Annex 1: Minor changes in the law made by the Act: Change 41: Allocation of expenditure to relevant periods: sections 135 and 137
This change gives a choice of relief for preliminary expenditure on a qualifying film under either the basic rules for allocation of expenditure to a relevant period or the special rules for qualifying films.
Under sections 40A to 40D of F(No 2)A 1992, expenditure on any film or sound recording can be allocated to a relevant period under the “income matching” method in section 40B(4) of F(No 2) 1992 or the “cost recovery” method in section 40B(4) of F(No 2) 1992 as augmented by section 40B(5) of F(No 2)A 1992.
Section 42 of F(No 2)A 1992 provides that claims may be made to allocate up to one-third of the production or acquisition expenditure on a film certified as a qualifying film under the Films Act 1985 to the relevant period in which the film was completed and any later relevant periods until all the expenditure has been allocated.
Section 42(7) of F(No 2)A 1992 provides that production or acquisition expenditure in respect of a qualifying film may not be deducted under both section 40B and section 42 of F(No 2)A 92 in the same relevant period.
Section 40C(1) of F(No 2)A 1992 further provides that if production or acquisition expenditure has been allocated to a relevant period under section 42 of F(No 2)A 1992, neither that expenditure, nor any other expenditure on the production or acquisition of the same film, can be allocated to that period under section 40B of F(No 2)A 1992.
The combined effect of sections 40C and 42(7) of F(No 2)A 1992 is to give the taxpayer a choice in any relevant period between relief under the “income matching” or “cost recovery” methods in section 40B of F(No 2)A 1992 and the special rules for qualifying films in section 42 of F(No 2)A 1992.
Section 41 of F(No 2)A 1992 provides that a claim may be made to allocate preliminary expenditure on a film certified as a qualifying film under the Films Act 1985 to the relevant period in which it is incurred or a later relevant period.
Section 40C(1) of F(No 2)A 1992 does not apply to preliminary expenditure under section 41 of F(No 2)A 1992. There is no restriction in section 41 of F(No 2)A 1992 on the deduction of preliminary expenditure on a qualifying film under both section 40B and section 42 of F(No 2)A 1992 in the same relevant period equivalent to the restriction for production or acquisition expenditure in section 42(7) of F(No 2)A 1992.
It is possible therefore that the taxpayer could claim relief for preliminary expenditure on a qualifying film (but not for the same expenditure) under both section 40B and section 41 of F(No 2)A 1992.
This change removes the inconsistency between the treatment of preliminary and of production or acquisition expenditure to give the taxpayer a choice in any relevant period between relief under the “income matching” or “cost recovery” methods in section 40B of F(No 2)A 1992 and the special rules for qualifying films in sections 41 and 42 of F(No 2)A 1992.
This change has no implications for the amount of income liable to tax or who is liable for tax on it. It affects (in principle but not in practice) only when tax is paid.