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HMRC internal manual

Film Production Company Manual

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HM Revenue & Customs
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Taxation: example 4 - multi-period production

This example shows how CTA2009/Part 15 Chapter 2 operates to arrive at the profits/losses of a film production company (FPC) producing a film whose production spans several years. It is based on an FPC making an animated film. Animated films, and those using computer-generated imagery (CGI), may take a considerable number of years to complete and may have a non-linear cost profile.

A film animation company makes a film costing £30 million that takes 4 years to complete. The cumulative costs at the end of each accounting period are £5 million, £15 million, £25 million, £30 million. The film is not eligible for Film Tax Relief (FTR).

The company finances the film by selling some rights to a distributor for £20 million at the start of film production. Further rights are sold for £10 million in Period 2 and £2 million in Period 4. On completion, the residual rights are sold for £2 million in Period 5. Total costs are therefore £30 million, with total income of £34 million, giving an overall profit of £4 million.

Unlike Examples 1- 3, where a contract has been agreed for the sale of the production as a whole (so that, although the payments are received in stages, the overall amount is certain, and must be taken into account from the start) we now have a number of separate sales of rights throughout the project. Until each has been agreed, it is not reflected in the profit. This judgement needs to be made at the end of each period.

The calculation of profits on the film is as follows:

Period 1

Expenditure incurred by end of period £5m Out of total expected costs of £30m
     
Income treated as earned by end of period £3.33m Expected total income of £20m. The extent to which this is allocated to Period 1 mirrors the extent to which total expected costs fall within Period 1.
£3.33m = £20m x £5m/£30m      
  Profit (loss) (£1.66m)  

 

Period 2

Expenditure incurred by end of period £15m    
       
Increase in expenditure incurred over previous period   £10m £15m less £5m
Income treated as earned by end of period £15m   Estimated total income has risen to £30m, and costs incurred represent £15m out of expected total costs of £30m.
£15m = £30m x £15m/£30m        
  Increase in income treated as earned over previous period   £11.66m £15m less £3.33m
  Profit   £1.66m  

 

Period 3

Expenditure incurred by end of period £25m    
       
Increase in expenditure incurred over previous period   £10m £25m less £15m
Income treated as earned by end of period £25m   Estimated total income remains £30m, and costs incurred represent £25m out of expected total costs of £30m.
£25m = £30m x £25m/£30m        
  Increase in income treated as earned over previous period   £10m £25m less £15m
  Profit   £nil  

 

Period 4

Expenditure incurred by end of period £30m    
       
Increase in expenditure incurred over previous period   £5m £30m less £25m
Income treated as earned by end of period £32m   Estimated total income has risen to £32m, and all expected costs now incurred.
£32m = £32m x £30m/£30m        
  Increase in income treated as earned over previous period   £7m £32m less £25m
  Profit   £2m  

 

Period 5

Expenditure incurred by end of period £30m    
       
Increase in expenditure incurred over previous period   £0m £30m less £30m
Income treated as earned by end of period £34m   Estimated total income has risen to £34m; all costs incurred.
£34m = £34m x £30m/£30m        
  Increase in income treated as earned over previous period   £2m £34m less £32m
  Profit   £2m