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HMRC internal manual

Film Production Company Manual

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HM Revenue & Customs
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Taxation: profit/loss calculation - matching income to expenditure

CTA2009/S1189 and S1194

CTA2009/Part 15 Chapter 2 sets out how the profits or losses of film-making activities of film production companies (FPCs) (FPC10110) are to be calculated for tax purposes.

The method is modelled on the way in which profits are recognised in long term contracts (see FPC20220), recognising expected income in line with the state of completion of the film as measured by the proportion of total costs to date that has been expended.

It operates by:

  • calculating what proportion of the film’s estimated total costs have been incurred (and are reflected in work done) within each accounting period and
  • allocating the film’s estimated total income in similar proportions.

This method will adjust for both changes to the estimated total income from the film, (for example, sale of further rights) and to changes in the estimated total cost (due, for example, to a change of plans during shooting).

In the calculation:

  • the estimated total cost of the film will be the expected cost of making the film plus any expected exploitation costs (FPC20230), and
  • the estimated total income will be all the expected income from the film (FPC20210). 

Estimated costs and income

An FPC may need to estimate both total expected costs and total expected income to be able to operate the formula to determine taxable profits or losses.

Where actual income and costs are known, this is not necessary. If, for example, a film has been sold and no rights to further income from that film retained, then the income is the proceeds of the sale.

Estimated total costs

The estimated total cost will generally be the total estimated allowable costs shown by the most recent and reliable estimate in the film production budget, plus a realistic estimated cost to the FPC of exploiting any rights in the film that it retains.

Budgets of this sort are generally maintained by FPCs both as a management tool and because their existence is generally a condition imposed by the completion guarantor and the financiers or commissioning studio.

Estimated total income

The estimated total income from the film is the total income, received or expected, from the film over its life.

The estimate of income should include income from all sources (FPC20210) but it should not include hypothetical or, potential income merely because a prediction (such as sales agent’s estimate) of that income has been made unless the FPC is in a position to realistically expect such income to arise and it can be reliably quantified.

So the estimated income should broadly include that income which the company would be confident enough to include in its Profit & Loss account were the film to be treated as being on revenue account. Whether any particular contract or agreement gives the company rights such that income should be recognised under these rules will be a question of fact. See below for further detail of how estimates are to be made.

Estimating total income earned at the end of an accounting period

At the end of any accounting period the amount of income treated as earned is calculated as follows:

The income treated as earned = C x I / T

Where:

C = Costs incurred and reflected in work done

I = Estimated total income

T = Total estimated costs

Calculation of profit or loss: first period of account after trading begins

In the first period of account following the commencement of trading (FPC20100) there are no costs reflected in work done that are attributable to a preceding accounting period because any pre-trading expenditure is treated as work of the first accounting period (FPC20120).

The expenditure to be taken into account as a debit in calculating the taxable profit is the expenditure of the first period that is reflected in the state of completion of the film (FPC20240). The income to be taken into account as a credit in calculating the taxable profits of the first accounting period is the income that is treated as earned at the end of the accounting period using the formula above.

For the majority of films, which are completed within an accounting period and then sold, this will be the normal method for calculating the profit or loss attributable to the film.

Calculation of profit or loss: subsequent periods of account

In subsequent periods of account the profit for the period is calculated by comparing the further work done measured by the additional expenditure and the increase, or decrease, in the income treated as earned by the film.

The expenditure to be taken into account as a debit in calculating the taxable profit is the expenditure to date, reflected in the state of completion of the film, less the expenditure to date at the end of the previous accounting period. This gives the expenditure of the accounting period that is reflected in the state of completion of the film.

The income to be taken into account as a credit in calculating the taxable profits is the income that is treated as earned at the end of the accounting period using the formula above less the income treated as earned at the end of the previous accounting period. This gives the increase or decrease in the income treated as earned in the accounting period.

See FPC20510 - FPC20550 for examples of these calculations.