Taxation: example 5 - retained rights
This example shows how CTA2009/Part 15 Chapter 2 operates to arrive at the profits/losses of a film production company (FPC) that is commissioned to produced a film in which it goes on to retain overseas exploitation rights.
An FPC is commissioned by a broadcaster to make a programme for transmission on a UK terrestrial network. The total cost of recording, editing and production is estimated at the outset as being £700,000. The broadcaster contracts to pay £1.5m for the right to broadcast the programme once it is completed. The film is not eligible for Film Tax Relief (FTR).
The FPC will retain the residual rights to exploit the programme in other territories. It has extensive experience of selling programmes overseas and broadcasters in a number of countries express an interest. The company anticipates sales of at least a further £1m based on its past experience of selling similar material and it anticipates further legal costs of £100,000 in securing these contracts. The total estimated expenditure for the programme is therefore £800,000.
At the end of the first accounting period the company has spent £900,000 on recording, editing and production and has completed the programme. It has spent £50,000 in negotiating further contracts but as yet it has not secured a contract.
When computing its profits for corporation tax purposes the film production company must estimate total income from the programme and total costs. At the end of the accounting period it has one contract to sell the UK rights for £1.5m that it has fulfilled at a cost of £900,000. Other broadcasters have expressed interest, but this does not give the film production company a realistic and quantifiable expectation of income. The estimated total income at the end of the first accounting period is therefore £1.5m.
The estimated total costs at the outset were £800,000 but the programme actually cost £900,000 to make and the company still considers that it is going to pay £100,000 in legal costs to secure the overseas contracts. The total estimated costs are therefore £1m. Of this estimated amount £950,000 is represented in work done.
The proportion of the estimated total income treated as earned at the end of the accounting period is therefore:
|Expenditure incurred by end of period||£950,000||Out of total expected costs of £1m|
|Income treated as earned by end of period||£1,425,000||Expected total income of £1.5m. The extent to which this is allocated to the mirrors the extent to which total expected costs fall within that period.|
|£1.425m = £1.5m x £0.95m/£1m|