Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Finance (No.2) Bill

Finance (No.2) Bill
Schedule 3 — Claims for relief for research and development
163

Schedule 3
Section 29

Claims for relief for research and development
Introductory
1
Schedule 18 to FA 1998 (company tax returns, assessments and related
matters) is amended as follows.
5
Claims to be included in return
2     (1)
Paragraph 10 (other claims and elections to be included in return) is
amended as follows.
      (2)
In sub-paragraph (2) (claims to which Part 8, 9 or 9A of Schedule 18 applies)
for “R&D tax credit” substitute “R&D tax relief”.
10
      (3)
After sub-paragraph (2A) insert—
   “(2B)
A claim to which Part 9BA of this Schedule applies (claims for
relief under Schedule 12 to the Finance Act 2002) can only be made
by being included in a company tax return (see paragraph 83LB).”
      (4)
In sub-paragraph (3) (claims to which Part 9C of Schedule 18 applies) for
15
“tax credits under Schedule 13 to the Finance Act 2002” substitute “tax relief
under Schedule 13 to the Finance Act 2002”.
Claims for R&D tax relief
3
In paragraph 83A (Part 9A: introduction) for “claims for R&D tax credits”
substitute “claims for R&D tax relief”.
20
4
In each of the following provisions for “claim for an R&D tax credit”
substitute “claim to which this Part of this Schedule applies”—
(a)
paragraph 83B(1) (claim to be included in company tax return);
(b)
paragraph 83C (content of claim);
(c)
paragraph 83D (amendment or withdrawal of a claim);
25
(d)
paragraph 83E(1) (time limit for claims).
5
In the title of Part 9A, “R&D tax credit” becomes “R&D tax relief”.
Claims for relief under Schedule 12 to FA 2002
6
After paragraph 83L insert—
“Part 9BA
30
Claims for relief under Schedule 12 to the Finance Act 2002
Introduction
83LA
This Part of this Schedule applies to claims for relief under
Schedule 12 to the Finance Act 2002.

Finance (No.2) Bill
Schedule 3 — Claims for relief for research and development
164

Claim to be included in company tax return
83LB  (1)
A claim to which this Part of this Schedule applies must be made
by being included in the claimant company’s company tax return
for the accounting period for which the claim is made.
      (2)
It may be included in the return originally made or by
5
amendment.
Content of claim
83LC
A claim to which this Part of this Schedule applies must specify the
amount of the relief claimed, which must be an amount quantified
at the time the claim is made.
10
Amendment or withdrawal of claim
83LD
A claim to which this Part of this Schedule applies may be
amended or withdrawn by the claimant company only by
amending its company tax return.
Time limit for claims
15
83LE  (1)
A claim to which this Part of this Schedule applies may be made,
amended or withdrawn at any time up to the first anniversary of
the filing date for the company tax return of the claimant company
for the accounting period for which the claim is made.
      (2)
The claim may be made, amended or withdrawn at a later date if
20
an officer of Revenue and Customs allows it.”
Claims for relief under Schedule 13 to FA 2002
7
In paragraph 83M (Part 9C: introduction) for “claims for tax credits”
substitute “claims for relief”.
8
In paragraph 83R (penalty), in sub-paragraph (1)(a) for “a claim to which
25
this Part of this Schedule applies” substitute “a claim for a tax credit under
Schedule 13 to the Finance Act 2002”.
9
In the title of Part 9C, “tax credit” becomes “tax relief”.
Commencement and transitional provision
10
The amendments made by paragraphs 2 to 9 have effect in relation to
30
accounting periods ending on or after 31st March 2006.
11    (1)
This paragraph applies where a company is entitled to relief under Schedule
20 to FA 2000 or Schedule 12 or 13 to FA 2002 for any accounting period of
the company falling within sub-paragraph (2).
      (2)
An accounting period of a company falls within this sub-paragraph if it ends
35
on a day falling after 31st March 2002 but before 31st March 2006.
      (3)
Sub-paragraphs (4) and (5) apply to any claim by the company for such relief
for an accounting period falling within sub-paragraph (2), other than a claim
by the company for—

Finance (No.2) Bill
Schedule 4 — Taxation of activities of film production company
165

