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HMRC internal manual

Animation Production Company Manual

Taxation: profit/loss calculation - estimating amounts examples

S1216BF Corporation Tax Act 2009 (CTA 2009)

The treatment for calculating taxable profits of the animation activities of Television Production Companies (TPCs) (APC10110) may involve estimating the total income and total costs of a programme (APC10100). The rules set out the basis on which such estimates are made (APC20260)

The examples below relate to relevant programmes and are intended to illustrate the calculation of the accounting profit or aspects of it. Entitlement to the additional Television Tax Relief (TTR) is not addressed here, but is dealt with separately - see APC55000:

Example 1: Sales agent forecasts

At the start of production income and expenditure for a programme is estimated as:

  Total cost of producing according to the budget and shooting schedule seen by the programme guarantor £220k
  Grants and equity investments £50k
  Existing pre-sales of rights £100k
  Sales agent forecast of sales of rights in remaining territories £120k

As production commences, the income to be brought into the computations under the TTR rules is the money which the TPC has, or expects to receive; this is the grants and equity investments of £50k plus the pre-sale of rights of £100k.

The sales agent forecast of £120k is the sales agent’s judgement of how much might be expected if the remaining rights are sold. The sales agent’s estimates, in this instance, are not considered to be sufficiently just and reasonable for the purposes of Part 15A CTA 2009 and are not included in the company’s estimated income.

Example 2: Contracts under negotiation

A TPC is commissioned by a major broadcaster to make a programme for transmission on a national terrestrial network. It is estimated that the programme will take three years to make and will have a total production budget of £150,000 which will be incurred on a straight line basis over the three-year period (ie £50,000 a year).

Under the terms of the commission contract, the TPC will receive income of £210,000 in two equal tranches - the first after 18 months and the second on delivery of the programme.

During the second year of production, the company enters into negotiations with a computer games development company for the sale of the right to use one of the characters in the programme for £60,000 once the programme has been completed. Although initial discussions were promising, negotiations fall through early in a third year of production and both parties decide not to proceed with the deal.

The negotiations do not give the TPC a realistic and quantifiable expectation of income and the income remains £210,000 spread over the three years of production, in the form of £70,000 per year following the straight line expenditure of £50,000 per year, giving taxable income of £20,000 per year.

If the negotiations were brought to fruition in the third year, and the contract agreed as described, then the additional income of £60,000 is recognised in Year 3.

Example 3: Speculative programme-making

A company that records live performances and sells DVDs of them arranges to record the radio shows of a famous comedian. They hope to produce an animation utilising the sound recording. They intend to broadcast the show prior to publishing the DVD.

The total cost of animating, editing, production, advertising and exploiting the DVD is reliably estimated as £1m. The company has established distribution channels for such DVDs and intends to retain all the underlying rights itself. From the company’s experience of producing and selling such DVDs it expects sales of not less than £6m over the normal sales profile for such products.

In the absence of contracts to sell the DVDs or the rights, the company has no reliably predictable income which it must estimate.

Consequently, although DVD expenditure needs to be fed into the animation trade’s profit/loss calculation and will be deductible, there is no income to bring in until sales are made.