8. What costs are allowable in calculating production expenditure?

The UK does not have a formal accounting standard covering the film industry. But production expenditure should, nevertheless, be identified by reference to normal accountancy principles, subject to the specific issues outlined below. It is not possible to list comprehensively what constitutes production expenditure. What follows is a guide:

• the cost of underlying rights used for a film;

• salaries, fees, benefits (and living expenses) and all associated costs (such as NIC and payroll taxes) of people involved in the making of the film, including payments to foreign nationals. This will include for example: all those employed in directing and producing, technical and industrial capacities, extras and miscellaneous staff; a relevant per cent of stills photographers and those engaged in processing and titling etc. pro rata to the work done on the film;

• studio costs wherever they are situated and all studio labour costs, as they actually relate to the production of the film;

• cost of set construction and operations;

• wardrobe and all accessories;

• cost of sound synchronisation;

• production overheads attributable to the film;

• location costs, including the rental of facilities on location and the costs of taking the unit to the location.

Certain costs are incurred during the final production phase and the release periods of films (sometimes termed exploitation costs) which are not related to the actual completion of the master negative. Examples of such costs are film prints, advertising, rents, salaries, and other distribution expenses. The Inland Revenue does not consider that these types of costs should be included as production expenditure.

Interest on money borrowed to finance production should be relieved for tax purposes in accordance with the normal rules for Case I/II of Schedule D (and via the loan relationship rules for companies), and should not be included as production expenditure. Similarly, any other costs connected with raising and servicing finance to make the film should not be included.

Both deferments (i.e. monetary amounts payable out of receipts from the film) and participations (i.e. percentage amounts payable out of receipts) are contractually due to producers, directors, actors etc. but are not paid in the course of production should normally be included as production expenditure provided the deferment will be paid within 4 months of completion of the film. However, very strict rules exist regarding deferments and they need to be reviewed in detail.

Capital expenditure on the provision of assets such as film cameras, lights and sound recording equipment may be employed in the process of production but which are not fully used up in that process should not be regarded as production expenditure for the purposes of these provisions. In these circumstances the capital allowances rules may apply.