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HMRC internal manual

Television Production Company Manual

Taxation: profit/loss calculation - introduction

Part 15A Ch 2 Corporation Tax Act 2009 (CTA 2009)

Where a company is a Television Production Company (TPC) (TPC10110) for the purposes of Part 15A CTA 2009:

  • the production of each programme is treated as a separate trade (TPC20010),
  • the profits or losses of producing a programme are on revenue account (TPC20230), with
  • costs debited as incurred (TPC20240), and
  • income credited as earned (on a prescribed estimated basis if necessary) (TPC20220).

Expenditure is deductible earlier than would generally be the case if the deduction had to await disposal, or part disposal, of a capital asset.

This is particularly relevant for any TPC that retained the broadcast rights. The company may mainly receive exploitation income against which the cost of creating the asset might not otherwise be set.

The method of calculating profits or losses of the deemed trade for tax purposes broadly follows the model provided by section 13 of FRS102. This sets out the principles and methodology for recognising income and profit arising on construction contracts (or long-term contracts) as activity progresses.

Construction contracts are defined in FRS102 as:

`A contract specifically negotiated for the construction of an asset (or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use).’

The method set out in FRS102 calculates and spreads the profits over the lifetime of a project and recognises income and expenditure in line with the state of completion of the project. FRS102 envisages alternative methods for doing this depending on whether the work done can be independently valued or whether the proportion of the budget spent provides the best measure of completion.

Other accounting standards that deal with construction contracts (or long term contracts) are SSAP9, UITF40 and IAS11, none of which contain principles that are substantially different to section 23 of FRS102.

For accounting periods beginning on or after 1 January 2015, UK businesses will follow Financial Reporting Standard 102 (FRS102) - ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’. This will effectively replace SSAP9.

The method of calculating profits or losses will then follow the model provided by Sections 13 and 23 of FRS102 - ‘Inventories’ and ‘Revenue’, respectively. There should be little change for practical purposes as to when revenue is first recognised.

In television programme production, the total budget for the programme is almost invariably agreed at the outset and costs are then carefully monitored and controlled to ensure delivery of the programme within that budget.

In contrast, the income that the programme is capable of generating can be more uncertain. This is particularly true where the programme has not been commissioned by the person to whom all the rights will be sold and the Television Production Company retains rights which it can sell itself, or otherwise exploit.

Consequently, taxable profits are recognised by apportioning the total expected income to the degree of completion as measured by the proportion of total expenditure incurred and reflected in work done (TPC20250).