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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Films and sound recordings: master versions of sound recordings: income matching method: examples

The income matching method can be expressed using the formula E = A x (B / (B + C)) where:

E = Expenditure deductible in the relevant period
   
A = The total expenditure on producing or acquiring the master version of the sound recording less any amounts already deducted in earlier relevant periods
B = The gross amount of income from the sound recording in the period
C = The estimated future gross income from the sound recording

But note that where C = 0, E = A, even if B is also zero.

Example 1

A sound recording is in the course of production in year 1 where £2.5 million of expenditure is incurred.

In year 2 the recording is completed and further expenditure of £1.5 million is incurred, thus total expenditure on production of the master version is £4 million (A).

In year 2 the sound recording is released and generates income of £3 million (B) out of a total estimated income of £8million, leaving estimated future gross income of £5 million (C).

In year 3 the recording generates a further £2 million (B) of income but the total estimated income is revised down to £6 million leaving future estimated income of £1 million (C).

In year 4 the recording generates income of £1 million. The recording is unlikely to generate more than a negligible amount of income in future and it is accepted that for the purposes of writing-off the expenditure the expected future income is nil.

Expenditure is deducted as follows:

YEAR A B C E = A x (B / (B + C))
         
1 £2.5 million nil not forecast Nil
2 £4.0 million £3.0 million £5.0 million £1.5 million
3 £2.5 million £2.0 million £1.0 million £1.67 million
4 £833,333 £1.0 million nil £833,333

Example 2

If at any time the amount of unrelieved expenditure exceeds the estimated future income from the sound recording, an additional amount up to the excess may be deducted as well as the amount given by the formula.

Thus, if in example 1 above the income in year 3 was £800,000 and the estimated future income was £200,000 and X is the excess of expenditure over future estimated income, the amounts written off would be as follows:

YEAR A B C E + X
         
1 £2.5 million nil not forecast Nil
2 £4.0 million £3.0 million £5.0 million £1.5 million
3 £2.5 million £800,000 £200,000 £2.3 million
4 £200,000 £200,000 nil £200,000

The £2.3 million written-off in year 3 comprises £2 million written-off under the formula and an additional amount of £300,000 written-off as the excess of unrelieved expenditure over estimated future income.