Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Finance (No.2) Bill

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
31

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Meaning of “qualifying co-production” and “co-producer”
In this Chapter—
(a)
“qualifying co-production” means a film that falls to be treated as a
national film in the United Kingdom by virtue of an agreement
between Her Majesty’s Government in the United Kingdom and any
5
other government, international organisation or authority,
(b)
“co-producer” means a person who is a co-producer for the purposes of
the agreement.
Taxation of activities of film production company
37
Taxation of activities of film production company
10
Schedule 4 to this Act (taxation of activities of film production company) has
effect for the purposes of corporation tax.
Film tax relief
38
Films qualifying for film tax relief
A film qualifies for film tax relief if the conditions specified in the following
15
sections are met—
(a)
section 39 (intended theatrical release),
(b)
section 40 (British film), and
(c)
section 41 (UK expenditure).
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Conditions of relief: intended theatrical release
20
(1)
The film must be intended for theatrical release.
(2)
For this purpose—
(a)
“theatrical release” means exhibition to the paying public at the
commercial cinema;
(b)
a film is not regarded as intended for theatrical release unless it is
25
intended that a significant proportion of the earnings from the film
should be obtained by such exhibition.
(3)
Whether this condition is met is determined when film-making activities
begin, so that—
(a)
where a film is originally intended for theatrical release, this condition
30
continues to be met even if that ceases to be the intention, and
(b)
where a film is not originally intended for theatrical release, this
condition is not met even if that becomes the intention.
40
Conditions of relief: British film
The film must be certified by the Secretary of State as a British film under
35
Schedule 1 to the Films Act 1985 (c. 21).
41
Conditions of relief: UK expenditure
(1)
Not less than 25% of the core expenditure on the film incurred—

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
32

(a)
in the case of a British film other than a qualifying co-production, by the
film production company,
(b)
in the case of a qualifying co-production, by the co-producers,

must be UK expenditure.
(2)
The Treasury may by regulations amend the percentage specified in subsection
5
(1).
(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.
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Film tax relief: further provisions
(1)
Schedule 5 to this Act contains further provisions about film tax relief.
10
(2)
In that Schedule—
Part 1 deals with entitlement to the relief;
Part 2 provides for the certification of British films for the purposes of the
relief;
Part 3 makes provision for claims for the relief;
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Part 4 is about provisional entitlement to relief.
Film losses
43
Films: restriction on use of losses while film in production
(1)
This section applies to restrict the use that may be made of a film production
company’s trading loss for an accounting period before—
20
(a)
that in which the film is completed, or
(b)
where the company does not complete the film, that in which it
abandons film-making activities in relation to the film.
(2)
A trading loss for such a period is not available for loss relief except to the
extent that it may be carried forward under section 393(1) of ICTA to be set
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against profits of the same trade in a later period.
(3)
In this section “loss relief” includes any means by which a loss might be used
to reduce the amount in respect of which the film production company, or any
other person, is chargeable to tax.
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Films: use of losses in later periods
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(1)
This section applies—
(a)
to the accounting period—
(i)
in which the film is completed, or
(ii)
if the film production company does not complete the film, in
which it abandons film-making activities in relation to the film,
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and
(b)
to any subsequent accounting period during which the trade continues.
(2)
Where a trading loss is carried forward to any such period under section 393(1)
of ICTA from an earlier period in relation to which section 43 applied
(restriction on use of losses while film is in production), so much (if any) of the
40
loss as is not attributable to film tax relief may be treated for the purposes of

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
33

loss relief as if it were a loss incurred in the period to which it is carried
forward.
(3)
The amount of the trading loss for an accounting period to which this section
applies that may be—
(a)
set against other profits of the same or an earlier period under section
5
393A of ICTA, or
(b)
surrendered as group relief under section 403 of that Act,

is restricted to the amount (if any) that is not attributable to film tax relief.
(4)
For the purposes of this section the amount of a trading loss in any period that
is attributable to film tax relief is calculated by deducting from the total amount
10
of the loss the amount there would have been if there had been no additional
deduction under Schedule 5 in that or any earlier period.
(5)
In this section “loss relief” includes any means by which a loss might be used
to reduce the amount in respect of which the film production company, or any
other person, is chargeable to tax.
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(6)
This section does not apply to a loss to the extent that it is carried forward or
surrendered under section 45 (terminal losses).
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Films: terminal losses
(1)
This section applies where—
(a)
a film production company (“company A”) ceases to carry on a trade in
20
relation to a qualifying film, and
(b)
if the company had not ceased to carry on the trade, it could have
carried forward an amount under section 393(1) of ICTA 1988 to be set
against profits of the same trade in a later period (the “terminal loss”).
(2)
If on cessation of the trade company A is carrying on a trade in relation to
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another qualifying film, it may on making a claim elect that the terminal loss or
a part of it shall be treated as if it were a loss brought forward under section
393(1) to be set against profits of that other trade in the accounting period
following that at the end of which the cessation takes place.
(3)
If on cessation of the trade carried on by company A there is another film
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production company (“company B”) which—
(a)
is carrying on a trade in relation to a qualifying film (its “qualifying
trade”), and
(b)
is in the same group as company A for the purposes of Chapter 4 of Part
10 of ICTA (group relief),
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the whole or part of the terminal loss may be surrendered by company A to
company B.
(4)
On the making of a claim by company B the amount surrendered shall be
treated as if it were a loss brought forward by that company under section
393(1) to be set against the profits of its qualifying trade for the accounting
40
period of that company following that in which or at the end of which the
cessation takes place of the qualifying trade carried on by company A.
(5)
The Treasury may, in relation to the surrender of a loss under subsection (3)
and the resulting claim under subsection (4), make provision by regulations
corresponding, subject to such adaptations or other modifications as appear to
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Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
34

