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

Film tax relief
38
Films qualifying for film tax relief
A film qualifies for film tax relief if the conditions specified in the following
sections are met—
(a)
section 39 (intended theatrical release),
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(b)
section 40 (British film), and
(c)
section 41 (UK expenditure).
39
Conditions of relief: intended theatrical release
(1)
The film must be intended for theatrical release.
(2)
For this purpose—
10
(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
intended that a significant proportion of the earnings from the film
should be obtained by such exhibition.
15
(3)
Whether this condition is met is determined for each accounting period of the
film production company during which film-making activities are carried on
in relation to the film, in accordance with the following rules.
(4)
If at the end of an accounting period the film is intended for theatrical release,
the condition is treated as having been met throughout that period (subject to
20
subsection (5)(b)).
(5)
If at the end of an accounting period the film is not intended for theatrical
release, the condition—
(a)
is treated as having been not met throughout that period, and
(b)
cannot be met in any subsequent accounting period.
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This does not affect any entitlement of the company to relief in an earlier
accounting period for which the condition was met.
40
Conditions of relief: British film
The film must be certified by the Secretary of State as a British film under
Schedule 1 to the Films Act 1985 (c. 21).
30
41
Conditions of relief: UK expenditure
(1)
Not less than 25% of the core expenditure on the film incurred—
(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,
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must be UK expenditure.
(2)
The Treasury may by regulations amend the percentage specified in subsection
(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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Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
32

42
Film tax relief: further provisions
(1)
Schedule 5 to this Act contains further provisions about film tax relief.
(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
5
relief;
Part 3 makes provision for claims for the relief;
Part 4 is about provisional entitlement to relief.
Film losses
43
Films: restriction on use of losses while film in production
10
(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—
(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.
15
(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
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
20
other person, is chargeable to tax.
44
Films: use of losses in later periods
(1)
This section applies—
(a)
to the accounting period—
(i)
in which the film is completed, or
25
(ii)
if the film production company does not complete the film, in
which it abandons film-making activities in relation to the film,
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)
30
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
loss as is not attributable to film tax relief may be treated for the purposes of
loss relief as if it were a loss incurred in the period to which it is carried
forward.
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(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
393A of ICTA, or
(b)
surrendered as group relief under section 403 of that Act,
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is restricted to the amount (if any) that is not attributable to film tax relief.

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

(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
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
5
to reduce the amount in respect of which the film production company, or any
other person, is chargeable to tax.
(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
10
(1)
This section applies where—
(a)
a film production company (“company A”) ceases to carry on a trade in
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
15
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
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
20
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
production company (“company B”) which—
(a)
is carrying on a trade in relation to a qualifying film (its “qualifying
trade”), and
25
(b)
is in the same group as company A for the purposes of Chapter 4 of Part
10 of ICTA (group relief),

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
30
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
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)
35
and the resulting claim under subsection (4), make provision by regulations
corresponding, subject to such adaptations or other modifications as appear to
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—
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(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
Schedule 4, and
(b)
references to a qualifying film are to a film that meets the conditions for
film tax relief (see section 38).
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Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
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Films: withdrawal of existing reliefs
46
Films: withdrawal of existing reliefs (corporation tax)
(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
5
photography on or after 1st April 2006;
(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
10
made).
(2)
Section 41 of that Act (preliminary expenditure) does not apply to expenditure
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—
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(a)
to production expenditure on a film that commences principal
photography on or after 1st April 2006;
(b)
to acquisition expenditure—
(i)
on a film that commences principal photography on or after 1st
April 2006, or
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(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
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—
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(a)
“original master version” means the original negative, tape or disc;
(b)
references to the original master version of a film include the original
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.
30
47
Films: withdrawal of existing reliefs (income tax)
(1)
Sections 134 and 135 of ITTOIA 2005 (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;
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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 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—

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

(a)
to production expenditure on a film that commences principal
photography on or after 1st April 2006;
(b)
to acquisition expenditure—
(i)
on a film that commences principal photography on or after 1st
April 2006, or
5
(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
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—
10
(a)
“original master version” means the original negative, tape or disc;
(b)
references to the original master version of a film include the original
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.
15
Corporation tax treatment of sound recordings
48
Sound recordings: revenue nature of expenditure
(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.
20
(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
recording—
(a)
are treated for corporation tax purposes as receipts of a revenue nature,
and
25
(b)
are brought into account in calculating the profits of the relevant period
in which they are received.
(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
30
original master version (including an interest or right created by the
disposal), and
(b)
insurance, compensation or similar money derived from the original
master version.
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Sound recordings: allocation of expenditure
35
(1)
This section applies in calculating for the purposes of corporation tax the
profits or losses of a company from a trade where—
(a)
the trade consists of or includes the exploitation of original master
versions of sound recordings, and
(b)
the original master versions do not constitute trading stock of the trade
40
as defined by section 100(2) of ICTA.
(2)
Expenditure that is—
(a)
incurred on the production or acquisition of the original master version
of a sound recording, and

