CREC039400 - Taxation: examples: retained rights
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 the company retains rights in the production which generate further income and costs.
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.
The example is based on a TV production; the same principles apply to films and video games.
Example
A TV production company is commissioned by a broadcaster to make a children’s TV series for transmission on a UK terrestrial network. The total cost of recording, editing and production is estimated at the outset as being £700,000. The broadcaster contracts to pay £1.5m for the right to broadcast the programme once it is completed.
The production company will retain the residual rights to exploit the programme in other territories. It has extensive experience of selling programmes overseas and broadcasters in a number of countries express an interest. Based on its previous experience of selling similar material, the company anticipates sales of at least a further £1m, and further legal costs of £100,000 in securing these contracts. The total estimated expenditure for the programme is therefore £800,000 at the outset.
At the end of the first accounting period, the company has spent £900,000 on recording, editing and production and has completed the programme. It has spent £50,000 on negotiating further contracts overseas but it has not yet secured any.
When computing its profits for Corporation Tax purposes, the production company must estimate total income from the programme and total costs. At the end of the accounting period, it has a contract to sell the UK rights for £1.5m, that it has fulfilled at a cost of £900,000. Overseas broadcasters have expressed interest, but this does not give the production company a realistic and quantifiable expectation of income. The estimated total income at the end of the first accounting period is therefore £1.5m.
The estimated total costs at the outset were £800,000, but the programme actually cost £900,000 to make and the company still expects that it is going to incur £100,000 in legal costs to secure the overseas contracts. The total estimated costs are therefore £1m. Of this estimated amount £950,000 is represented in work done: £900,000 on completing the programme itself, and £50,000 incurred so far on securing overseas contracts.
The profit for the accounting period is therefore:
- |
Amount (£) |
Notes |
Expenditure incurred by end of period |
950,000 |
Out of total expected costs of £1m |
Income treated as earned by end of period |
1,425,000 |
Expected total income is £1.5m. The extent to which this is allocated to this period mirrors the extent to which total expected costs fall within the period. |
Trade profit |
475,000 |
- |
Plus expenditure credit |
290,000 |
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 |
765,000 |
- |