them to be appropriate, to that made by Part 8 of Schedule 18 to FA 1998
(company tax returns: claims for group relief).
(6)
In this section—
(a)
references to the trade carried on by a film production company in
relation to a film are to the trade that it is treated as carrying on under
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Schedule 4, and
(b)
references to a qualifying film are to a film that meets the conditions for
film tax relief (see section 38).
Films: withdrawal of existing reliefs
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Films: withdrawal of existing reliefs (corporation tax)
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(1)
Sections 40A to 40D of F(No.2)A 1992 (treatment of expenditure on production
or acquisition of film) do not apply—
(a)
to production expenditure on a film that commences principal
photography on or after 1st April 2006;
(b)
to acquisition expenditure—
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(i)
on a film that commences principal photography on or after 1st
April 2006, or
(ii)
that is incurred on or after 1st October 2007 on a film (whenever
made).
(2)
Section 41 of that Act (preliminary expenditure) does not apply to expenditure
20
incurred after the date on which this Act is passed.
(3)
Section 42 of that Act and section 48 of F(No.2)A 1997 (special reliefs for British
films) do not apply—
(a)
to production expenditure on a film that commences principal
photography on or after 1st April 2006;
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(b)
to acquisition expenditure—
(i)
on a film that commences principal photography on or after 1st
April 2006, or
(ii)
that is incurred on or after 1st October 2007.
(4)
References in this section to expenditure on the acquisition of a film, or to sums
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received from the disposal of a film, are to expenditure on the acquisition of, or
sums received from the disposal of, the original master version of the film.
(5)
For this purpose—
(a)
“original master version” means the original negative, tape or disc;
(b)
references to the original master version of a film include the original
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master version of the film soundtrack (if any);
(c)
references to the original master version include any rights in the
original master version that are held or acquired with it.
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Films: withdrawal of existing reliefs (income tax)
(1)
Sections 134 and 135 of ITTOIA 2005 (treatment of expenditure on production
40
or acquisition of film) do not apply—
(a)
to production expenditure on a film that commences principal
photography on or after 1st April 2006;

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
35

(b)
to acquisition expenditure—
(i)
on a film that commences principal photography on or after 1st
April 2006, or
(ii)
that is incurred on or after 1st October 2007 on a film (whenever
made).
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(2)
Section 137 of that Act (preliminary expenditure) does not apply to
expenditure incurred after the date on which this Act is passed.
(3)
Sections 138 to 144 of that Act (special reliefs for British films) do not apply—
(a)
to production expenditure on a film that commences principal
photography on or after 1st April 2006;
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(b)
to acquisition expenditure—
(i)
on a film that commences principal photography on or after 1st
April 2006, or
(ii)
that is incurred on or after 1st October 2007.
(4)
References in this section to expenditure on the acquisition of a film, or to sums
15
received from the disposal of a film, are to expenditure on the acquisition of, or
sums received from the disposal of, the original master version of the film.
(5)
For this purpose—
(a)
“original master version” means the original negative, tape or disc;
(b)
references to the original master version of a film include the original
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master version of the film soundtrack (if any);
(c)
references to the original master version include any rights in the
original master version that are held or acquired with it.
Corporation tax treatment of sound recordings
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Sound recordings: revenue nature of expenditure
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(1)
If a company carrying on a trade incurs expenditure on the production or
acquisition of the original master version of a sound recording, the expenditure
is treated for corporation tax purposes as expenditure of a revenue nature.
(2)
If expenditure is treated under this section as revenue in nature, sums received
by the company from the disposal of the original master version of the sound
30
recording—
(a)
are treated for corporation tax purposes as receipts of a revenue nature,
and
(b)
are brought into account in calculating the profits of the relevant period
in which they are received.
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(3)
For this purpose sums received from the disposal of the original master version
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
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(b)
insurance, compensation or similar money derived from the original
master version.