Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 8 — Trade profits: herd basis rules
58

(c)
both the transferor and transferee are bodies of persons and another
person has control over both of them.
(3)
For this purpose “body of persons” includes a firm.
(4)
The herd basis benefit condition is met if—
(a)
the transferor or transferee (or both) might (but for this section) have
5
been expected to obtain a herd basis benefit as a result of the transfer or
the transactions of which the transfer is one, and
(b)
the herd basis benefit is the sole or main benefit, or one of the main
benefits, that the person in question might have been expected to
obtain.
10
(5)
For this purpose a “herd basis benefit” is a benefit resulting from—
(a)
the obtaining of a right to make a herd basis election,
(b)
the herd basis rules applying or not applying, or
(c)
the herd basis rules having a greater or lesser effect.
(6)
For the purpose of calculating the profits of—
15
(a)
the trade carried on by the transferor, and
(b)
any trade carried on by the transferee,

the animals transferred are treated as having been sold at the price which they
would have fetched if sold in the open market.
Supplementary
20
128
Information if election made
(1)
The Inland Revenue may by notice require the person carrying on a trade in
relation to which a herd basis election is made to deliver a return of such
information about—
(a)
the animals kept for the purposes of the trade, and
25
(b)
the products of those animals,

as may be required by the notice.
(2)
The return must be delivered to the Inland Revenue within the time specified
in the notice.
129
Further assessment etc. if herd basis rules apply
30
(1)
If the herd basis rules apply in calculating the profits of a tax year after an
assessment for that tax year has become final and conclusive, any assessment
or repayment of tax that is necessary to give effect to the rules must be made.
(2)
But repayment of tax is due only if a claim for it is made.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 9 — Trade profits: films and sound recordings
59

Chapter 9
Trade profits: films and sound recordings
Introduction
130
Expenditure to which this Chapter applies
(1)
This Chapter makes provision about—
5
(a)
expenditure incurred on the production or acquisition of the original
master version of a film or sound recording, and
(b)
preliminary expenditure in relation to a film.
(2)
In this Chapter references to production expenditure are to expenditure
incurred on the production of the original master version of a film or sound
10
recording.
(3)
In this Chapter references to acquisition expenditure are to expenditure
incurred on the acquisition of the original master version of a film or sound
recording.
(4)
In this Chapter references to the original master version of a film or sound
15
recording include any rights in the original master version of a film or sound
recording that are held or acquired with it.
(5)
In this Chapter references to production or acquisition expenditure do not
include—
(a)
interest (as to which, see section 29), or
20
(b)
the incidental costs of obtaining finance (as to which, see sections 58
and 59).
(6)
In this Chapter “preliminary expenditure”, in relation to a film, means
expenditure which—
(a)
can reasonably be said to have been incurred with a view to enabling a
25
decision to be taken as to whether to make the film,
(b)
is payable before the first day of principal photography (if the decision
is to make the film), and
(c)
is not repayable under a contract or other arrangement if the film is not
made.
30
(7)
In this Chapter “any prohibitive rule” means any provision of the Income Tax
Acts which—
(a)
prohibits a deduction from being made, or
(b)
restricts the extent to which it is allowed,

in calculating the profits of a trade.
35
131
Meaning of “film” and related expressions
(1)
In this Chapter “film” includes any record, however made, of a sequence of
visual images which is capable of being used as a means of showing that
sequence as a moving picture.
(2)
For the purposes of this Chapter each part of a series of films is treated as a
40
separate film.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 9 — Trade profits: films and sound recordings
60

(3)
But if the Secretary of State has given a direction under paragraph 1(4) of
Schedule 1 to the Films Act 1985 (c. 21) that parts of a series of films are to be
treated as a single film for the purposes of that Schedule, they are also treated
as a single film for the purposes of this Chapter.
(4)
In this Chapter references to a film include the film soundtrack (if any).
5
(5)
For the purposes of this Chapter a film is completed when it is first in a form in
which it can reasonably be regarded as ready for copies of it to be made and
distributed for presentation to the general public.
132
Meaning of “original master version” and “certified master version”
(1)
In this Chapter “original master version” means—
10
(a)
in relation to a film, the original master negative, tape or disc, and
(b)
in relation to a sound recording, the original master audio tape or disc.
(2)
In this Chapter references to the original master version of a film include the
original master version of the film soundtrack (if any).
(3)
In this Chapter “certified master version”, in relation to a film, means an
15
original master negative, tape or disc which is certified under paragraph 3 of
Schedule 1 to the Films Act 1985 as a qualifying film, tape or disc for the
purposes of this Chapter.
133
Meaning of “relevant period”
In this Chapter “relevant period”, in relation to a trade, means—
20
(a)
a period of account of the trade, or
(b)
if no accounts of the trade are drawn up for a period, the basis period
for a tax year.
Expenditure treated as revenue in nature
134
Expenditure treated as revenue in nature
25
(1)
If a person carrying on a trade incurs production or acquisition expenditure,
the expenditure is treated for income tax purposes as expenditure of a revenue
nature.
(2)
If expenditure is treated under this section as revenue in nature, sums received
by the person carrying on the trade from the disposal of the original master
30
version—
(a)
are treated for income tax purposes as receipts of a revenue nature, and
(b)
are brought into account in calculating the profits of the trade of the
relevant period in which they are received.
(3)
For this purpose sums received from the disposal of the original master version
35
include—
(a)
sums received from the disposal of any interest or right in or over the
original master version (including an interest or right created by the
disposal), and
(b)
insurance, compensation or similar money derived from the original
40
master version.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 9 — Trade profits: films and sound recordings
61

