CREC039300 - Taxation: examples: multi-period production
The following example shows 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 when work on the production spans several years.
The example is based on a production company making an animated film. Animated films, and those using computer-generated imagery (CGI), may take a number of years to complete and may have a non-linear cost profile.
Where other films, TV programmes and video games take several years to complete, the same principles apply as shown in the example.
In the example, none of the costs are disallowed under the Taxes Acts.
The example shows 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.
Example
An animation company makes a film that costs £30m and takes 4 years to complete. The cumulative costs at the end of each accounting period are:
£5m at the end of Period 1
£15m at the end of Period 2
£25m at the end of Period 3
£30m at the end of Period 4
The company finances the film by selling some rights to a distributor for £20m at the start of film production. Further rights are sold for £10m in Period 2 and £2m in Period 4. On completion, the residual rights are sold for £2m in Period 5.
Total costs are therefore £30m, with total income of £34 million, giving an overall profit of £4m (before expenditure credits).
Unlike the examples in CREC039100 and CREC039200, where a contract was agreed for the sale of the production as a whole (so that, although the payments are received in stages, the overall amount is certain, and must be taken into account from the start), we now have a number of separate sales of rights throughout the project.
Until each sale has been agreed, it is not included in estimated total income in the (C/T) x I formula. This means the income is not reflected in the profit/loss until the company can reasonably expect to receive it. This judgement about the amount of income to include in total estimated income needs to be made at the end of each period.
The calculation of profits for each accounting period is as follows:
Period 1
- |
Amount (£) |
Notes |
Expenditure incurred by end of period |
5,000,000 |
Out of total expected costs of £30m |
Income treated as earned by end of period |
3,330,000 |
Expected total income is £20m at this point. The extent to which this is allocated to Period 1 mirrors the extent to which total expected costs fall within Period 1. |
Trade profit/(loss) |
(1,670,000) |
- |
Plus expenditure credit |
1,500,000 |
This must be added on at the end – it should not be included as income in the (C/T) x I formula |
Loss for the period |
(170,000) |
- |
Period 2
Further rights worth £10m are sold in this period, increasing the estimated total income (I), to £30m. Estimated total costs (T) are £30m, of which £15m are incurred by the end of the period (C).
- |
Amount (£) |
Difference (£) |
Notes |
Expenditure incurred by end of period |
15,000,000 |
- |
- |
Increase in expenditure incurred over previous period |
- |
10,000,000 |
£15m less £5m |
Income treated as earned by end of period |
15,000,000 |
- |
(C/T) x I = (£15m/£30m) x £30m = £15m |
Increase in income treated as earned over previous period |
- |
11,670,000 |
£15m less £3.33m |
Trade profit |
- |
1,670,000 |
- |
Plus expenditure credit |
- |
3,120,000 |
Added at end, as in Period 1 |
Profit chargeable to tax |
- |
4,790,000 |
- |
Period 3
No further rights are sold in this period, so the estimated total income (I) remains at £30m. Estimated total costs (T) are £30m, of which £25m are incurred by the end of the period (C).
- |
Amount (£) |
Difference (£) |
Notes |
Expenditure incurred by end of period |
25,000,000 |
- |
- |
Increase in expenditure incurred over previous period |
- |
10,000,000 |
£25m less £15m |
Income treated as earned by end of period |
25,000,000 |
- |
(C/T) x I = (£25m/£30m) x £30m = £25m |
Increase in income treated as earned over previous period |
- |
10,000,000 |
£25m less £15m |
Trade profit |
- |
nil |
- |
Plus expenditure credit |
- |
3,120,000 |
Added at end |
Profit chargeable to tax |
- |
3,120,000 |
- |
Period 4
Further rights worth £2m are sold in this period, increasing the estimated total income (I), to £32m. Estimated total costs (T) are £30m, all of which are incurred by the end of the period. C is therefore £30m.
- |
Amount (£) |
Difference (£) |
Notes |
Expenditure incurred by end of period |
30,000,000 |
- |
- |
Increase in expenditure incurred over previous period |
- |
5,000,000 |
£30m less £25m |
Income treated as earned by end of period |
32,000,000 |
- |
(C/T) x I = (£30m/£30m) x 32m = £32m |
Increase in income treated as earned over previous period |
- |
7,000,000 |
£32m less £25m |
Trade profit |
- |
2,000,000 |
- |
Plus expenditure credit |
- |
1,500,000 |
Added at end |
Profit chargeable to tax |
- |
3,500,000 |
- |
Period 5
The company has incurred no further expenditure, so costs incurred to date (C) and total estimated costs (T) both remain at £30m. The residual rights are sold for £2m in this period, increasing total estimated income (I) to £34m.
- |
Amount (£) |
Difference (£) |
Notes |
Expenditure incurred by end of period |
30,000,000 |
- |
- |
Increase in expenditure incurred over previous period |
- |
nil |
£30m less £30m |
Income treated as earned by end of period |
34,000,000 |
- |
(C/T) x I = (£30m/£30m) x £34m = £34m |
Increase in income treated as earned over previous period |
- |
2,000,000 |
£34m less £32m |
Trade profit |
- |
2,000,000 |
- |
Plus expenditure credit |
- |
- |
None for this period, as there is no further expenditure |
Profit chargeable to tax |
- |
2,000,000 |
- |
The budget for the film was £30m and the eventual income was £34m, giving an overall profit on the film of £4m. If we take the trade profit/loss for each period – that is, profit/loss before adding the expenditure credit – we can see that their total matches the overall profit:
Period 1: £1,670,000 loss
Period 2: £1,670,000 profit – cumulative position is £nil
Period 3: £nil profit – cumulative position is £nil
Period 4: £2,000,000 profit – cumulative position is £2,000,000 profit
Period 5: £2,000,000 profit – cumulative position is £4,000,000 profit