(a)
an R&D tax credit under Schedule 20 to FA 2000, or
(b)
a tax credit under Schedule 13 to FA 2002.
      (4)
A claim to which this sub-paragraph applies may be made, amended or
withdrawn by the company at any time up to and including 31st March
2008.
5
      (5)
A claim to which this sub-paragraph applies may be made, amended or
withdrawn by the company at a later date if an officer of Revenue and
Customs allows it.
Schedule 4
Section 37

Taxation of activities of film production company
10
Films to which this Schedule applies
1
The provisions of this Schedule apply in relation to films that commence
principal photography on or after 1st April 2006.
Activities treated as separate trade
2
The activities of the film production company in relation to such a film are
15
treated as a trade separate from any other activities of the company (and
from any activities in relation to any other film).
When the trade begins
3
The film production company is treated as starting to carry on the trade—
(a)
when pre-production of the film begins, or
20
(b)
if earlier, when any income from the film is received by the company.
Pre-trading expenditure
4     (1)
Where a company incurs expenditure on development of a film and
subsequently begins to carry on a trade as the film production company in
relation to the film, the expenditure may be treated as expenditure of that
25
trade and as if incurred immediately after the company began to carry it on.
      (2)
If expenditure so treated has previously been taken into account for other tax
purposes, the company must amend any relevant company tax return
accordingly.
      (3)
Any amendment or assessment necessary to give effect to sub-paragraph (2)
30
may be made notwithstanding any limitation on the time within which an
amendment or assessment may normally be made.
Costs of the film
5     (1)
References in this Schedule to the costs of the film are to expenditure
incurred by the company on—
35
(a)
film-making activities in connection with the film, or
(b)
activities with a view to exploiting the film.

Finance (No.2) Bill
Schedule 4 — Taxation of activities of film production company
166

      (2)
This is subject to any provision of the Corporation Tax Acts prohibiting the
making of a deduction, or restricting the extent to which a deduction is
allowed, in calculating the profits of a trade.
      (3)
Expenditure that (apart from this provision) would be regarded as of a
capital nature by reason only of being incurred on the creation of an asset
5
(the film) is treated as being of a revenue nature.
Income from the film
6     (1)
References in this Schedule to income from the film are to any receipts by the
company in connection with the making or exploitation of the film.
      (2)
This includes—
10
(a)
receipts from the sale of the film or rights in it;
(b)
royalties or other payments for use of the film or aspects of it (for
example, characters or music);
(c)
payments for rights to produce games or other merchandise;
(d)
receipts by the company by way of a profit share agreement.
15
      (3)
Receipts that (apart from this provision) would be regarded as of a capital
nature are treated as being of a revenue nature.
Calculation of profit or loss
7     (1)
For the first period of account there shall be brought into account in
determining profit or loss—
20
(a)
as a debit, the costs of the film incurred (and represented in work
done) to date, and
(b)
as a credit, the proportion of the estimated total income from the film
treated as earned at the end of that period.
      (2)
For any period of account after the first there shall be brought into account
25
in determining profit or loss—
(a)
as a debit, the difference between the amount of the costs of the film
incurred (and represented in work done) to date and the
corresponding amount for the previous period, and
(b)
as a credit, the difference between the proportion of the estimated
30
total income from the film treated as earned at the end of that period
and the corresponding amount for the previous period.
      (3)
The proportion of estimated total income treated as earned at the end of any
period of account is determined using the formula:

where—
35
C is the total to date of costs incurred (and reflected in work done),
T is the estimated total cost of the film, and
I is the estimated total income from the film.

Finance (No.2) Bill
Schedule 5 — Film tax relief: further provisions
Part 1 — Entitlement to film tax relief
167

Estimates
8
Estimates for the purposes of this Schedule must be made as at the balance
sheet date for each period of account, on a fair and reasonable basis taking
into consideration all relevant circumstances.
When costs are taken to be incurred
5
9     (1)
For the purposes of this Schedule costs are incurred when they are
represented in the state of completion of the work in progress.
      (2)
Accordingly—
(a)
payments in advance for work to be done are ignored until the work
has been carried out, and
10
(b)
deferred payments are recognised to the extent that the work is
represented in the state of completion.
      (3)
The costs incurred on a film shall be taken to include an amount that has not
been paid only if it is the subject of an unconditional obligation to pay.
      (4)
Where an obligation is linked to income being earned from the film no
15
amount is to be brought into account in respect of the costs of the obligation
unless an appropriate amount of income is or has been brought into account.
Exclusion of expenditure relieved under other provisions
10
Expenditure in respect of which relief has been given under—
(a)
section 40B, 41 or 42 of F(No.2)A 1992,
20
(b)
section 48 of F(No.2)A 1997, or
(c)
section 135, 136 to 138A or 139 to 142 of ITTOIA 2005,

shall not be taken into account for the purposes of this Schedule.
Schedule 5
Section 42

