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HMRC internal manual

Film Production Company Manual

Film Tax Relief: Eligible Expenditure: distinguishing 'development' from later stages of production


Because FTR is available on pre-production expenditure but not on development expenditure it is important to understand the difference between the two.


  • Development expenditure is essentially speculative. It relates to those activities undertaken with the aim of determining whether the film is a commercially feasible project which might proceed to the later stages of production.
  • Pre-production expenditure, in contrast, is not speculative. It is incurred on those activities undertaken in the knowledge that a decision has been taken for the film to go ahead. Such activities can, however, be undertaken even where some development activities are still taking place.

Expenditure attributable partly to development and partly to later stages of production

Some costs relate both to the developments stage of a film and to other stages of production. Examples of such costs would be those incurred on the script and the producer’s fee. Where the costs of the film attract FTR In each case it is necessary to establish to what extent the expenditure on the script is incurred on establishing whether a film can be made and what it should be like and how far it is incurred on actually making the film.

The correct apportionment will vary according to circumstances.

If a producer worked substantially full-time on a film for a year, with the first three months being taken up with development and the remaining nine months with pre-production, principal photography and post production it would be reasonable for one quarter of the producer’s fee to be allocated to development.

A script could likewise be used during the development stage of a film as well as the later stages of production. If the original script was more or less unchanged through this process then it may be reasonable to allocate its costs according the extent to which reference is made to it during the various stages of production in which it is used. But if the script writer is paid for an initial fee for a first draft of the script for development purposes followed by further instalments as the film proceeds to the later stages of production and further refinements are made to the script then it may be reasonable for the allocation of costs to more closely follow the timing of the payments and the use to which the various versions are put.

Book rights

Expenditure on the rights to use a story or book as the basis of a film is production expenditure. Expenditure on wider rights – for example the right to use and exploit characters from a book – beyond what is necessary to make the film, is not.

Ways of making films vary, and each case must be considered carefully, but in general a payment for an option over the right to use a book or story would be speculative, while the purchase of the actual rights needed to make the film is not speculative expenditure, it is core expenditure.

Example 1

An independent producer likes a book and thinks that a film might be made of it.

She does some preliminary work, including setting up a company (SPV) through which any costs associated with the film will be channelled, and seeking initial opinions from colleagues and financiers.

All seems favourable, so to protect the position the company pays for an option over the film rights.

There follows further development work, including commissioning a screenwriter to write a screenplay. Finance is found (greenlighting).

At this stage the SPV exercises the option so that it can make the film.

The SPV’s payment for the rights (but not for the option) is core expenditure.

Example 2

A studio buys outright the intellectual property in a series of popular children’s adventure stories and sets to work to make films of them. It does this by engaging separate SPV production companies to produce and deliver a film of each individual book.

Included with the costs borne by each SPV is a recharge by the studio of the book rights relating to the film it has been engaged to produce. The studio retains all other intellectual property including merchandising rights.

The payments from each SPV to the studio are core expenditure.

Musical, literary and stock film rights

Similar considerations apply to payments made for options and rights connected to music, songs, literary works and stock footage that may be incorporated into the film during principal photography or post production.