Chapter 3: Film tax relief

Clause 1195: Availability and overview of film tax relief

3032.     This clause gives an overview of the Chapter and gives signposts to film tax relief and to the three conditions that must be satisfied in order for the relief to be available. It is new.

Clause 1196: Intended theatrical release

3033.     This clause sets out the condition about intended theatrical release. It is based on section 39 of FA 2006.

Clause 1197: British film

3034.     This clause sets out the condition about certification as a British film. It is based on section 40 of FA 2006.

Clause 1198: UK expenditure

3035.     This clause sets out conditions about the minimum percentage of core expenditure that must be UK expenditure and gives the Treasury power to alter that percentage. It is based on section 41 of FA 2006.

Clause 1199: Additional deduction for qualifying expenditure

3036.     This clause allows a company, entitled to film tax relief, to claim additional trading deductions in respect of core expenditure on the film and gives the Treasury powers in relation to such additional deductions. It is based on paragraphs 1 to 3 of Schedule 5 to FA 2006.

Clause 1200: Amount of additional deduction

3037.     This clause sets out the amount of additional deduction for which a claim may be made under clause 1199 and gives the Treasury power to alter the percentages in subsections (1) and (2). It is based on paragraphs 4 and 5 of Schedule 5 to FA 2006.

3038.     Subsection (3) provides for a higher rate of enhancement if the film is a limited-budget film.

Clause 1201: Film tax credit claimable if company has surrenderable loss

3039.     This clause allows a company, entitled to film tax relief, to surrender a tax loss for a payment if it has a surrenderable loss for the accounting period concerned. It is based on paragraph 6 of Schedule 5 to FA 2006.

Clause 1202: Surrendering of loss and amount of film tax credit

3040.     This clause allows a company to claim a film tax credit for only part of its surrenderable loss and quantifies the film tax credit. It is based on paragraphs 7, 8 and 11 of Schedule 5 to FA 2006.

3041.     Subsection (3) provides for a higher payable credit rate if the film is a limited-budget film.

3042.     Subsection (4) provides that the company’s loss is reduced by the amount for which it claims a film tax credit.

Clause 1203: Payment in respect of film tax credit

3043.     This clause requires the Commissioners for HMRC to pay to the company any film tax credit to which it is entitled and for which a claim has been made. It is based on paragraphs 9, 10 and 14 of Schedule 5 to FA 2006.

3044.     Various circumstances in which a payment need not be made are set out. These include cases where the company has not yet made certain payments that it is required to make.

3045.     Subsection (5) provides that a payment in respect of film tax credit does not count as income of the company.

Clause 1204: No account to be taken of amount if unpaid

3046.     This clause requires costs that remain unpaid four months after the end of a period of account to be treated, for the purposes of this Chapter, as if they had not been incurred by the end of that period. It is based on paragraph 12 of Schedule 5 to FA 2006.

3047.     The restriction in this clause is additional to that in clause 1192. Clause 1192 is concerned with whether, and when, a trading deduction may be made in respect of expenditure in calculating the profit or loss of the single film trade. The further restriction in this clause applies in deciding whether (and, if so, how much of) an additional trading deduction may be claimed or a trading loss may be surrendered for payment.

Clause 1205: Artificially inflated claims for additional deduction or film tax credit

3048.     This clause requires transactions to be ignored for film tax relief purposes if they are attributable to arrangements whose sole or main purpose is obtaining, or increasing, entitlement to that relief. It is based on paragraph 13 of Schedule 5 to FA 2006.

Clause 1206: Confidentiality of information

3049.     This clause permits disclosure of information by HMRC for the purpose of the Secretary of State’s functions relating to certification of films, but prevents the recipient of such information making further disclosure except in specified cases. It is based on paragraph 24 of Schedule 5 to FA 2006.

Clause 1207: Wrongful disclosure

3050.     This clause makes it an offence to disclose information in contravention of clause 1206(3) if the disclosure reveals, or one can deduce, the identity of the person to whom the information relates. It is based on paragraph 25 of Schedule 5 to FA 2006.

3051.     Subsection (6)(b) does not reproduce the reference to “Scotland” in paragraph 25(7) of Schedule 5 to FA 2006. That is because section 45(1) of the Criminal Proceedings etc (Reform) (Scotland) Act 2007 (ASP 6) (brought into force on 10 December 2007) has the effect that the 12 month limit in paragraph 25(4)(b) of Schedule 5 to FA 2006 applies in Scotland.

Chapter 4: Film losses

Clause 1208: Application of sections 1209 and 1210

3052.     This clause introduces, and provides defined terms for, the next two clauses dealing with losses of separate film trades. It is based on section 43(3) and 44(5) of FA 2006.

