CREC035000 - Taxation: profit/loss calculation
Chapter 2 Part 14A Corporation Tax Act (CTA) 2009
For the purposes of the Audio-Visual and Video Games Expenditure Credit (AVEC and VGEC):
the production of each film, TV programme and video game is treated as a separate trade (CREC031000), and
the profits or losses of producing a film, TV programme or video game are on revenue account (CREC037100), with
costs debited as they are incurred (CREC037200), and
income credited as it is earned (on a prescribed estimated basis if necessary) (CREC036200).
Expenditure is deductible earlier than would generally be the case if the deduction had to await disposal, or part disposal, of a capital asset. This is particularly relevant for any production company that retains the rights to a production. The company may mainly receive exploitation income against which the cost of creating the asset might not otherwise be set.
The method of calculating profits or losses for tax purposes of the deemed separate production trade broadly follows the model provided by section 13 of FRS102. This sets out the principles and methodology for recognising income and profit arising on construction contracts (or long-term contracts) as activity progresses.
Construction contracts are defined in FRS102 as:
`A contract specifically negotiated for the construction of an asset (or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use).’
The method set out in FRS102 calculates and spreads the profits over the lifetime of a project and recognises income and expenditure in line with the state of completion of the project. FRS102 envisages alternative methods for doing this depending on whether the work done can be independently valued or whether the proportion of the budget spent provides the best measure of completion.
In film, television and video game production, the total budget for the production is generally agreed at the outset and costs are then carefully monitored and controlled to ensure delivery of the production within that budget.
In contrast, the income that the production is capable of generating can be more uncertain. This is particularly true where the production has not been commissioned by the person to whom all the rights will be sold, and the production company retains rights which it can sell or otherwise exploit.
Consequently, taxable profits are calculated by apportioning the total expected income to the degree of completion of the production, as measured by the proportion of total expenditure incurred and reflected in work done (CREC038000).
Calculation of profit or loss – section 1179BB CTA 2009
First period of account after trading begins
In the first period of account following the commencement of trading there are no costs reflected in work done that are attributable to a preceding accounting period because any preliminary expenditure is treated as work of the first accounting period (CREC034000).
The expenditure to be taken into account as a debit in calculating the taxable profit is the expenditure of the first period that is reflected in the state of completion of the production (CREC037200). The income to be taken into account as a credit in calculating the taxable profits of the first accounting period is the income that is treated as earned at the end of the accounting period using the formula in section 1179BB – see CREC038000.
For those productions which are completed within a single period and then sold, this will be the normal method for calculating the profit or loss attributable to the production.
Please see CREC039000 for an example.
Subsequent periods of account
In subsequent periods of account, the profit for the period is calculated by comparing the further work done measured by the additional expenditure and the increase, or decrease, in the income treated as earned by the production.
The expenditure to be taken into account as a debit in calculating the taxable profit is the expenditure to date, reflected in the state of completion of the production, less the expenditure to date at the end of the previous accounting period. This gives the expenditure for the current period.
The income to be taken into account as a credit in calculating the taxable profits is the income that is treated as earned at the end of the accounting period using the formula in s1179BB (CREC038000), less the income treated as earned at the end of the previous accounting period. This gives the income treated as earned in the current period.
Please see CREC039000 for an example.
Expenditure credit added to profit or loss – section 1179CB CTA 2009
Audio-visual and video games expenditure credits are treated as taxable credits of the production company. However, they are calculated independently of other income of the separate trade and don’t count as income for the purposes of the profit/loss calculation in section 1179BB CTA 2009.
This means that, to reach profits chargeable to Corporation Tax for a separate production trade, the production company should calculate the profit/loss of the separate trade in accordance with section 1179BB, not including the credit in the income formula, then add the credit on as income at the end.
Please see CREC039000 for examples of how to do this.
Note that the expenditure credit must be recognised as a taxable credit by the production company itself. The production company cannot assign the credit to another company outright. It can, however, surrender some of the value of the credit to other companies as part of the credit redemption process – see CREC070100 for that.
Non-coincident accounting periods
Profit/loss is calculated for each period of account. This may not coincide with each accounting period. This could happen if, for example, the period of account is over 12 months long and is covered by multiple accounting periods. CREC062000 explains what to do in this scenario.