CREC037100 - Taxation: expenditure: nature
all the expenditure on producing the film, TV programme or video game, and
expenditure on activities to exploit the production. This can arise where rights are retained by the production company.
The legislation is in section 1179DX CTA 2009 for films and TV programmes, and section 1179FP for video games.
The normal rules determining whether particular items are allowable for tax purposes in computing the profits of a trade still apply (see BIM42051 onwards).
Capital expenditure – section 1179BE CTA 2009
Expenditure which would otherwise be treated as capital because it relates to the creation of the production (rights in which would be reflected as an asset on the balance sheet) is treated as revenue expenditure.
This treatment extends only to costs that relate to the creation of an asset (the qualifying film, TV programme or video game). It does not apply to expenditure on the acquisition of plant and machinery, since that would be capital regardless of the creation of the production. This includes (but is not limited to) cameras, lighting equipment, computers and software with an enduring benefit.
Capital expenditure that is not within the scope of section 1179BE is prohibited as a deduction for tax purposes by section 53 CTA 2009. Capital allowances will be available where appropriate.
Interaction with other tax regimes
The rules in Chapter 2 Part 14A CTA 2009 take precedence over the intangibles regime for expenditure which is related to making the film, TV programme or video game (section 807A CTA 2009).
Where income or expenditure is not related to making the production and is subject to a specific tax regime (for example because it is proper to the loan relationships or intangibles regimes), the computational rules in those regimes will take priority, as they do for other trades. Any trading debit or credit arising from those regimes will then be brought into account in addition to those for Part 14A.
For more information on the loan relationships legislation in particular, see CFM30000 onwards.
Example
Company A is carrying on a trade in relation to a video game. In the year, income from the video game to be brought into account as a credit is £200,000. Costs of the video game to be brought into account as a debit are £150,000, which include £5,000 spent on entertaining. The video game is financed by a loan on which interest of £10,000 is payable. The cash from the loan is deposited in the bank and interest of £5,000 is receivable.
The credits and debits for the year are therefore:
- |
Credits (£) |
Debits (£) |
Income from video game |
200,000 |
- |
Production expenditure |
- |
150,000 |
Interest received |
5,000 |
- |
Interest paid |
- |
10,000 |
The loan is a trading loan relationship while the deposit with the bank is a non-trading loan relationship. The debit for interest paid is therefore deducted in computing the profit on the video game-making activity, while the credit for interest received will be a non-trading loan relationship credit and is not part of the separate production trade.
A computational adjustment is needed to disallow the expenditure on entertaining. This gives a net debit for costs of the video game of £145,000.
The computation of the profit or loss on the video game-making activity will therefore be made up of the following debits and credits:
- |
Amount (£) |
Income from video game |
200,000 |
Costs of video game |
(145,000) |
Interest paid |
(10,000) |
Profit |
45,000 |
No double deductions
Expenditure is not deductible under Part 14A CTA 2009 if it has been relieved under the reliefs available for Research and Development (R&D) expenditure (see CIRD80000). Video game development in particular may qualify for R&D, especially where the development involves work on an underlying software engine.
Where expenditure has not been relieved under one of the R&D reliefs, it can be included as a deduction of the separate production trade. However, if that expenditure could theoretically be relieved under one of the R&D reliefs, it is excluded expenditure and does not count towards qualifying expenditure for the Audio-Visual or Video Games Expenditure Credit (AVEC or VGEC). Please see CREC051000.
Interaction of AVEC and VGEC with Research and Development reliefs
Some production companies may be carrying on research and development and or may have claimed research and development (R&D) tax relief in the past. AVEC and VGEC are not State Aids, which means that R&D ‘bubbles’ within film, TV and video game projects are not precluded from receiving any of the R&D tax reliefs and/or expenditure credits.
The R&D legislation on the interaction between the creative industries reliefs and R&D reliefs is in s1040ZA CTA 2009.