Clause 1209: Restriction on use of losses while film in production

3053.     This clause restricts the offset of single film trade losses arising in accounting periods ending before the film is completed or abandoned (“pre-completion periods”). It is based on section 43(1) and (2) of FA 2006.

3054.     The profits against which pre-completion period single film trade losses can be offset are restricted to those provided for by section 393(1) of ICTA (carry forward against trading profits of the same trade). But this restriction may effectively cease to apply in respect of some, or all, of those single film trade losses from the accounting period in which the film is completed or abandoned (see clause 1210).

Clause 1210: Use of losses in later periods

3055.     This clause modifies, for accounting periods from that in which the film is completed or abandoned (“the completion period”), the rules on trade losses and their offset against other profits. It is based on section 44(1) to (4) and (6) of FA 2006.

3056.     Subsection (1)(b) refers to the separate film trade continuing in accounting periods after the completion period. This deals with the possibility that a film production company might decide to exploit the completed film, rather than sell it. In such a case the separate film trade may continue after the completion period.

3057.     Subsections (2) and (3) allow part (or all) of single film trade losses brought forward to the completion period to be treated as if they were single film trade losses of the completion period. Single film trade losses of the completion period are not subject to the restrictions in clause 1209. Any brought forward losses that are attributable to film tax relief (see subsection (6)) will not be “freed-up” in this manner. Nor will losses be “freed-up” if they are brought forward because of clause 1211 (terminal losses) (see subsection (7)).

3058.     Subsections (4) and (5) prevent single film trade losses being offset against other profits to the extent that such losses are attributable to film tax relief (see subsection (6)).

Clause 1211: Terminal losses

3059.     This clause allows certain single film trade losses, attributable to a trade that ceases, to be treated as if they were brought forward losses of certain other single film trades and it allows the Treasury to make regulations appropriate to the operation of the clause. It is based on section 45 of FA 2006.

3060.     The normal rule is that trade losses do not survive the cessation of the trade in which the losses were made. This clause operates if the trade that ceases (trade A) is a single film trade that qualifies for film tax relief and, at the time of cessation, there is another single film trade (trade B) carried on which also qualifies for film tax relief. Subject to conditions being met, the losses of trade A that would otherwise have been available for carry forward under section 393(1) of ICTA may be treated as if they were losses of trade B that are carried forward under section 393(1) of ICTA.

3061.     Trade B may be carried on either by the film production company that had carried on trade A or by another member of the same group (for group relief) as that film production company.

3062.     The Corporation Tax (Surrender of Terminal Losses on Films and Claims for Relief) Regulations 2007 (SI 2007/678) have been made under section 45(5) of FA 2006.

Chapter 5: Provisional entitlement to relief

Overview

3063.     It may not be established that a film qualifies for film tax relief, or transfer of terminal losses, until the accounting period in which the film is completed or abandoned (“the final accounting period”). This Chapter provides for film tax relief to be obtained, or terminal losses transferred, for earlier accounting periods (“interim accounting periods”) on the basis of provisional assumptions and for later adjustments where those assumptions are wrong.

Clause 1212: Introduction

3064.     This clause defines terms used in the Chapter and requires the appropriate company tax return of the film production company to state that the film has been completed or abandoned. It is based on paragraph 30 of Schedule 5 to FA 2006.

3065.     The term “special film relief” covers both film tax relief (which requires that the film in question satisfy the requirements listed in clause 1195(2)) and the transfer of terminal losses (which requires that both of the films in question satisfy those requirements).

Clause 1213: Certification as a British film

3066.     This clause relates to the requirement that a film must be certified as a British film in order for there to be entitlement to special film relief. It is based on paragraph 31 of Schedule 5 to FA 2006.

3067.     Special film relief cannot be claimed for an interim accounting period unless the company tax return is accompanied by an interim certificate. For the final accounting period the company tax return must be accompanied by a final certificate or, if the film was abandoned rather than completed, an interim certificate. Special film relief previously obtained is withdrawn if the conditions in this clause are not met.

Clause 1214: The UK expenditure condition

3068.     This clause relates to the requirement that a film must meet the UK expenditure condition in order for there to be entitlement to special film relief. It is based on paragraph 32 of Schedule 5 to FA 2006.

3069.     Special film relief cannot be claimed for an interim accounting period unless the company tax return indicates that the UK expenditure condition will be met. For the final accounting period the company tax return must show that the UK expenditure condition is met. Special film relief previously obtained is withdrawn if the conditions in this clause are not met.

