Taxation: profit/loss calculation: introduction
Part 15C Corporation Tax Act 2009 (CTA 2009)
Where a company is a Theatrical Production Company (TPC) (TTR10110) for the purposes of Part 15C CTA 2009 and makes a claim to Theatre Tax Relief (TTR) in respect of a qualifying theatrical production:
- the making of that theatrical production is treated as a separate trade (TTR20010)
- the profits or losses of that separate theatrical trade are on revenue account (TTR20230), with
- costs debited as incurred (TTR20240), and
- income credited as earned (on a prescribed estimated basis if necessary) (TTR20220).
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 production rights. The company may mainly receive exploitation income against which the cost of creating the asset might not otherwise be set.
For accounting periods beginning before 1 January 2015, the method of calculating profits or losses of the separate theatrical trade for tax purposes broadly follows the model provided by Statement of Standard Accounting Practice 9- ‘Stocks and long-term contracts’ (SSAP9).
For accounting periods beginning on or after 1 January 2015, UK businesses will follow Financial Reporting Standard 102 (FRS 102). This will effectively replace SSAP9.
In theatrical productions, the total budget for the production is almost invariably agreed at the outset and costs are then carefully monitored and controlled to ensure delivery of the production within that budget.
In contrast, the income that the separate theatrical trade is capable of generating can be more uncertain.
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 (TTR20250).
In other words, profits are calculated and spread over the lifetime of a theatrical production with income and expenditure being recognised in line with the state of completion of the production.