Avoidance and disclosure: avoidance - inflation of production costs
S1216CJ, S1216CK Corporation Tax Act 2009 (CTA 2009)
The legislation of Television Tax Relief (TTR) is based on the legislation already in place for Film Tax Relief (FTR). FTR was designed to ensure that it did not suffer from abuses similar to the previous tax relief regime for films.
The previous film tax regime was subject to regular abuse by those seeking a means to avoid tax. One such abuse was 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.
The tax regime for animation includes features intended to ensure that it does not suffer from similar abuse in the future.
Recognition of expenditure
There are rules for determining when expenditure on television production is recognised for the purposes of the Television Production Company’s (TPC) basic tax computation under Part 15A CTA 2009. This is the case regardless of whether or not TTR is available or claimed.
Under these rules:
- expenditure is recognised to the extent to which it is represented in the state of completion of the programme,
- any amount that has not actually been paid is only recognised where its payment by the TPC 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 brought into account.
In calculating a claim for TTR any costs which remain unpaid four months after the end of the relevant period of account are excluded, irrespective of whether there is an unconditional obligation for them to be paid in the future.
Deferments or contingent fees (unpaid four months after the end of the period) should be disregarded for the purposes of calculating a claim for TTR, even where such costs are subject to an unconditional obligation to be paid.
This disregard does not apply to the basic tax computation.
A TPC is commissioned to produce a TTR-qualifying animation. Production costs (all UK) are £500k. The programme is completed within a single accounting period (Period 1).
The production agreement provides that the TPC will be paid:
- £420k for producing the programme, and
- a further £50,000 dependent on viewing figures.
The producer has an agreement with the TPC that if the target for viewing figures is met he will receive an additional £40,000 from the TPC.
The contingent receipt of £50,000 is too uncertain to bring into the calculation of the animation’s profit or loss until viewing figures are known.
Viewing figures 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 producer will also be recognised in that period for the purposes of calculating the profits or losses of the separate animation trade under Part 15A Ch 2 CTA 2009.
But the TPC does not receive the payment, and does not pay out the £40,000 due to the producer until midway through Period 3. This is more than four months after the end of Period 2. So for the purposes of TTR, the £40,000 is ignored when looking at Period 2, but is brought into Period 3.
|Profits or losses of separate trade (Part 15A Ch 2 CTA 2009)||Period 1||Period 2||Period 3|
|Expenditure incurred during period (all UK)||£500k||£40k||nil|
|Trading profits (losses)||(£80k)||£10k||nil|
|Calculation of additional deduction and surrenderable loss (Part 15A Ch 3 CTA 2009)|
|Expenditure incurred to end of period (all UK)||£500k||£500k|
|(disregarding £40k unpaid within 4 months of end of period||£540k|
|(including £40k incurred in Period 2 but paid in Period 3)|
|Increase over expenditure incurred over previous period||£500k||nil||£40k|
|Enhanceable expenditure (in this case 80% of total core)||£400k||nil||£32k|
|Additional deduction to end of period (100% of enhanceable expenditure)||£400k||£400k||£432k|
|Less additional deduction claimed for earlier period(s)||-||(£400k)||(£400k)|
|Additional deduction due for the period||£400k||-||£32k|
|Trading (profit) loss for the period after additional deduction||(£480k)||£10k||(32k)|
|Surrenderable loss (lower of trading loss for the period (after additional deduction) and enhanceable expenditure)||(£400k)||-||(£32k)|
Pre-TTR loss: £70,000
Surrenderable losses: £432k