3070.     Subsection (3) does not rewrite the requirement, in paragraph 32(3)(a)(i) of Schedule 5 to FA 2006, that the company’s tax return for the final accounting period state that the film has been completed or abandoned. That is because it duplicates the requirement in paragraph 30(2) of Schedule 5 to FA 2006 (rewritten in clause 1212(2)).

Clause 1215: Film tax relief on basis that film is limited-budget film

3071.     This clause relates to the requirement that a film must be a limited-budget film in order for there to be entitlement to film tax relief at the enhanced rates in clauses 1200(3)(a) and 1202(3)(a). It is based on paragraph 33 of Schedule 5 to FA 2006.

3072.     Film tax relief at an enhanced rate cannot be claimed for an interim accounting period unless the company tax return indicates that the film will be a limited-budget film. For the final accounting period the company tax return must show that the film is, or if it had been completed would have been, a limited-budget film. Film tax relief previously obtained at an enhanced rate tax relief is reduced if the conditions in this clause are not met.

3073.     Subsection (3) does not rewrite the requirement, in paragraph 33(3)(a)(i) of Schedule 5 to FA 2006, that the company’s tax return for the final accounting period state that the film has been completed or abandoned. That is because it duplicates the requirement in paragraph 30(2) of Schedule 5 to FA 2006 (rewritten in clause 1212(2)).

Clause 1216: Time limit for amendments and assessments

3074.     This clause allows an amendment or assessment, required by this Chapter, to be made even if it would otherwise be out of time to do so. It is based on paragraph 34 of Schedule 5 to FA 2006.

Part 16: Companies with investment business

Overview

3075.     Expenses of management (generally known as “management expenses”) are designed to give relief for the cost of managing an investment business on broadly the same basis as relief for trading expenses or expenses of a property business.

3076.     Originally relief was given for expenses “disbursed” but changes in 2004 brought the relief (and the recovery of relief) more closely into line with the treatment of the corresponding items in a company’s accounts. So, for instance, clauses 1225 and 1231 rely on the concept of “generally accepted accounting practice”.

Chapter 1: Introduction

Clause 1217: Overview of Part

3077.     This clause introduces the Part. It is new.

3078.     This Bill does not rewrite section 76 of ICTA (expenses of insurance companies). Instead, it inserts sections 76ZA to 76ZO into ICTA, to provide a version of the trading income rules adapted to insurance companies to which section 76 of ICTA applies. For companies carrying on life assurance business, but not charged in accordance with the trading income rules, this Part does not apply. Instead, the rules in section 76 apply.

Clause 1218: “Company with investment business” and “investment business”

3079.     This clause sets out which companies are within the rules in this Part of the Bill. It is based on sections 75 and 130 of ICTA.

3080.     Subsection (2) is the rule that a credit union is not a company with investment business.

3081.     The rule applies for the purposes of this Part of the Bill. So there is no possibility of a charge on a credit union under clause 1254 on a FISMA repayment. See Change 80 in Annex 1.

3082.     Subsection (3) is a signpost to clause 1219(2) which restricts the application of this Part of the Bill to the part of the company’s business which is an investment business. But that restriction does not affect the basic definition of a “company with investment business”.

3083.     Schedule 1 to this Bill amends section 18 of CAA so that “managing the investments of a company with investment business” in section 15(1)(g) of CAA is defined by reference to clauses 1218 and 1219 of the Bill. So there is no need for a separate rule to the effect that a credit union is not a company with investment business for the purposes of CAA.

Chapter 2: Management expenses

Clause 1219: Expenses of management of a company’s investment business

3084.     This clause sets out what are “expenses of management”. It is based on section 75 of ICTA.

3085.     There is no explicit definition of “expenses of management” either in the source legislation or in this Bill. Instead, the limits of the expression are set by:

• case law, in which the expression (retained in this Bill) has been considered;

• general exclusions set out in this clause;

• specific reliefs set out in Chapter 3 of this Part; and

• specific restrictions set out in Chapter 4 of this Part.

3086.     Subsection (1) ties the expenses to the management of the company’s investment business (defined in clause 1218), and to the accounting period to which the expenses are “referable” (see clause 1224).

3087.     The clause provides that the expenses are “allowed as a deduction”, echoing the words of Part 3 (trading income). HMRC guidance (see paragraph 8580 of the Company Taxation Manual) suggests that the deduction of management expenses is mandatory. But this amounts to the same thing.

3088.     Both restrictions in subsection (2) apply for the purposes of this Part (see clause 1218).

3089.     Subsection (3) excludes capital expenditure, in terms that follow closely the trading income rule. It also prevents a deduction as management expenses for anything that is otherwise allowable for tax purposes.

