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HMRC internal manual

Theatre Tax Relief

Losses: example: terminal losses surrendered

Part 15C Corporation Tax Act 2009 (CTA 2009)

Company A is a new Theatrical Production Company (TPC) and produces Production 1 which qualifies for Theatre Tax Relief (TTR).

The separate theatrical trade for the purposes of Part 15C CTA 2009 commences on 3 July 2015 and Production 1 is closed on 10 February 2016.  The company ceases its separate theatrical trade in respect of Production 1 on 15 April 2016 when it sells the rights to Production 1 outright.

Company A is in a group as defined for group relief purposes with Company B.

Company B is also a new TPC and carries on a separate theatrical trade in respect of Production 2.  It commences Production 2, which also qualifies for TTR, on 17 February 2016.

The group of companies draws up accounts to 31 December.

The accounting periods are therefore:

Company A Company B
   
3 July to 31 December 2015  
1 January to 15 April 2016 17 February to 31 December 2016
  Year ended 31 December 2017

The computations show:

Company A Production 1
   
3 July to 31 December 2015 £
Income from the production 100,000
Costs of the production (850,000)
Theatre tax relief – additional deduction (400,000)
Profit/(loss) on production (1,150,000)
Other income – non-trade loan relationship 10,000

The computation shows a trading loss of £1,150,000 on Production 1.  Company A chooses not to surrender any part of this trading loss for the Theatre Tax Credit (TTC).  In reality, a TPC would be unlikely to make this choice, which is intended to illustrate the computational principle.

As this is a pre-completion period, the loss is restricted and cannot be offset against other income.  The interest income (the non-trade loan relationship income) is therefore taxable.

Company A Production 1
   
1 January to 15 April 2016 £
Income from the production 500,000
Costs of the production (150,000)
Theatre tax relief – additional deduction (100,000)
Profit/(loss) on production 250,000
Other income – non-trade loan relationship 20,000

 

Company B Production 2
   
17 February to 31 December 2016 £
Income from the production 800,000
Costs of the production (400,000)
Theatre tax relief – additional deduction (300,000)
Profit/(loss) on production 100,000
Other income – non-trading loan relationship 20,000

Company A’s computation shows a profit of £250,000 on Production 1 and Company B’s computation shows a profit of £100,000 on Production 2.

This is the cessation period of the separate theatrical trade in respect of Production 1 and therefore the completion period for Production 1.

The brought forward loss of £1,150,000 reduces the profit of Production 1 to nil.  This leaves an unutilised loss of £900,000 (£1,150,000 - £250,000) of which:

  • £150,000 (£400,000 - £250,000) is attributable to TTR, and
  • £750,000 is not attributable to TTR.

As this is the completion period for Production 1, Company A can utilise the profits not attributable to TTR against other profits and carry them back to the previous period.  It therefore utilises losses as follows:

Set against other profits of the same accounting period £20,000
   
Carried back against profits of the previous period £10,000
Surrendered as group relief £120,000
  £150,000

This is the maximum amount that can be relieved.  It leaves Company A with nil total taxable profits in both periods.  Company B is the recipient of the group relief and this reduces its total taxable profits to nil also.

This leaves Company A with unutilised losses of £750,000 (£900,000 - £150,000).  Without the capacity to claim terminal loss relief, these losses may be stranded.

By claiming terminal loss relief under the TTR rules, the losses are surrendered to Company B.  The losses must be allocated to the separate theatrical trade of Production 2.  This trade will therefore treat the full £750,000 losses as brought forward losses in the next accounting period.

Company B Production 2
   
Year ended 31 December 2017 £
Income from the production 1,000,000
Costs of the production (400,000)
Theatre tax relief – additional deduction (200,000)
Profit/(loss) on production 400,000
Other income – non-trade loan relationship 50,000

Company B’s computation for this period shows a trading profit of £400,000 for Production 2.  The losses deemed to be brought forward of £750,000 are utilised against this profit first.

Company B’s profit is reduced to nil and there are £350,000 of losses deemed to be brought forward for Production 2 at the beginning of the next period.

In these circumstances, the losses can only be used against the profits of the separate theatrical trade of Production 2.  This is because the legislation states that, in a pre-completion period, the losses must be treated as trading losses carried forward under S45 Corporation Tax Act 2010.

The following table shows how the losses from Production 1 are used in the various accounting periods:

  Company A   Company B
       
  TTR         non-TTR non-TTR
  £ £ £
APE 31/12/15          
Production period loss 400,000 750,000  
Losses carried forward into completion period  400,000 750,000  
APE 15/04/16      
Losses brought forward                400,000 750,000  
Set off against Production 1 profit (250,000)    
Set off against NTLR   (20,000)  
Carried back against NTLR of previous period   (10,000)  
Surrendered as group relief   (120,000)  
Losses surrendered under terminal loss relief rules 150,000 600,000  
APE 31/12/16     N/A
APE 31/12/17      
         
  Losses brought forward                    750,000
  Utilised against profits of Production 2     (400,000)
  Losses carried forward     350,000