Theatre Tax Relief - new developments
Theatre Tax Relief: recent clarifications
Since the last update in November, there has been clarification on a number of important issues. Though questions do remain, the picture is sufficiently clear for organisations to make applications for Theatre Tax Relief (‘TTR’) with confidence.
TTR relates to production expenditure incurred since 1 September 2014 so for most subsidised organisations the first opportunity to make a claim will be for the year ending on 31 March 2015. For commercial organisations the process is straightforward and most productions will be undertaken through a stand-alone company or SPV with investment being made into that producing entity as needed. As a result the year end of those companies can be adjusted to enable a claim to be made as soon as the bulk of the creation costs have been incurred – ie on the first public performance. Some producers have already had TTR claims processed and have received payments from HMRC.
The key issue for charitable arts organisations, whether involved in theatre, dance, opera, circus or other art-forms is that the charity can itself make a claim for TTR. There are organisations who are under the impression that as charities they cannot make a claim as they do not pay corporation tax. This is not correct and I would urge you to look at whether a claim should be made for the current year. This impression also arises from the various presentations focussing on the setting up a subsidiary company which then makes a claim. Some have been looking to put in place arrangements from April 2015, accepting that the arrangements were not in place early enough to enable a claim for the current year.
This will not be news to many of you reading this, but I hope there will be at least one organisation for whom this is news and is prompted to make a claim it would not otherwise have made.
In the last months I have been corresponding with HMRC, seeking to clarify points. HMRC have been helpful in offering assistance and I would urge anyone with outstanding concerns, not addressed by these updates to consider contacting HMRC.
Particular clarifications from HMRC
HMRC guidance. Formal guidance from HMRC is unlikely to be issued before late March. In any case if you look at the guidance for film tax relief as the model on which it may be based, the guidance is likely to be basic and may not answer all your questions. It is worth making telephone enquiries of the dedicated unit (03000 510191).
Turnaround of claims. HMRC seek to turnaround claims within 28 days of submission. I have pointed out that there is likely to be a far higher number of claims in the months following the year end of 31 March so that HMRC are aware and can seek to deal with the extra workload.
Making a claim. HMRC form CT600 needs to be used and I have received confirmation that it is not due to be amended in the near future. Also, accompanying the form is the statutory accounts (ie those submitted to Companies House) plus the computation of the claim for TTR – there is no prescribed format for this computation. In practice the schedule setting out this computation is the key document and members’ accountants are likely to have their own form of schedule into which the relevant figures can be inserted.
Co-productions. For a co-production one limited company needs to be the main production company for TTR purposes and only one entity can make a claim. If you are using a subsidiary as the production company HMRC have suggested that the subsidiary should sign the co-production agreement.
Whether a subsidiary production company need a bank account which receives or makes payments. HMRC have confirmed that having a bank account is not necessary in order to make a claim but the company does need to be a trading entity. Having a functioning bank account will generally establish the trading nature of the company.
NT Live income and other broadcast income. HMRC have confirmed that income from live recordings will be treated as income as part of the TTR calculation, the costs of the broadcast are in principle treated as expenditure within the theatre production trade.
Scratch performances. HMRC’s principal basis of determining when running expenses start being incurred is the date of the first public performance. Some companies run scratch performances for which they charge admission. In principle therefore all expenses of the production incurred on and after this date are running expenses and therefore not qualifying expenditure. There are exceptions such as closing costs and substantial (ie exceptional) recasting or set costs. If you subsequently develop a production beyond the scratch performance stage you would need to argue (for TTR purposes) that the further expenditure was on a separate production as the performances after the scratch performances would not have been committed to or scheduled at the time of the scratch performances. I suspect sometimes this may be relatively easy to demonstrate and sometimes it will not. If in doubt then it may be worth considering whether the additional income from charging for scratch performances is outweighed by the potential loss of TTR.
Organisations who are not charities
It is first worth reiterating the simplest situation – ie where organisations are not charities and may take in investors for productions. This most closely mirrors how the Film Tax Relief works (which is the basis on which TTR is drafted) and as a result should be the easiest to run. Generally speaking I would expect members to set up a subsidiary company for each production – this will work well for investors who want transparency in accounting for that production. The production company is funded by investors and contracts all elements of the show. It is clearly the production company for TTR purposes and will be the entity making the corporation tax return and receiving the Theatre Tax Credit. Organisations have generally offered to cut in investors with the TTR benefit – ie as though it were net box office income.
When putting in place a subsidiary company it is crucial that the arrangements for the production are in place before the commencement of the production. HMRC does not feel able to define when the production phase commences but is clear that come what may it is considered to have commenced no later than the commencement of rehearsals. In this first year of operation of TTR this is important for two particular reasons – first, the subsidiary must be in place and in charge of the production by commencement of rehearsals (at the latest) and in order to qualify rehearsals need to have started no earlier than 1 September 2014 – the date when TTR came into effect.
Organisations who are charities
A claim for TTR is dependent on a company submitting a corporation tax return. Only limited companies are eligible. Even though charitable companies do not as a rule pay corporation tax they are nevertheless eligible for TTR. A theatre company which is a charity and produces work will in principle be the production company for the purposes of TTR as it is in control and directs all aspects of the production. There have been some perceived disadvantages of a charity making a claim rather than using a subsidiary. HMRC has appeared to encourage charities to make claims through subsidiaries partly because this is closer to what they are used to with films but also because the accounting is likely to be easier.
HMRC accept that when using a subsidiary all income from the show does not need to go through the subsidiary and so this helps ensure that in TTR terms the subsidiary will make a loss and therefore be eligible to claim the tax credit (which is a payment from HMRC like a rebate) rather than apply any amount by way of reducing corporation tax otherwise due.
One reason some give for using a subsidiary is that if there is a very successful show this may reduce the amount of TTR that can be claimed. There are two reasons why I feel this is unlikely in practice. Firstly, I would advise subsidised companies to use one subsidiary rather than to set up one per production. This is to avoid being overloaded with the administration of the companies but also because with one company you will aggregate the theatrical trades across a year. This means that one incredibly financially successful show will be set off against other loss-making shows. Secondly, HMRC have confirmed that grants that are not connected to productions will not be treated as income for the purposes – so this will apply to NPO and other funding. A successful show can only have the potential to reduce the amount claimed if the relevant trade (ie of theatrical production) over the year may not make a loss (ie the income receivable by the charity exceeds the expenditure) where the income does not include many grants. Also please note, the expenditure can include recharges of staff time working on the production. Each show is different and so each organisation’s calculations will differ but I would hope you can see that most organisations are unlikely to have production years that are ‘profitable’ when the TTR calculation is done.
I am not arguing for one approach over another (ie to use a subsidiary or not) as the decision will depend on a number of factors. I just wish to point out that in this first year using the charity as the entity to make a claim is perfectly viable.
-This bulletin was first published in February 2015-
About the author
Sean Egan is an independent lawyer with over 25 years’ experience providing legal and business advisory services to theatre, film, arts and creative industries.
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