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HMRC internal manual

Film Production Company Manual

Avoidance and disclosure: avoidance - inflation of production costs

CTA2009/S1203 and S1204

The tax relief previously available for production or acquisition of British films was subject to regular abuse by those seeking a means to avoid tax. One such abuse was the artificial inflation of the actual level of production expenditure through the inclusion of deferred fees or other contingent costs, such as participations, which might never arise in practice.

The tax regime for films includes features intended to ensure that it does not suffer from similar abuse in the future.

Recognition of expenditure

There are rules for determining when expenditure on film production is recognised for the purposes of the film production company’s (FPC) basic tax computation (i.e. regardless of whether or not Film Tax Relief (FTR) is available or claimed).

Under these rules,

  • expenditure is recognised to the extent to which it is represented in the state of completion of the film
  • any amount that has not actually been paid is only recognised where its payment by the FPC in the future is unconditional.
  • costs relating to an obligation that is linked to income being earned can only be brought into account to the extent that the relevant income is brought into account 

Unpaid amounts

In calculating FTR any costs which remain unpaid four months after the end of the relevant period of account are excluded, irrespective of whether there is an unconditional obligation for them to be paid in the future.

Deferments or contingent fees (unpaid four months after the end of the period) should be disregarded for the purposes of FTR, even where such costs are subject to an unconditional obligation to be paid.

This disregard does not apply to the basic tax computation.


An FPC is commissioned to produce an FTR-qualifying film. Production costs (all UK) are £5m. The film is completed within a single accounting period (Period 1).

The production agreement provides that the FPC will be paid:

  • £4.2m for producing the film, and
  • a further £500,000 if box office receipts exceed £20m.

The principal actor has an agreement with the FPC that if box office receipts exceed £20m he will receive an additional £400,000 from the FPC.

The contingent receipt of £500,000 is too uncertain to bring into the calculation of the film’s profit or loss until box office receipts are known.

Box office receipts exceed £20m towards the end of Period 2. At that point the additional £500,000 is treated as earned and brought into the calculation of profit or loss for Period 2. The obligation to pay the actor will also be recognised in that period for the purposes of calculating the profits or losses of the separate trade of film production under CTA2009/Part 15 Chapter 2

But the FPC does not receive the payment, and does not pay out the £400,000 due to the principal actor until midway through Period 3 (i.e. more than four months after the end of Period 2). So for the purposes of FTR, the £400,000 is ignored when looking at the Period 2, but is brought in to Period 3.

Profits or losses of separate trade (CTA2009/Part 15 Chapter 2) Period 1 Period 2 Period 3
Income £4.2m £0.5m nil
Expenditure incurred during period (all UK) £5m £0.4m nil
Trading profits (losses) (£0.8m) £0.1m nil
Calculation of additional deduction and surrenderable loss (CTA2009/Part 15 Chapter 3)      
Expenditure incurred to end of period (all UK) £5m £5.0m  
(disregarding £0.4m unpaid within 3 months of end of period £5.4m
(including £0.4m incurred in Period 2 but paid in Period 3)        
  Increase over expenditure incurred over previous period £5m nil £0.4
  Enhanceable Expenditure (in this case 80% of total core) £4m nil £0.32m
  Additional deduction to end of period (100% of enhanceble expenditure) £4m £4m £4.32m
  Less additional deduction claimed for earlier period(s) - (£4m) (£4m)
  Additional deduction due for the period £4m - £0.32m
  Trading (profit) loss for the period after additional deduction (£4.8m) £0.1m (0.32m)
  Surrenderable loss (lower of trading loss for the period (after additional deduction) and enhanceable expenditure) (£4m) - (£0.32m)



Pre-FTR loss: £700,000

Surrenderable losses: £4.32m