CREC039100 - Taxation: examples: single & two-period productions
The following two examples show how Chapter 2 Part 14A Corporation Tax Act (CTA) 2009 applies in calculating the profits/losses for the separate production trade of a production company over one and two accounting periods.
In the examples, none of the costs are disallowed under the Taxes Acts.
The examples show how expenditure credits should be added to profit/loss once it has been calculated. Round numbers have been used for ease – in reality, the amount of credit due will vary depending on how much expenditure is qualifying expenditure, and the proportion of UK expenditure. For guidance on how to calculate the amount of expenditure credit due for an accounting period, please see Chapter 6 of this manual.
The examples are based on a TV production; the same principles apply to films and video games.
Example 1
A production company is commissioned by a broadcaster to make a television programme for a budget of £1.52m and agrees to sell all the rights in the programme to the broadcaster for £1.55m. The television programme is completed within a single accounting period.
The production company intends to claim an Audio-Visual Expenditure Credit (AVEC) for the production, so the separate production trade rules apply.
First, find the profit or loss of the separate trade for the period
For tax purposes, the production company’s profit from the trade of producing the programme (before expenditure credit) is £1.55m - £1.52m = £30k.
Second, add the expenditure credit to the profit or loss for the period
The company calculates that the value of the expenditure credit for the period is £400k. This is added to the trade profit to give profits chargeable to tax of £430k.
Example 2
The situation is similar to Example 1 but the programme takes longer to complete.
The rights sale is still agreed at £1.55m. At the end of the first accounting period, the production company has spent £1m of the £1.52m budget, and in the second period it spends the remaining £520k. Again, the separate trade rules apply because the company wishes to claim AVEC.
The profits in each accounting period are calculated as follows:
Period 1
- |
Amount (£) |
Notes |
Expenditure incurred by end of period |
1,000,000 |
Out of total expected costs of £1.52m |
Income treated as earned by end of period |
1,020,000 |
Expected total income is £1.55m. The extent to which this is allocated to Period 1 mirrors the extent to which total expected costs fall within Period 1. |
Trade profit |
20,000 |
- |
Plus expenditure credit |
270,000 |
This must be added on at the end – it should not be included as income in the (C/T) x I formula |
Profit chargeable to tax |
290,000 |
- |
Period 2
- |
Amount (£) |
Difference (£) |
Notes |
Expenditure incurred by end of period |
1,520,000 |
- |
- |
Increase in expenditure incurred over previous period |
- |
520,000 |
£1.52m less £1m |
Income treated as earned by end of period |
1,550,000 |
- |
(C/T) x I = (£1.52m/£1.52m) x £1.55m = £1.55m |
Increase in income treated as earned over previous period |
- |
530,000 |
£1.55m less £1.02m |
Trade profit |
- |
10,000 |
- |
Plus expenditure credit |
- |
140,000 |
Added at end, as in Period 1 |
Profit chargeable to tax |
- |
150,000 |
- |