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
36

(b)
expenditure of a revenue nature (whether as a result of section 48 or
otherwise),

must be allocated to relevant periods in accordance with this section.
(3)
The company must allocate to a relevant period so much of the expenditure as
is just and reasonable having regard to—
5
(a)
the amount of the expenditure that remains unallocated at the
beginning of the period,
(b)
the proportion that the estimated value of the original master version
of the sound recording that is realised in that period (whether by way
of income or otherwise) bears to the aggregate of the value so realised
10
and the estimated remaining value of the original master version at the
end of the period, and
(c)
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
to be realised.
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(4)
The company may also allocate to a relevant period a further amount, so long
as the total amount allocated does not exceed the value of the original master
version of the sound recording realised in that period (whether by way of
income or otherwise).
50
Sound recordings: interpretation
20
For the purposes of sections 48 and 49 (corporation tax treatment of sound
recordings)—
(a)
“sound recording” does not include a film soundtrack;
(b)
“original master version” means the master tape or master audio disc
of the recording;
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(c)
references to the original master version of a sound recording include
any rights in the original master version that are held or acquired with
it; and
(d)
“relevant period” means—
(i)
a period for which accounts of the trade are made up, or
30
(ii)
if no accounts of the trade are made up for a period, an
accounting period of the company.
Supplementary provisions
51
Corporation tax: films and sound recordings as intangible fixed assets
(1)
In Schedule 29 to FA 2002 (corporation tax: gains and losses from intangible
35
fixed assets), for paragraph 80 (exclusion of films and sound recordings)
substitute—
“Assets excluded: certain films
80A   (1)
This Schedule does not apply to an intangible fixed asset held by a
film production company to the extent that it represents production
40
expenditure on a film to which Schedule 4 of the Finance Act 2006
applies.

Expressions used in this sub-paragraph have the same meaning as in
Chapter 3 of Part 3 of the Finance Act 2006.

Finance (No.2) Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 3 — Films and sound recordings
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      (2)
Except as regards royalties, this Schedule does not apply to an
intangible fixed asset held by a company to the extent that it
represents expenditure by the company—
(a)
on the production of the original master version of a film that
commenced principal photography before 1st April 2006;
5
(b)
on the acquisition before 1st October 2007 of the original
master version of a film that commenced principal
photography before 1st April 2006.
      (3)
In sub-paragraph (2)—
(a)
“film” has the same meaning as in Chapter 3 Part 3 of the
10
Finance Act 2006;
(b)
“original master version” means the original negative, tape or
disc;
(c)
references to the original master version of a film include the
original master version of the film soundtrack (if any);
15
(d)
references to the original master version include any rights in
the original master version that are held or acquired with it.
Assets excluded except as regards royalties: sound recordings
80B   (1)
Except as regards royalties, this Schedule does not apply to an
intangible fixed asset held by a company to the extent that it
20
represents expenditure by the company on the production or
acquisition of the master version of a sound recording.
      (2)
For this purpose—
(a)
“sound recording” does not include a film soundtrack;
(b)
“master version” means master tape or master audio disc of
25
the recording;
(c)
references to the master version include any rights in the
master version that are held or acquired with it.”.
(2)
In determining for the purposes of that Schedule whether an asset representing
production expenditure on a film was created before or after 1st April 2002, the
30
asset shall be treated as created when the film was completed.
52
Films: application of provisions to certain films already in production
(1)
The Treasury may make provision by regulations for the application of the
provisions of this Chapter, and of any enactment amended by this Chapter, in
relation to films that commenced principal photography before 1st April 2006
35
but are not completed before 1st January 2007.
(2)
The regulations may provide for such adaptations and modifications of the
provisions of this Chapter, of any enactment amended by this Chapter and of
any other provision of the Corporation Tax Acts, as appear to the Treasury
appropriate for that purpose.
40
(3)
The regulations may—
(a)
provide that the provisions of this Chapter (or any specified provisions
of this Chapter) shall have effect as if they had been in force at all
material times;