Taxation: profit/loss calculation: matching income to expenditure
S1216BA, S1216BF Corporation Tax Act 2009 (CTA 2009)
Part 15A CTA 2009 sets out how the profits and losses of a television programme trade of Television Production Companies (TPCs) (TPC10110) are calculated for tax purposes.
The method is modelled on the way in which profits are recognised in construction contracts (or long-term contracts) (see TPC20220). This means recognising expected income in line with the state of completion of the programme as measured by the proportion of total costs to date that has been expended.
It operates by:
- calculating what proportion of the programme’s estimated total costs have been incurred (and are reflected in work done) within each accounting period, and
- allocating the programme’s estimated total income in similar proportions.
This method will adjust for both changes to the estimated total income from the programme, (for example, sale of further rights) and to changes in the estimated total cost (due, for example, to a change of plans during shooting).
In the calculation:
- the estimated total cost of the programme will be the expected cost of making the programme plus any expected exploitation costs (TPC20230), and
- the estimated total income will be all the expected income from the programme (TPC20210).
Estimated costs and income
A TPC may need to estimate both total expected costs and total expected income to be able to operate the formula to determine taxable profits or losses.
Where actual income and costs are known, this estimate is not necessary. For example, if a programme has been sold and no rights to further income from that programme retained, then the income is the proceeds of the sale.
Estimated total costs
The estimated total cost will generally be the total estimated allowable costs shown by the most recent and reliable estimate in the television production budget, plus a realistic estimated cost to the TPC of exploiting any rights in the programme that it retains.
Budgets of this sort are generally maintained by TPCs both as a management tool and because their existence is generally a condition imposed by the completion guarantor and the financiers or commissioning broadcaster.
Estimated total income
The estimated total income from the programme is the total income, received or expected, from the programme over its life.
The estimate of income should include income from all sources (TPC20210) but it should only include income that the TPC is in a position to realistically expect and quantify. This does not include hypothetical or potential income merely because a prediction of that income has been made such as by a sales agent. The realistic expectation of income is closer to that included in the statutory accounts.
So the estimated income should broadly include that income which the company would be confident enough to include in its Profit & Loss account were the programme to be treated as being on revenue account.
Whether any particular contract or agreement gives the company rights such that income should be recognised under these rules will be a question of fact. See below for further detail of how estimates are to be made.
Estimating total income earned at the end of an accounting period
At the end of any accounting period the amount of income treated as earned is calculated as follows:
|The income treated as earned||=||C/T x I|
|C||=||Total to date of costs incurred on the television programme and reflected in work done|
|I||=||Estimated total income of the television programme|
|T||=||Estimated total costs of the television programme|
See TPC20510 - TPC20550 for examples of these calculations.