Theatre Tax Relief - update for dance companies
There are a number of enduring myths relating to Theatre Tax Relief. The aim of this update is to clarify how TTR may be of use to Dance Companies, whether they are charities or not. This is not intended as an exhaustive statement of all the relevant considerations but is based on my experience of dealing with many arts companies and the many permutations that affect how to decide the best approach. There are different approaches and no one approach will be the best for everyone.
TTR was introduced quickly. Usually there is much deliberation and consultation before significant tax breaks are introduced. As a result HMRC are playing catch-up and are yet to issue their guidance even though some TTR claims have already been submitted and payments received.
Main factors:
Dance Companies who are charities can make claims and do not have to set up a subsidiary company (or ‘SPV’ – single purpose vehicle). The amounts of those claims will generally be the same as if a subsidiary or SPV is used. Dance Companies who finance productions through investors are likely to find it convenient to set up a different company (or ‘SPV’) for each production – this uses a structure which is essentially the same as used for the film tax relief and with which HMRC are very familiar. Generally Dance Companies who do not finance productions by using investors (and especially if they are charities) will either make claims themselves or set up only one subsidiary. When considering whether you should put in place a subsidiary or not there are a number of factors to consider. These are the main factors that have emerged so far.
In favour of making claims through main company:
it is simpler to administer – you have only one company and one board of directors to consider;
there may be significant costs in putting in a corporation tax return for the main company – as there will be aspects of the company, which are not part of the producing side, which will need to be included in the return. If you are a charity you may well have not put in a corporation tax return before;
the look of the company’s accounts as filed will be exactly the same – if you set up a subsidiary you should discuss with your accountants how the accounts of the main company will look. This may be relevant if you are an NPO and submit accounts to ACE – it may be that the annual accounts will not essentially change if you use a subsidiary.
In favour of using a subsidiary are:
you have a cleaner and more transparent structure so that the producing side is separated and the corporation tax return, in respect of which the TTR claim is made, just relates to production activity;
HMRC are used to this structure as it is used in relation to film tax relief claims. The original expectation of HMRC was that subsidised arts organisations (ie including theatre companies and dance companies) would all use a subsidiary. I have been making the point that this is not the only approach and using the main company works too;
if you use a subsidiary you will need to have a specific agreement between the main company and the subsidiary for each production to ensure that the subsidiary is the production company and eligible to make a TTR claim. HMRC have been helpful in indicating what they expect of such agreements and I have developed a form of agreement that HMRC have reviewed and have approved;
if you have a very successful production, it may be that the TTR can be greater using a subsidiary;
you will need to discuss with your accountants whether the accounting costs will be more or less should you use a subsidiary.
Things to consider:
If you have a year end of 31 March and have done nothing so far about putting arrangements in place for a claim for the year just ended, you will still in principle be able to make a claim as long as there is production with qualifying performances and you are a limited company.
If you had a production where rehearsals started before 1 September 2014 you probably cannot make a claim in respect of that production. You may be able to include in a TTR claim sums paid out prior to that date so long as the production phase started after that date.
A TTR claim can be made even if you do not pay corporation tax - ie you are a charity and all your activity is within your primary purposes (ie charitable objects).
An international tour may still qualify for TTR but you need to check whether the expenditure of the production is such that you fulfil the criteria for making a claim.
Claims can include as expenditure all those costs that relate to a production including items that are incurred as core costs such as staff time. I would recommend you identify all costs relating to a production as these can form part of a claim. You should consider putting in place reporting structures on a full cost recovery basis in order to capture all costs attributable to productions.
Creation and closing costs will generally be qualifying expenditure but running costs do not. Claims in principle amount to 16% of non-touring qualifying expenditure (ie 80% of 20%) and 20% of touring expenditure (ie 80% of 25%). The main items of qualifying expenditure are likely to be costs during development, rehearsals and physical expenditure (especially on sets).
Claims are made by the ‘Production Company’ after the end of the financial year in which performances take place and after the accounts for that year which are completed. A claim for TTR is made as part of a corporation tax return and needs to set out a detailed schedule of the income, expenditure and amount claimed for that year. Where a production straddles a year end then the correct proportion of the income and expenditure will need to be shown in the claim for that year.
In addition you need to ensure that you identify the relevant ‘production’ and there are additional practical considerations relating to co-productions.
Where you put on a stand-alone tour or present a show at a venue the situation will be clear. If you put on a tour and subsequently the show is presented separately at, a festival or at a venue then for TTR purposes this may be more than one production. How the production is determined is important as you need to establish the creation and closing costs for each production. For instance, if HMRC take the view that the tour and the subsequent presentation at a festival or venue are in fact the same production then the re-rehearsal costs of the presentation at the festival or venue will not be claimable as qualifying expenditure.
Co-productions pose different challenges. Only one company can make a TTR claim in respect of each ‘production’ so for most co-productions you will need to agree which company will make the claim and, as part of the co-production agreement, put in place the necessary provisions to ensure eligibility for TTR. It will be important that the lead producer is in effective control over the whole of the production. You will also need to agree how any successful TTR claim is divided between the co-producers.
There are so many different permutations when looking at the treatment of productions for TTR purposes that necessarily I have kept to the main issues and not sought to identify the many different elements involved. I appreciate that for many the key is to be able to convert complicated tax provisions to practical decision-making, I do hope this update can help with that process.
-This bulletin was first published in April 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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