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HMRC internal manual

Business Income Manual

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Films and sound recordings: master versions of sound recordings: cost recovery method: examples

The cost recovery method allows a deduction in a relevant period up to the amount of income received from the exploitation of the master version of the sound recording in that relevant period. It only applies where that income exceeds the amount deductible under the income matching method and there is unrelieved expenditure.

Example

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 of the recording is £4 million.

In year 2 the recording is released and generates income of £3million out of a total estimated income of £8million.

In year 3 the recording generates a further £2 million of income but the total estimated income for the recording is revised down to £6 million.

In year 4 the recording generates income of £1 million. It 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.

Relief under the cost recovery method is as follows:

Year Unrelieved cost Income Cost recovery method
       
1 £2.5 million nil nil
2 £4.0 million £3.0 million £3.0 million
3 £1.0 million £2.0 million £1.0 million
4 nil £1.0 million nil

As the cost recovery method provides an additional deduction over and above the amount that is due under the income matching method it is only applicable where the income matching method gives a figure lower than the income received in the relevant period.

In the example above, if the estimated future income at the end of year 2 is £0.5 million the income matching method provides a deduction of £3.5 million for that year (see BIM56220 example 2). As the ‘income matching’ deduction exceeds the income for the period there is no additional amount to claim under the cost recovery method.