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HMRC internal manual

Business Income Manual

From
HM Revenue & Customs
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Films and sound recordings: master versions of sound recordings: leases and licences

One way of exploiting the master version of a sound recording is to lease or license the recording to another person, usually a distributor who in return will pay rentals or fees, which may be spread over a number of years. Commonly the form of the lease (or licence) will be that of a finance lease. Under these arrangements the lessor or licensor is effectively providing finance to the lessee or licensee to enable him to obtain the asset. The accountancy treatment seeks to reflect the reality of this financial arrangement treating the rentals as part payment of interest, part repayment of capital on a loan. However, this is not relevant for tax purposes where the entirety of the expenditure and income is treated as revenue.

The income matching or cost recovery rules apply. In particular, the full amount of the rentals or fees are taxable as they become due, and the expenditure is either matched against the income receipts using the income matching formula described in BIM56220 or under the cost recovery method described in BIM56235. Usually, it is beneficial to use the cost recovery method because the income matching method spreads the expenditure so as to lead to taxable profits every year, whereas the cost recovery method ensures that no taxable profits arise until all the expenditure has been deducted.