make, and the FPC incurs expenditure of £4³¾ in the first period and £6³¾ in the second. The commissioning distributor pays the FPC £5m in the first period and the remaining £4³¾ in the second.

In order to establish the profit or loss made in each accounting period, the FPC should apply the income recognition rules set out in FA06/SCH4, rather than the amount which the distributor actually pays during each period (FPC20220). In this example, this is calculated on the basis of the proportion of total expenditure incurred in each period multiplied by the estimated total income.

First period

In the first period, estimated income is £3.6³¾ (£4³¾/£10³¾ x £9m). Of the total core expenditure of £4³¾, 80% is eligible for FTR, giving an additional deduction of £3.2³¾ (£4³¾ x 80%) and total deductions in the period of £7.2m (£4³¾ plus £3.2³¾).

The post-FTR trading loss in the period is therefore £3.6³¾ (estimated income of £3.6³¾ less deductions of £7.2m). Because this is more than the £3.2³¾ additional deduction, only £3.2³¾ of the loss can be surrendered, giving a tax credit of £0.8³¾ (25% x £3.2³¾).

Second period

In the second period, total expenditure to date is £10³¾, giving an additional deduction of £8³¾ (£10³¾ x 80%), less the £3.2³¾ additional deduction claimed in the previous year, or £4.8³¾. Total estimated income is £9m, of which £3.6³¾ has already been accounted for, giving estimated income for the period of £5.4³¾. Total deductions for the year equal £10.8m (core expenditure of £6³¾ plus the additional deduction of £4.8³¾).

The trading loss for the period is therefore £5.4³¾ (estimated income of £5.4³¾ less deductions of £10.8m). Adding the loss previously surrendered gives £8.6m, which is more than the total enhanceable expenditure to date, of £8³¾ so only £4.8³¾ can be surrendered, giving a tax credit of £1.2³¾ (25% x £4.8³¾).

Cumulative effect

This means the tax credit is worth £2m over the two years (£0.8³¾ plus £1.2³¾), the same as it would have been had the film been made in a single year.

Summary

-	Period 1	Period 2
Expenditure incurred to end of period (all UK)	£4³¾	£10³¾
Enhanceable Expenditure (in this case 80% of total core)	£3.2³¾	£8³¾
Additional deduction to end of period (100% of enhanceable expenditure)	£3.2³¾	£8³¾
Less additional deduction claimed for earlier period(s)	-	(£3.2³¾)
Additional deduction due for the period	£3.2³¾	£4.8³¾
Estimated total income attributed to period	£3.6³¾	£5.4³¾
Expenditure attributed to period	£4³¾	£6³¾
Additional deduction due for the period	£3.2³¾	£4.8³¾
Post-FTR trading profit (loss) for the period after additional deduction	(£3.6³¾)	(£5.4³¾)
Surrenderable loss (lower of trading loss for the period and enhanceable expenditure)	(£3.2³¾)	(£4.8³¾) (assuming £3.2³¾ surrenderable loss of Period 1 is surrendered for payable credit)
Tax credit	£0.8³¾	£1.2³¾