(4)
This section does not apply if an election under section 143 below or section
40D of F(No.2)A 1992 (corresponding corporation tax provision) has effect in
relation to the expenditure.
Films and sound recordings: normal rules for allocating expenditure
135
Films and sound recordings: production or acquisition expenditure
5
(1)
This section applies for the purpose of calculating the profits of a trade of a
relevant period if—
(a)
the trade consists of or includes the exploitation of the original master
versions of films or sound recordings,
(b)
the original master versions do not constitute trading stock of the trade
10
(within the meaning of section 174),
(c)
the person carrying on the trade incurs production or acquisition
expenditure in, or before, the relevant period, and
(d)
no election under section 143 below or section 40D of F(No.2)A 1992 has
effect in relation to the expenditure.
15
(2)
A deduction is allowed for the amount of the production or acquisition
expenditure allocated to the relevant period, but this is subject to the
application of any prohibitive rule.
(3)
The person carrying on the trade must allocate to the relevant period so much
of the expenditure as is just and reasonable (but see subsection (5)).
20
(4)
In making this allocation regard must be had to the following—
(a)
the amount of the expenditure which remains unallocated at the
beginning of the period,
(b)
the amount of the expenditure incurred in the period,
(c)
the proportion which the estimated value of the original master version
25
realised in the period (by way of income or otherwise) bears to the sum
of the value so realised and the estimated remaining value at the end of
the period, and
(d)
the need to bring the whole of the expenditure into account over the
time during which the value of the original master version is expected
30
to be realised.
(5)
The person carrying on the trade may also allocate to the relevant period a
further amount, so long as the total amount allocated to the period does not
exceed the value of the original master version realised in the period (by way
of income or otherwise).
35
(6)
Expenditure may not be allocated to the relevant period under this section if it
is allocated—
(a)
under this section to any other relevant period,
(b)
under any other provision of this Chapter to the relevant period or any
other relevant period,
40
(c)
under section 40B of F(No.2)A 1992 (corporation tax provision
corresponding to this section) to any other relevant period, or
(d)
under section 41 of that Act (corporation tax provision corresponding
to section 137 below) or 42 of that Act (corporation tax provision
corresponding to sections 138 to 140 below) to the relevant period or
45
any other relevant period.

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 9 — Trade profits: films and sound recordings
62

(7)
If any expenditure in respect of the original master version is allocated to the relevant
period—
(a)
under any other provision of this Chapter, or
(b)
under section 41 or 42 of F(No.2)A 1992,

no other production or acquisition expenditure in respect of the original master version
5
may be allocated to the relevant period under this section.
Certified master versions: special rules for allocating expenditure
136
Application of provisions about certified master versions
Sections 137 to 140 (certified master versions: certain expenditure) apply for
the purpose of calculating the profits of a trade of a relevant period if—
10
(a)
the trade consists of or includes the exploitation of films,
(b)
the films do not constitute trading stock of the trade (within the
meaning of section 174),
(c)
the expenditure in question is of a revenue nature (whether as a result
of section 134 or otherwise), and
15
(d)
no election under section 143 below or section 40D of F(No.2)A 1992 has
effect in relation to the expenditure.
137
Certified master versions: preliminary expenditure
(1)
This section applies if—
(a)
the person carrying on the trade has incurred preliminary expenditure
20
in connection with a film in, or before, the relevant period,
(b)
the certified master version condition is met (see subsection (2)), and
(c)
the film is genuinely intended for theatrical release.
(2)
The certified master version condition is—
(a)
if the film is completed, that the original master version of it is a
25
certified master version, or
(b)
if the film is not completed, that it is reasonably likely that, if the film
were completed, the original master version of it would be a certified
master version.
(3)
A deduction is allowed for the amount of the preliminary expenditure
30
allocated to the relevant period, but this is subject to the application of any
prohibitive rule.
(4)
The person carrying on the trade may allocate up to 100% of the preliminary
expenditure to the relevant period.
(5)
But the total amount allocated under this section must not exceed 20% of the
35
budgeted total expenditure on the film, calculated as at the first day of
principal photography.
(6)
Expenditure may not be allocated to the relevant period under this section if—
(a)
it is allocated under this section to any other relevant period,
(b)
it is allocated under any other provision of this Chapter to the relevant
40
period or any other relevant period,
(c)
it is allocated under section 41 of F(No.2)A 1992 to any other relevant
period,

