FPC20540 - Taxation: example 4 - multi-period production

This example shows how CTA2009/Part 15 Chapter 2 operates to arrive at the profits/losses of a film production company (FPC) producing a film whose production spans several years. It is based on an FPC making an animated film. Animated films, and those using computer-generated imagery (CGI), may take a considerable number of years to complete and may have a non-linear cost profile.

A film animation company makes a film costing £30 million that takes 4 years to complete. The cumulative costs at the end of each accounting period are £5 million, £15 million, £25 million, £30 million. The film is not eligible for Film Tax Relief (FTR).

The company finances the film by selling some rights to a distributor for £20 million at the start of film production. Further rights are sold for £10 million in Period 2 and £2 million in Period 4. On completion, the residual rights are sold for £2 million in Period 5. Total costs are therefore £30 million, with total income of £34 million, giving an overall profit of £4 million.

Unlike Examples 1- 3, where a contract has been 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 has been agreed, it is not reflected in the profit. This judgement needs to be made at the end of each period.

The calculation of profits on the film is as follows:

Period 1

- Amount Notes
Expenditure incurred by end of period £5m Out of total expected costs of £30m
Income treated as earned by end of period £3.33m Expected total income of £20m. The extent to which this is allocated to Period 1 mirrors the extent to which total expected costs fall within Period 1.\n£3.33m = £20m x £5m/£30m
Profit (loss) (£1.66m) -

Period 2

- Amount Difference Notes
Expenditure incurred by end of period £15m - -
Increase in expenditure incurred over previous period - £10m £15m less £5m
Income treated as earned by end of period £15m - Estimated total income has risen to £30m, and costs incurred represent £15m out of expected total costs of £30m. (£15m = £30m x £15m/£30m)
Increase in income treated as earned over previous period - £11.66m £15m less £3.33m
Profit - £1.66m -

Period 3

- Amount Difference Notes
Expenditure incurred by end of period £25m - -
Increase in expenditure incurred over previous period - £10m £25m less £15m
Income treated as earned by end of period £25m - Estimated total income remains £30m, and costs incurred represent £25m out of expected total costs of £30m. (£25m = £30m x £25m/£30m)
Increase in income treated as earned over previous period - £10m £25m less £15m
Profit - £nil -

Period 4

- Amount Difference Notes
Expenditure incurred by end of period £30m - -
Increase in expenditure incurred over previous period - £5m £30m less £25m
Income treated as earned by end of period £32m - Estimated total income has risen to £32m, and all expected costs now incurred. (£32m = £32m x £30m/£30m)
Increase in income treated as earned over previous period - £7m £32m less £25m
Profit - £2m -

Period 5

- Amount Difference Notes
Expenditure incurred by end of period £30m - -
Increase in expenditure incurred over previous period - £0m £30m less £30m
Income treated as earned by end of period £34m - Estimated total income has risen to £34m; all costs incurred. (£34m = £34m x £30m/£30m)
Increase in income treated as earned over previous period - £2m £34m less £32m
Profit - £2m -