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HMRC internal manual

Business Income Manual

Films and sound recordings: old regime for films

Before the introduction of the film production companies rules, the rules summarised below applied to expenditure incurred on the production or acquisition of the original master version of a film for both Income Tax and Corporation Tax purposes.

In practice, the reliefs for qualifying films were rarely accessed directly by film producers themselves, but were usually claimed by financial intermediaries (for example, banks or partnerships of wealthy individuals) using sale and lease back or production and licence schemes. The involvement of these third party financiers was accompanied by a great many complex and artificial tax avoidance schemes which required anti-avoidance legislation to counter them. Anti-avoidance rules which may still have effect in relation to films within the old regime are described at BIM56500 onwards.

Expenditure treated as revenue

S40A, S40B Finance (No 2) Act 1992, S134, S135 Income Tax (Trading and Other Income) Act 2005, S46, S47 Finance Act 2006, SI 2007/1050

Expenditure on the production or acquisition of the original master version of a film was deemed to be revenue in nature and associated receipts were deemed to be income for tax purposes.

There were special rules to determine how the expenditure was brought into account for tax purposes. The rules were the same as those which continue to apply to expenditure on the master version of a sound recording. See BIM56200 onwards.

This legislation does not apply to production expenditure on a film which commenced principal photography on or after 1 January 2007. It also does not apply to acquisition expenditure on a film which commenced principal photography on or after 1 January 2007 if the expenditure was incurred on or after 1 October 2007. In relation to films that commenced principal photography before 1 January 2007 but were uncompleted on that date, the legislation does not apply to films certified under Sch1 Films Act 1985 as British films and intended for theatrical release and it also does not apply to acquisition expenditure incurred on any film on or after 31 March 2008.

Election for capital treatment of qualifying film

S40D Finance (No 2) Act 1992, S99 Finance Act 2002, S143 Income Tax (Trading and Other Income) Act 2005, S46, S47 Finance Act 2006, SI 2007/1050

Where the film was a qualifying film intended for theatrical release, an irrevocable election could be made for the original master version to qualify for capital allowances.

The conditions that had to be met were as follows:

  1. The expenditure on the production or acquisition of the master version of the film was incurred by a person who carried on a trade or business that consisted of or included the exploitation of master versions of films.
  2. The film was certified as being a qualifying film and was genuinely intended for theatrical release.
  3. The value of the master version of the film was expected to be realised over a period not less than two years (i.e. income from exploitation of the film was likely to arise for more than two years).
  4. No claim had been made under any of the other treatments that were specifically available for qualifying films.

This legislation does not apply to production expenditure on a film which commenced principal photography on or after 1 January 2007. It also does not apply to acquisition expenditure on a film which commenced principal photography on or after 1 January 2007 if the expenditure was incurred on or after 1 October 2007. In relation to films that commenced principal photography before 1 January 2007 but were uncompleted on that date, the legislation does not apply to films certified under Sch1 Films Act 1985 as British films and intended for theatrical release and it also does not apply to acquisition expenditure incurred on any film on or after 31 March 2008.

Preliminary expenditure on qualifying film

S41 Finance (No 2) Act 1992, S99 Finance Act 2002, S137 Income Tax (Trading and Other Income) Act 2005, S46, S47 Finance Act 2006

A deduction was available in computing the profits of a trade or business consisting of or including the exploitation of original master versions of films for preliminary expenditure incurred for the purpose of enabling a decision to be taken as to whether or not to make a film. The following conditions had to be met:

  1. If the film had been completed at the time that the deduction was sought it had to be a qualifying film.
  2. If the film had not been completed at the time that the deduction was sought there had to be evidence that the film was, or on aborted films would have been, reasonably likely to be a qualifying film.
  3. The expenditure must have been incurred to enable a decision to be taken whether or not to go ahead with the film.
  4. The film must have been genuinely intended for theatrical release.
  5. The expenditure must have been incurred in the period for which the deduction was sought or in an earlier period, but must also have been payable before the first day of principal photography.
  6. The total amounts of preliminary expenditure deducted in respect of a film for all relevant periods must not have exceeded 20% of the film’s budget at the start of principal photography.

This legislation does not apply to expenditure incurred after 19 July 2006.

Accelerated write-off of expenditure on qualifying film

S42 Finance (No 2) Act 1992, S48 Finance (No 2) Act 1997, S99 Finance Act 2002, S138 Income Tax (Trading and Other Income) Act 2005, S46, S47 Finance Act 2006, SI 2007/1050

Expenditure on the production or acquisition of qualifying films genuinely intended for theatrical release could be deducted over a minimum period of three years. Anti-avoidance rules, effective from 2 December 2004, prevented relief being claimed more than once on any film (double dipping) and restricted the total relief to the immediate cost of production of the film.

100% of the expenditure on the production or acquisition of qualifying films costing £15 million or less and genuinely intended for theatrical release could be deducted in a single period.

This legislation does not apply to production expenditure on a film which commenced principal photography on or after 1 January 2007. It also does not apply to acquisition expenditure on a film which commenced principal photography on or after 1 January 2007 if the expenditure was incurred on or after 1 October 2007. In relation to films that commenced principal photography before 1 January 2007 but were uncompleted on that date, the legislation does not apply to films certified under Sch1 Films Act 1985 as British films and intended for theatrical release and it also does not apply to acquisition expenditure incurred on any film on or after 31 March 2008.

Meaning of ‘qualifying film’

S43 Finance (No 2) Act 1992, S132 Income Tax (Trading and Other Income) Act 2005

A ‘qualifying film’ was the master negative of a film certified by the Secretary of State at the Department of Culture, Media and Sport (DCMS) under Sch1 Films Act 1985 as a qualifying film.

If the conditions required by the Secretary of State were met, a certificate to that effect was issued by DCMS. It was this certificate that was the necessary evidence for tax purposes that a film had qualifying film status.

An additional requirement for claiming relief was that a film should be intended for theatrical release; that is, intended for the cinema, not a TV programme or film. This meant that some films would not qualify for the special tax relief for qualifying films even though certification has been granted.

For the qualifying conditions under Sch1 Films Act 1985, see FPC40030.