Film tax relief: further provisions
25
Part 1
Entitlement to film tax relief
Introduction
1     (1)
Film tax relief is available in accordance with this Schedule in respect of
expenditure on a film—
30
(a)
that qualifies for the relief (see section 38), and
(b)
that commences principal photography on or after 1st April 2006.
      (2)
References in this Part of this Schedule to the trade of a film production
company are to the trade that it is treated as carrying on under Schedule 4.

Finance (No.2) Bill
Schedule 5 — Film tax relief: further provisions
Part 1 — Entitlement to film tax relief
168

Additional deduction in computing profits of trade
2
The film production company may (on making a claim) make an additional
deduction in calculating the profit or loss of its trade in respect of qualifying
expenditure on the film.
Qualifying expenditure
5
3     (1)
Qualifying expenditure for this purpose means core expenditure on the film
that falls to be taken into account under Schedule 4 in calculating the profit
or loss of the trade for tax purposes.
      (2)
The Treasury may by regulations—
(a)
amend sub-paragraph (1);
10
(b)
provide that expenditure of a specified description is or is not to be
regarded for the purposes of this Part of this Schedule as qualifying
expenditure.
      (3)
No such regulations shall be made unless a draft of the regulations has been
laid before and approved by a resolution of the House of Commons.
15
Amount of additional deduction
4     (1)
For the first period of account during which the trade is carried on the
amount of the additional deduction is given by—

where—
E is—
20
(a)
so much of the qualifying expenditure as is UK expenditure,
or
(b)
if less, 80% of the total amount of qualifying expenditure; and
R is the rate of enhancement (see paragraph 5).
      (2)
For any period of account after the first the amount of the additional
25
deduction is given by—

where—
E is—
(a)
so much of the qualifying expenditure incurred to date as is
UK expenditure, or
30
(b)
if less, 80% of the total amount of qualifying expenditure
incurred to date,
R is the rate of enhancement (see paragraph 5), and
P is the amount of the additional deduction given in the previous
period or, as the case may be, the aggregate amount of the additional
35
deductions given in previous periods.
      (3)
The Treasury may by regulations amend the percentage stated in sub-
paragraph (1) or (2).

Finance (No.2) Bill
Schedule 5 — Film tax relief: further provisions
Part 1 — Entitlement to film tax relief
169

      (4)
No such regulations shall be made unless a draft of the regulations has been
laid before and approved by a resolution of the House of Commons.
Rate of enhancement
5
The rate of enhancement is—
(a)
for a limited-budget film, 100%;
5
(b)
for a film other than a limited-budget film, 80%.
Film tax credits
6     (1)
A film production company may claim a film tax credit for an accounting
period in which it has a surrenderable loss.
      (2)
The amount of the company’s surrenderable loss in any period is equal to
10
whichever is the less of—
(a)
the amount of its trading loss for that period, and
(b)
the available qualifying expenditure.
      (3)
For the first period of account during which the trade is carried on, the
available qualifying expenditure is the amount that is E for that period for
15
the purposes of paragraph 4(1).
      (4)
For any period of account after the first, the available qualifying expenditure
is given by—

where—
E is the amount that is E for that period for the purposes of paragraph
20
4(2), and
S is the amount surrendered in the previous period, or (as the case may
be) the aggregate amount of the amounts surrendered in previous
periods, under paragraph 7.
Amount of credit
25
7     (1)
The company may surrender the whole or part of its surrenderable loss in a
period.
      (2)
The amount of the film tax credit to which a company is entitled for a period
is given by the formula—

where—
30
L is the amount of the loss surrendered, and
R is the payable credit rate (see paragraph 8).
Payable credit rate
8
The payable credit rate is—
(a)
for a limited-budget film, 25%;
35
(b)
for a film other than a limited-budget film, 20%.