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HMRC internal manual

Film Production Company Manual

Taxation: profit/loss calculation - estimating amounts


The treatment for calculating taxable profits of the film-making activities of film production companies (FPCs) (FPC10110) may involve estimating the total income and total costs of a film (FPC10100). There are rules which set out the basis on which such estimates are made.

The aim of these rules is to ensure that the income that is recognised accords with the substance of transactions in the same way that would be expected for statutory accounts.

To be income, sums should be recognised using the same principles that are set out in Generally Accepted Accounting Practice (GAAP).  Section 23 of FRS102 requires that revenue from the rendering of services and from construction contracts is recognised with reference to the stage of completion of the transaction at the end of the reporting period (where the outcome can be estimated reliably). 

 In effect these principles embody the principle that income is recognised as it is earned.  Other accounting standards dealing with revenue are Application Note G to FRS 5 and IAS18, neither of which contain principles that are substantially different to section 23 of FRS102. 

For FPCs the estimate to be made as at the end of the accounting period using all the information available at that time, on a fair and reasonable basis and taking into consideration all relevant circumstances. It follows, under GAAP, that speculative income, where potential buyers have not yet been identified, would not be brought into account. But where a seller has entered into a transaction with a buyer, revenue should be recognised in accordance with the substance of that transaction.


Speculative productions

While almost all television and theatrical films are commissioned, and will have a measure for estimated total income from the outset, some productions that come within this legislation may be speculative with little, if any, income that can be brought into account in calculating profits for an accounting period. Nevertheless, it is likely that there will be a reliable estimate for the estimated total cost and so the costs to be debited in each accounting period will be the additional costs reflected in the work done while the income may well be zero.


The examples below which relate to qualifying British films are intended to illustrate the calculation of the accounting profit or aspects of it. Entitlement to the additional Film Tax Relief is not addressed here, but is dealt with separately - see FPC55000:

Example 1: Sales agent forecasts

At the start of production income and expenditure for a film is estimated as:

Total cost of producing according to the budget and shooting schedule seen by the film guarantor £22m
Grants and equity investments £5m
Existing pre-sales of rights £10m
Sales agent forecast of sales of rights in remaining territories £12m

As production commences, the income to be brought into the computations in FA06/SCH4 is the money which the FPC has, or expects to receive; this is the grants and equity investments of £5m plus the pre-sale of rights of £10m.

The sales agent forecast of £12m is the sales agent’s judgement of how much might be expected if the remaining rights are sold. The sales agent’s estimates are not estimates within the meaning of CTA09/S1190 and are not included in the company’s estimated income.

Example 2: Contracts under negotiation

An FPC is commissioned by a major broadcaster to make a programme for transmission on a national terrestrial network. It is estimated that the programme will take three years to make and will have a total production budget of £150,000 which will be incurred on a straight line basis over the three-year period (i.e. £50,000 a year).

Under the terms of the commission contract, the FPC will receive income of £210,000 in two equal tranches - the first after 18 months and the second on delivery of the programme.

During the second year of production, the company enters into negotiations with a computer games development company for the sale of the right to use one of the characters in the programme for £60,000 once the programme has been completed. Although initial discussions were promising, negotiations fall through early in a third year of production and both parties decided not to proceed with the deal.

The negotiations do not give the FPC a realistic and quantifiable expectation of income and the income remains £210,000 spread over the 3 years of production, in the form of £70,000 per year following the straight line expenditure of £50,000 per year, giving taxable income of £20,000 per year.

If the negotiations were brought to fruition in the third year, and the contract agreed as described, then the additional income of £60,000 is recognised in Year 3.

Example 3: Speculative film-making

A company that records live performances and sells DVDs of them arranges to record the current tour of a famous comedian. The total cost of recording, editing, production, advertising and exploiting the DVD is reliably estimated as £1m. The company has established distribution channels for such DVDs and intends to retain all the underlying rights itself. From the company’s experience of producing and selling such DVDs it expects sales of not less than £6m over the normal sales profile for such products.

In the absence of contracts to sell the DVDs or the rights, the company has no reliably predictable income which it must estimate.

Consequently, although DVD expenditure needs to be fed into the calculation in CTA2009/Part 15 Chapter 2 and will be deductible, there is no income to bring in until sales are made.