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 9 — Trade profits: films and sound recordings
63

(d)
it is allocated under section 40B or 42 of that Act to the relevant period
or any other relevant period, or
(e)
a deduction in respect of it has otherwise been made in calculating the
profits of the trade for income or corporation tax purposes.
(7)
If any preliminary expenditure in connection with the film is allocated to the relevant
5
period—
(a)
under section 135 above, or
(b)
under section 40B of F(No.2)A 1992,

no other preliminary expenditure in connection with the film may be allocated to the
relevant period under this section.
10
(8)
So far as a deduction is given in respect of any expenditure—
(a)
under this section, or
(b)
under section 41 of F(No.2)A 1992,

no further deduction is allowed in respect of that expenditure in calculating the
profits of the trade for income tax purposes.
15
138
Certified master versions: production or acquisition expenditure
(1)
This section applies if—
(a)
the person carrying on the trade has incurred production or acquisition
expenditure in respect of the original master version of a film in, or
before, the relevant period,
20
(b)
the film was completed in, or before, that period,
(c)
the original master version is a certified master version, and
(d)
the film is genuinely intended for theatrical release.
(2)
A deduction is allowed for the amount of the expenditure allocated to the
relevant period, but this is subject to the application of any prohibitive rule.
25
(3)
The person carrying on the trade may allocate up to the permissible amount of
the expenditure to the relevant period.
(4)
The permissible amount of the expenditure is the smallest amount given by the
following calculations.
(5)
The calculations are—
30

Calculation 1

Calculate one-third of the total production or acquisition expenditure incurred
by the person in respect of the original master version (“the total expenditure”).

Calculation 2

Calculate one-third of the sum obtained by deducting from the total
35
expenditure—
(a)
any amount of the total expenditure already allocated under section
137,
(b)
any amount of the total expenditure already allocated under section 41
of F(No.2)A 1992, and
40
(c)
any amount of the total expenditure that has already been, or is capable
of being, allocated under section 139 or 140 below or under section 42
of F(No.2)A 1992 as applied by section 48(1) to (3) of F(No.2)A 1997
(corresponding corporation tax provision).

Calculation 3
45

Income Tax (Trading and Other Income) Bill
Part 2 — Trading income
Chapter 9 — Trade profits: films and sound recordings
64


Calculate so much of the total expenditure as has not already been allocated to
the relevant period or any other relevant period—
(a)
under this section or any other provision of this Chapter, or
(b)
under any of sections 40B, 41 or 42 of F(No.2)A 1992.
(6)
If the relevant period is less than 12 months the above references to one-third
5
are to be read as references to a proportionately smaller fraction.
(7)
If any production or acquisition expenditure in respect of the original master
version is allocated to the relevant period—
(a)
under section 135 above, or
(b)
under section 40B of F(No.2)A 1992,
10

no other production or acquisition expenditure in respect of the original master
version may be allocated to the relevant period under this section.
Certified master versions: limited-budget films
139
Certified master versions: production expenditure on limited-budget films
(1)
This section applies if—
15
(a)
the person carrying on the trade has incurred production expenditure
in respect of the original master version of a film in, or before, the
relevant period,
(b)
the expenditure was incurred before 2nd July 2005 (see section 142 for
timing rule),
20
(c)
the original master version is a certified master version,
(d)
the film is genuinely intended for theatrical release, and
(e)
the total production expenditure in respect of the original master
version is £15 million or less (see section 141).
(2)
A deduction is allowed for the amount of the production expenditure allocated
25
to the relevant period, but this is subject to the application of any prohibitive
rule.
(3)
The person carrying on the trade may allocate up to 100% of the production
expenditure to the relevant period.
(4)
Any expenditure which—
30
(a)
has not been paid at the time the film is completed, and
(b)
is not, at that time, the subject of an unconditional obligation to pay
within 4 months after the date of completion,

is not regarded as production expenditure for the purposes of this section.
(5)
Expenditure may not be allocated to the relevant period under this section if it
35
is allocated—
(a)
under this section to any other relevant period,
(b)
under any other provision of this Chapter to the relevant period or any
other relevant period,
(c)
under section 42 of F(No.2)A 1992 as applied by section 48(1) and (2) of
40
F(No.2)A 1997 (corporation tax provision corresponding to this section)
to any other relevant period, or
(d)
under section 40B or 41 of F(No.2)A 1992, or section 42 of that Act (but
not as applied by section 48(1) and (2) of F(No.2)A 1997), to the relevant
period or any other relevant period.
45