CREC031100 - Taxation: separate trade: introduction
Chapter 2 Part 14A Corporation Tax Act (CTA) 2009
If a company intends to claim an expenditure credit under Part 14A CTA 2009 for a film, TV programme or video game, the production of each film, TV programme or video game is treated as a separate trade. This means that profits and losses should be calculated separately for each production, and the rules applying to a trade should be applied to each production.
In producing their statutory accounts, production companies may account for their costs and income in a number of ways. This will vary according to their operating model and how they think best represents a true and fair view of the business. The rules in Chapter 2 Part 14A CTA 2009 therefore set out a consistent approach to calculating taxable profits of production companies.
This approach is important when considering relief for losses. There are special provisions which restrict the ways in which losses arising from a separate production trade can be used (CREC040100) and this will vary depending on whether the production has been completed and the trade has ceased (CREC031300).
The Part 14A CTA 2009 basis applies a revenue treatment to income and to certain types of expenditure that would otherwise be treated as capital expenditure (CREC035000).
Election to apply separate trade treatment – section 1179B CTA 2009
If a company intends to claim Audio-Visual Expenditure Credit (AVEC) or Video Games Expenditure Credit (VGEC) in relation to a production, it must elect to apply the separate trade rules. It may make this election in its tax return, by accounting for the production as a separate trade in its Corporation Tax computations.
The accounting period covered by the tax return in which an election is made is called the ‘opt-in period’.
AVEC and VGEC are not available to companies which do not apply the separate trade rules.
What counts as a separate production – film
The definition of a film can link a number of parts of a self-contained work and treat them as a single film (CREC021000) with a single separate trade.
What counts as a separate production – TV programmes
A TV programme includes all episodes and series produced within an individual contract for that programme. There can be a number of parts of a self-contained work, and these are treated as a single programme (CREC022000) with a single separate trade.
Television programmes are often commissioned by broadcast companies which agree to buy exclusive time-limited transmission rights within their territory. Following the Communications Act 2003, a UK production company retains the overarching rights to a programme commissioned by a UK public service broadcaster. The production company can exploit the programme outside the boundaries of, or after the expiry of, the exclusivity agreement.
Programmes may be commissioned as individual episodes or as a series. Generally, production companies will contract for and maintain detailed management accounts for the series. For the purposes of the tax rules, that series will treated as a single programme because it will be contracted for delivery as a self-contained work.
A long-running series will normally be contracted for (or `picked up’) in discrete seasons for commercial reasons. The normal rules will apply to treat each season contract as a separate programme.
Where a programme is performing well, it might be that additional episodes are commissioned part-way through a season or series. If these episodes are commissioned by an extension or amendment to the existing contract, then the production of the additional episodes may be considered as part of the existing trade. This will be considered on the basis of the facts of each case.
What counts as a separate production – video games
A video game includes the core programme and any additional software produced within an individual contract for that video game. There can be a number of different parts of a game which are supplied separately, and these are treated as a single video game (CREC027000) with a single separate trade.
Video games are usually sold directly by the development company to the public. This may be done in a number of ways, either stored on a physical media or via the internet. The development company usually retains the rights to the video game, though they may sell the rights at a future time. This is common with ‘classic games’.
Video games are typically developed as stand-alone products. However, it is now common to produce enhancements in the form of additional levels and features which are added to the core programme. This is particularly common practice for games played over the internet or those that are downloaded as apps.
Depending on the facts, the enhancements may be considered to be part of the original video game trade or a new video game trade in its own right. This will normally depend on whether there are any improvements made to the underlying game engine.
Where additional levels are created and released as an ‘expansion pack’, but do not fundamentally change the underlying game code or functionality, these will be typically seen as part of the original game. Future costs are therefore part of the same trade. This is simply an increase in content made available through the game.
However, it is conceivable that such development goes into an expansion pack that it could be regarded as a new game. Also, a sequel may involve such limited development that it merely represents a continuation of the same trade. Each case will be decided by its particular facts.
Transfer of separate production trade
Separate production trades cannot be transferred between companies. Once a separate production trade has commenced, it is impossible for a second company to succeed to the trade in relation to the production. Please see CREC045000 for more details.