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HMRC internal manual

Film Production Company Manual

Taxation: profit/loss calculation - introduction

CTA2009/Part 15 Chapter 2

Where a company is a film production company (FPC) (FPC10110) for the purposes of the film tax regime :

  • the production of each film is treated as a separate trade (FPC20010),
  • the profits or losses of producing a film are on revenue account (FPC20230), with
  • costs debited as incurred (FPC20240), and
  • income credited as earned (on a prescribed estimated basis if necessary) (FPC20220).

This ensures that expenditure is deductible earlier than would generally be the case if the deduction had to await disposal, or part disposal, of the capital asset. This is particularly relevant for any FPC that retained the film rights as the company may have mainly exploitation income against which the cost of creating the asset might not otherwise be set.

The method of calculating profits or losses of the deemed trade for tax purposes broadly follows the model in section 13 of FRS102. This sets out the principles and methodology for recognising income and profit arising on construction contracts (long term contracts), as activity progresses.

Construction contracts are defined in FRS102 as:

`A contract specifically negotiated for the construction of an asset (or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use).’

The method set out in FRS102 calculates and spreads the profits over the lifetime of a project and recognises income and expenditure in line with the state of completion of the project. FRS102 envisages alternative methods for doing this depending on whether the work done can be independently valued (as is common in construction contracts) or whether the proportion of the budget spent provides the best measure of completion.

Other accounting standards that deal with construction contracts (or long term contracts) are SSAP9, UITF40 and IAS11, none of which contain principles that are substantially different to section 23 of FRS102.

In film production, the total budget for the film is almost invariably agreed at the outset and costs are then carefully monitored and controlled to ensure delivery of the film within that budget.

In contrast, the income the film is capable of generating can be more uncertain. This is particularly true where the film has not been commissioned by the person to whom all the rights will be sold and the film production company retains rights which it can sell itself, or otherwise exploit.

Consequently, taxable profits are recognised by apportioning the total expected income to the degree of completion as measured by the proportion of total expenditure incurred and reflected in work done (FPC20250).