CREC056300 - Eligible expenditure: avoidance: recognition of expenditure and unpaid amounts

Recognition of expenditure 

There are rules for determining when expenditure on production is recognised for the purposes of the production company’s basic tax computation. These are intended to prevent the artificial inflation of the actual level of production expenditure through the inclusion of deferred fees or other contingent costs, such as participations, which might never arise in practice. 

Under these rules, 

• expenditure is recognised to the extent to which it is represented in the state of completion of the production, 

• any amount that has not actually been paid is only recognised where its payment by the production company in the future is unconditional, and 

• costs relating to an obligation that is linked to income being earned can only be brought into account to the extent that the relevant income is also brought into account. 

Chapter 3 of this manual explains how to apply these rules. 

 

Unpaid amounts 

Costs which remain unpaid four months after the end of the period of account in which they are incurred are treated as if they were not incurred in that period. That is the case even if there is an unconditional obligation for them to be paid in the future, or the company plans to pay them within the 4-month window but fails to do so. The legislation is in sections 1179DX (for film and TV) and 1179FP (for video games) of the Corporation Tax Act 2009. 

These costs may only be treated as incurred in the period of account in which they are eventually paid. 

These costs include deferments or contingent fees which remain unpaid four months after the end of the period. It does not matter that they are subject to an unconditional obligation to pay. 

Example 

A video game development company (VGDC) is commissioned to produce a qualifying video game. Development costs (all UK) are £500k. The video game is completed within a single accounting period (Period 1). 

The development agreement provides that the VGDC will be paid: 

• £420k for producing the video game, plus 

• a further £50,000 dependent on download figures. 

A key subcontractor has an agreement with the VGDC that if the target for download figures is met, he will receive an additional £40,000 from the VGDC. 

The contingent receipt of £50,000 is too uncertain to bring into the calculation of the video game’s profits or losses until download figures are known. 

Download targets are met towards the end of Period 2. At that point the additional £50,000 is treated as earned and brought into the calculation of profit or loss for Period 2. 

The obligation to pay the subcontractor would ordinarily be recognised in that period for the purposes of calculating the profits or losses of the separate video game trade under s1179BB CTA 2009. 

However, the VGDC does not receive the £50,000 payment, and so does not pay out the £40,000 due to the subcontractor, until midway through Period 3. This is more than four months after the end of Period 2. 

Therefore, the £40,000 is not counted towards costs incurred in Period 2 and is only treated as incurred in Period 3. This means that no expenditure credit is due in respect of the expenditure until Period 3. 

Profit/loss of separate trade	Period 1	Period 2	Period 3
Income	£420k	£50k	nil
Expenditure incurred during period (all UK)	£50k	nil (disregarding £40k unpaid within 4 months of end of period)	£40k
Trading profit/(loss)	(£80k)	£50k	(£40k)
Calculation of expenditure credit	-	-	-
Relevant global expenditure incurred to date (all UK)	£500k	£500k	£540k (including £40k from Period 2 but paid in Period 3)
Increase over expenditure incurred over previous period	£500k	nil	£40k
Qualifying expenditure to date (in this case 80% of total core)	£400k	£400k	£432k
Less qualifying expenditure to date at end of previous period	-	(£400k)	(£400k)
Qualifying expenditure for the period	£400k	nil	£32k
Expenditure credit due (34%)	£136k	nil	£10.88k