Two years on: how is theatre tax relief working?
September 1 marked the second anniversary of theatre tax relief coming into effect, and by any measure it has been a success. It marks a good time to look back on this significant innovation and how it has changed the way companies plan.
Productions that ‘began’ after September 1, 2014 were eligible to qualify for TTR. Commercial producers typically set up single-purpose vehicles for each production, so they will have claimed for productions from 2014 long ago and be claiming for productions that opened this summer. Subsidised companies generally put claims in on a yearly basis (usually based on a year end of March 31) and so are likely to have been though one claim cycle and be in the process of applying for a second year of productions.
The success of TTR has been due to it being a simplified version of the film tax relief, so that theatre companies and producers can make claims with the minimum of expense and red tape. It also covers all forms of dance and circus shows. The experience of companies is overwhelmingly positive so far and claims are often accepted in full. This has created confidence, and TTR now forms part of most production budgets.
The amount that can be claimed as TTR depends on the individual details of the production. As a very broad approximation, creation costs might be 40% of the budget. So for a touring production the claim might be worth in the region of 8% of the budget. I have seen claims for much more – and less.
TTR has defined a new landscape for producing live work and has enabled productions to proceed that otherwise may not have gone ahead or would have done so on a smaller scale. The trade-off is that TTR has introduced additional complexity in the deals that are done and the ways in which different areas of the theatre sector interrelate. To see the different effects, you need to look at ways in which different deals are affected. The differences are most marked between the commercial and subsidised sectors.
During the last Parliament, there was a substantial reduction in funding, particularly in grants provided by Arts Council England and local authorities. As a result, subsidised companies have developed new ways of working with other companies to share costs. Co-producing is now more the norm. TTR arrived at a good time as a means of reducing the net cost to the co-producing companies, and subsidised companies have worked well together to ensure the benefits are divided fairly.
The most common structure for these co-production arrangements is set out here:
Co-Production Agreements
Three subsidised companies produce a show: A, B and C.
A is the lead producer. Each company may be either a theatre or a company without a venue. The cash budget of the production will be agreed, as will an estimate of the TTR claim for the production.
Before TTR, co-productions typically worked on the basis of mutual approvals and control over the production. Since TTR, one company must be the decision-maker of last resort of most, if not all, of the material decisions affecting the production. So B and C need to accept this loss of control over the performances they co-fund.
The TTR claim (when it is received) is divided in the proportions of A, B and C’s respective contributions to the budget.
Many subsidised theatres are partially exempt for VAT – as a result, particular care is needed when drafting co-production agreements. The structure required for TTR to apply means that there can be a risk of irrecoverable VAT under the co-production agreement.
The other approach for minority co-producers is to agree a fixed amount of contribution on the basis that the lead co-producer keeps all the TTR claim. For companies making yearly claims, TTR may not be received until a year after a production has closed and so needs to be factored into cashflows, whether or not shared with co-producers.
The commercial sector has become adept at using TTR as gap-financing for productions in a number of different ways. Some producers choose to share TTR with investors (ie, treating TTR receipts in the same way as box office) and some don’t. It depends on what investors expect and the nature of the production’s risk. Producers often use TTR to reduce the capitalisation of productions by choosing a year end for the SPV so that the TTR claim can be received before the production ends. This needs careful management and increases the risks that the show will fail if too little cash is raised to cover problems with the production or if the TTR claim is delayed or less than expected.
The different practices and approaches to TTR are clearest when commercial producers are negotiating deals with subsidised theatres. A typical sort of deal is outlined in Box B, though there are many variations. A commercial producer may pay a fixed sum for the exclusive right to transfer the production. In reaching that figure, each party will take account of the likely value of TTR.
Typical commercial TTR deal
Theatre A has a production that has commercial potential. Commercial producer B wants to secure the rights to transfer the show.
Part of the discussions will centre on how A’s additional funding enhance production values and improve commercial prospects. A’s funding can mean the difference between a production being a twinkle in the artistic director’s eye and actually happening.
B is able to secure a fully produced production at a fraction of the cost.
When negotiating the production budget, B’s starting point will be to calculate the cash gap of A after allowing for A’s TTR claim, even though A may have to take the risk that the TTR is less than expected and received long after B takes over the production.
TTR works well for commercial producers combining it with Enterprise Investment Scheme and Seed Enterprise Investment Scheme tax incentives. The TTR claim on the production can be used to reduce the risk to investors even if the production bombs.
Gap-financing has long been a prominent feature of film financing, and a consequence of TTR is for the funding of productions by commercial producers to resemble more closely the financing structures developed by film producers.
The parallels may be instructive. In my experience, when financing structures become more complex and tax driven, the risks of productions falling apart become much greater. Producers can become so preoccupied by satisfying the requirements of the financing structure that the quality of the production may be affected.
Whatever happens in the coming years, co-production financing will be more technical and negotiations will become more complicated to make the best use of the benefits of TTR. It is up to those working in each sector to do the best deals they can without introducing too much risk into the equation. TTR is a wonderful opportunity for the sectors to work together.
– This article was published in the Stage Newspaper on 7 September 2016 –
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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