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HMRC internal manual

Film Production Company Manual

Film Production Companies: Losses: Example: Terminal losses applied to new film

A film production company (FPC) produces Film 1, qualifying for FTR. The company draws upaccounts to 31 December. The trade in relation to Film 1 commences on 3 July 2009. Thefilm is completed on 10 February 2010. The company ceases to trade relating to Film 1 on15 August 2010 when it sells Film 1 outright.

During the period the company starts to make a second qualifying film, Film 2. The tradein relation to Film 2 commences on 17 March 2010.

The accounting periods are therefore:

3 July to 31 December 2009
Year ended 31 December 2010
Year ended 31 December 2011

The computations show:

APE 31 December 2009

Income from Film 1 100,000
Costs of Film 1 (850,000)
Film tax relief – additional deduction (400,000)
Loss on Film 1 (1,150,000)
Other income – Case III 10,000

The computation for this period shows a Case I loss of 1,150,000 on Film 1. Of this750,000 is not attributable to FTR; 400,000 is attributable to FTR.

The company chooses not to surrender any part of this loss for the film tax credit. Thisis a production accounting period and so the use of the loss is restricted. It can only becarried forward under ICTA88/S393(1).

The Case III profit remains taxable and a loss of 1,150,000 is carried forward.

APE 31 December 2010 – Film 1 completed & trade ceases; Film 2 commences

  Film 1 Film 2 Other
Income from Film 500,000 800,000  
Costs of Film (150,000) (400,000)  
Film tax relief – additional deduction (100,000) (300,000)  
Profit on Film 1 250,000 100,000  
Other income – Case III     20,000

The computation for this period shows a profit of 250,000 on Film 1 and a profit of100,000 on Film 2. This is a completion accounting period and a cessation accountingperiod in respect of Film 1.

The brought forward loss of 1,150,000 reduces the profit on Film 1 to nil leaving a lossof 900,000. Under normal circumstances this loss would only be available to carry forwardto the next accounting period for set off against profits of the same trade. But, if anypart of the loss is not attributable to FTR and is derived from a production period it caninstead be treated as a loss of the later accounting period for the purposes of lossrelief.

The brought forward loss that is attributable to FTR (400,000) is sufficient to cover theprofits of the same trade, leaving 150,000 of those losses unused.

The whole of the brought forward production period loss not attributableto Film Tax Relief (750,000) can now treated as a loss of this accounting period for thepurposes of loss relief. The options available for these losses, and the extent to whichthe company chooses to utilise those options are as follows:

Set against other profits of the same accounting period 120,000
Carry back against profits of an earlier accounting period 10,000
Surrender as group relief where appropriate 200,000
Total 330,000

Of the full brought forward loss of 1,150,000 a total of 580,000 has been utilized(250,000 of the losses attributable to FTR plus 330,000 of losses not so attributable).The remaining 570,000 would be available to carry forward under section 393(1) ICTA 1988but for the fact that the trade has now ceased. In normal circumstances this loss would bestranded.

The company instead elects to treat the stranded loss as a loss brought forward in thetrade in relation to Film 2 in the next accounting period.

APE 31 December 2011

Income from Film 2 1,000,000
Costs of Film 2 (400,000)
Film tax relief – additional deduction (200,000)
Profit on Film 2 400,000
Other income – Case III 50,000

The computation for this period ended 31 December 2011 shows a Case I profit in Film 2 of400,000. This is reduced to nil by the loss treated as brought forward in the trade of570,000.

The remaining 170,000 is now available to carry forward into the next accounting period asa loss brought forward in the trade in relation to Film 2. This loss will now only beavailable to utilise against profits of the trade in respect of Film 2. Note that thespecial treatment afforded to some production period losses does not carry over into theFilm 2 trade.

The following table tracks the losses in the accounting periods.

  Film 1 Film 2  
  FTR losses non-FTR losses  
APE 31 December 2009      
Production period loss carried forward into completion period 400,000 750,000  
APE 31 December 2010      
Losses brought forward 400,000 750,000  
Set off against current period profit of Film 1 (250,000)    
Set off against current period Case III   (20,000)  
Set off against current period profits of Film 2   (100,000)  
Carried back against Case III of earlier period   (10,000)  
Surrendered as group relief   (200,000)  
Carried forward to set against future profits of Film 2 150,000 420,000  
APE 31 December 2011      
Losses brought forward     570,000
Set off against current period profits of Film 2     (400,000)
Loss carried forward     170,000