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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Films and sound recordings: master versions of sound recordings: sale of the master version

S135 Income Tax (Trading and Other Income) Act 2005, S151 Corporation Tax Act 2009

Sale for a fixed sum

When the master version of a sound recording is sold for a fixed sum the seller will have thereby realised the full value of that master version. So, under the income matching method (BIM56215), the seller is able immediately to deduct the balance of production or acquisition expenditure.

The cost recovery method (BIM56230) has no application here as it only applies where it can increase the deduction above the income matching method. But the entire expenditure is already deductible under income matching.

The proceeds of the sale of the master version are also revenue (see BIM56205) and, where the sale is for a fixed sum, the proceeds are taxable in full when the sale is made. Normally this will be the same as the accountancy treatment, but with the exception of sale and lease back transactions where the accountancy treatment may sometimes differ significantly from the statutory tax treatment.

In a typical sale and lease-back (see BIM56240), the producer places a large proportion of the proceeds of the sale on deposit in order to guarantee future lease rental payments. In some circumstances accountancy treatment may validly recognise only the net benefit as a receipt - the difference between the sale proceeds and the deposit. This is not appropriate for the purposes of computing the taxable profits of the trade or business.

For tax purposes the full disposal proceeds of the master version must be taken into account as a receipt when the master version is sold. Future rental payments under a lease are not costs of production or acquisition of the master version and cannot be offset against this. Often this will have no tax consequence as the income simply matches the expenditure.

Sale for contingent amounts

A sound recording may be sold for a fixed sum plus an additional amount contingent on future profits, or for a wholly contingent amount - where any proceeds only arise if the recording is profitable. Here, the appropriate treatment under the income matching method is the same as if ownership had been retained. That is, account must be taken of likely future receipts as well as actual sums received.

Master version held as trading stock

In some circumstances the master version may more appropriately be regarded as trading stock rather than a fixed asset of the trade. This is most likely to arise where there is a pre-existing intention to dispose of the master version before the sound recording is produced or acquired. In these situations the normal computational rules for trading profits apply rather than the special rules for master versions - see BIM56255.