Clause 1220: Meaning of “unallowable purpose”

3090.     This clause explains “unallowable purpose”, an expression used in clause 1219(2)(b). It is based on section 75 of ICTA.

3091.     Subsection (1) is the basic rule that explains the ordinary meaning of “unallowable purpose”.

3092.     Subsection (2) extends “unallowable purpose” to include investments held in connection with arrangements to secure a tax advantage.

Clause 1221: Amounts treated as expenses of management

3093.     This clause makes clear the relationship between two of the rules in clause 1219 and rules elsewhere in this Part. It is based on section 75 of ICTA.

3094.     The rule in clause 1219(3)(a) which excludes capital expenditure is not applied to a rule that treats an amount as an expense of management.

3095.     Similarly, the rule in clause 1219(2) that expenses must be “in respect of” the company’s investment business is not applied to a rule that makes an amount deductible as an expense of management. See Change 81 in Annex 1.

Clause 1222: Income from a source not charged to tax

3096.     This clause requires non-taxable income to be set off against management expenses. It is based on section 75 of ICTA.

Clause 1223: Carrying forward expenses of management and other amounts

3097.     This clause allows excess management expenses to be carried forward. It is based on section 75 of ICTA.

Clause 1224: Accounting period to which expenses are referable

3098.     This clause introduces the timing rules for management expenses. It is based on section 75A of ICTA.

3099.     Subsection (2) makes clear that the general rules in this Chapter may be overridden by a specific timing rule elsewhere.

Clause 1225: Accounts conforming with GAAP

3100.     This clause gives the timing rule in the two most common cases. It is based on section 75A of ICTA.

3101.     Subsection (1) deals with the first most common case. The management expenses are “referable to” the accounting period for which accounts are drawn up in accordance with generally accepted accounting practice (“GAAP”). GAAP is defined in section 50(1) of FA 2004.

3102.     UK generally accepted accounting practice is defined in section 50(4) of FA 2004.

3103.     Subsection (2) deals with the second most common case. GAAP accounts are drawn up. But the period of the accounts does not coincide with the company’s accounting period. The expenses are apportioned.

3104.     Subsection (3) sets out the basis of apportionment. It retains the words “it appears that” because they may make the test easier to meet than an apparently objective test (“if the method would work unreasonably ..”). But the second “appears” in section 75A(5) of ICTA (“such other method .. as appears just and reasonable”) is dropped as it adds nothing. So the wording here is consistent with other “just and reasonable” apportionments in the Bill. The same point arises in connection with clause 1229(6).

Clause 1226: Accounts not conforming with GAAP

3105.     This clause gives the timing rule if accounts are not GAAP compliant. It is based on section 75A of ICTA.

Clause 1227: Accounts not drawn up

3106.     This clause gives the timing rule if there are no accounts. It is based on section 75A(7) and (8) of ICTA.

3107.     The rule is that the management expenses are “referable to” the accounting period into which they would have fallen if GAAP accounts had been drawn up.

3108.     There are alternative definitions of GAAP in section 50 of FA 2004. International standards apply if the company “prepares accounts in accordance with international accounting standards”. In any other case (including the case where no accounts are prepared), the United Kingdom standard (UK GAAP) applies.

3109.     The combined effect of section 50(1) and (4) of FA 2004 is that in section 75A(8) GAAP means UK GAAP. A similar point arises in clause 1231. In each case the clause specifies UK GAAP.

Clause 1228: Credits that reverse debits

3110.     This clause explains that the credits in accounts with which clauses 1229 and 1230 are concerned include repayments and amounts never paid. It is based on section 75B of ICTA.

Clause 1229: Claw back of relief

3111.     This clause applies the corporation tax charge to credits in accounts that reverse management expenses. It is based on section 75B of ICTA.

3112.     Subsection (5) provides for any necessary apportionment of the company’s accounts to accounting periods.

3113.     Subsection (6) sets out the basis of apportionment. It retains the words “it appears that” because they may make the test easier to meet than an apparently objective test (“if the method would work unreasonably ..”). But the second “appears” in section 75B(6) of ICTA (“such other method .. as appears just and reasonable”) is dropped as it adds nothing. So the wording here is consistent with other “just and reasonable” apportionments in the Bill. The same point arises in connection with clause 1225(3).

Clause 1230: Meaning of “reversal amount”

3114.     This clause calculates the reversal amount. It is based on section 75B of ICTA.

3115.     The calculation is set out in a method statement that excludes from the credit in the accounts:

• anything that does not relate to management expenses previously allowed; and

• anything that has already been taxed.