SolvedCREC039200 | Taxation: examples: costs exceed initial budget
From HM Revenue & Customs · Creative Industries Expenditure Credit Manual
The following example shows how Chapter 2 Part 14A Corporation Tax Act (CTA) 2009 applies in calculating the profits/losses for the separate production trade of a production company when costs increase during production, with the final expenditure exceeding the original estimate.
In the example, none of the costs are disallowed under the Taxes Acts.
The example shows how expenditure credits should be added to profit/loss once it has been calculated. Round numbers have been used for ease – in reality, the amount of credit due will vary depending on how much expenditure is qualifying expenditure, and the proportion of UK expenditure. For guidance on how to calculate the amount of expenditure credit due for an accounting period, please see Chapter 6 of this manual.
The example is based on a video game production; the same principles apply to films and TV programmes.
Example
A video game development company is commissioned by a third party to make a video game for an agreed budget of £1.52m. It also agrees to sell the rights to the game to the commissioner for £1.55m.
At the end of the first accounting period, the development company has spent £1m and still expects to complete the game for £1.52m. In the second accounting period, the company spends a further £620k, taking it £100k over budget. It anticipates that it will need to spend another £50k in the third accounting period to fulfill the commission.
The development company completes the game in the third accounting period, spending the estimated further £50k. The estimated income remains the same.
The development company intends to claim Video Games Expenditure Credits (VGEC) in relation to the game, so it must apply the separate production trade rules.
The profits in each accounting period are therefore calculated as follows:
Period 1
| - | Amount (£) | Notes |
| Expenditure incurred by end of period | 1,000,000 | Out of total expected costs of £1.52m |
| Income treated as earned by end of period | 1,020,000 | Expected total income of £1.55m. The extent to which this is allocated to Period 1 mirrors the extent to which total expected costs fall within Period 1.(C/T) x I = (£1m/£1.52m) x £1.55m = £1.02m |
| Trade profit | 20,000 | - |
| Plus expenditure credit | 270,000 | This must be added on at the end – it should not be included as income in the (C/T) x I formula |
| Profit chargeable to tax | 290,000 | - |
Period 2
When applying the (C/T) x I formula, the extra £100k spent over the initial budget and the estimated £50k remaining expenditure are included in the estimated total costs (T).
Costs incurred to date (C) are £1m from period 1 plus £620k from period 2 = £1.62m.
| - | Amount (£) | Difference (£) | Notes |
| Expenditure incurred by end of period | 1,620,000 | - | - |
| Increase in expenditure incurred over previous period | - | 620,000 | £1.62m less £1m |
| Income treated as earned by end of period | 1,504,000 | - | (C/T) x I = (£1.62m/£1.67m) x £1.55m = £1.504m |
| Increase in income treated as earned over previous period | - | 484,000 | £1.504m less £1.02m |
| Trade loss | - | (136,000) | - |
| Plus expenditure credit | - | 160,000 | Added at end, as in Period 1 |
| Profit chargeable to tax | - | 24,000 | - |
Period 3
All estimated costs have now been incurred, so C and T are both £1.67m.
| - | Amount (£) | Difference (£) | Notes |
| Expenditure incurred by end of period | 1,670,000 | - | - |
| Increase in expenditure incurred over previous period | - | 50,000 | £1.67m less £1.62m |
| Income treated as earned by end of period | 1,550,000 | - | (C/T) x I = (£1.67m/£1.67m) x £1.55m = £1.55m |
| Increase in income treated as earned over previous period | - | 46,000 | £1.55m less £1.504m |
| Trade loss | - | (4,000) | - |
| Plus expenditure credit | - | 17,000 | Added at end, as in Period 1 |
| Profit chargeable to tax | - | 13,000 | - |