For many in the Subsidised Sector it may not be immediately obvious why the new theatre tax relief announced in March’s Budget is relevant. The purpose of this eBulletin is to explain the significance of the relief and its impact on the Subsidised Sector.
Most Subsidised Sector producing organisations are charities that do not ordinarily pay tax. However, the key point to understand is that whilst the relief can operate as a deduction for tax purposes, it can also operate as a payable tax credit. This means that HMRC will make a cash payment to a producer of the amount of the tax relief. This is not connected with whether the producer has any tax to pay.
HM Treasury is currently consulting on the detailed arrangements for the operation of the tax relief so at this stage we cannot be certain of all of the details surrounding the operation of the relief. However, the consultation and the operation of other creative sector tax reliefs give us a good idea of how it is likely to operate.
The relief will be available at a 20% rate for all productions across theatre including plays, musicals, opera, ballet and dance. A higher rate of relief at 25% will be available for touring productions, which the consultation suggests will be productions presented for at least 14 performances in two or more venues or, alternatively, performances in at least 12 or more different venues.
The relief will apply to qualifying expenditure incurred on a production. This will include pre-opening production costs but not ongoing running costs once a production has opened. Other key elements of expenditure which will not qualify are marketing and advertising costs. The relief will apply to 80% of qualifying expenditure. By way of example:
- Qualifying expenditure (e.g. sets and costumes, cast and crew costs up to first performance, rehearsal room, creative team costs) = £400,000
- For a non-touring production: 20% relief on 80% of qualifying expenditure = £64,000
On receipt of a claim HMRC would therefore pay £64,000 to the producing organisation (assuming that there has not yet been any income attributable to the production).
Qualifying expenditure could potentially include reasonable costs attributable to an organisation’s in-house staff or facilities. For example, it should be acceptable to include a sum in respect of an organisation’s own production manager, so long as it is reasonably determined, such as by reference to the equivalent cost of engaging a freelance production manager.
To qualify for the relief an entity will need to be directly involved in the production in question. This is likely to create an additional consideration for co-productions as only one claim will be able to be made per production. However, there should be no reason why arrangements cannot be structured so that a co-production qualifies for the relief. The benefit of the relief can then be shared amongst the co-producers.
At the moment we envisage that for most charitable organisations it will be more straightforward if the entity claiming the relief is a limited company set up as a trading subsidiary of the charity. While this will be an unfamiliar concept for some organisations, and certainly a new way of producing for many, we anticipate that over time and as organisations increasingly become used to operating the relief, ways of working will be developed which should make this relatively straightforward. It will however mean that all of the production activity needs to take place in the trading subsidiary. The funding of trading subsidiaries is an area which is regulated by charity law so care will be needed in determining how funds are transferred to a trading subsidiary for the purposes of producing. Again we are confident that over time this is something which organisations will become used to and will find increasingly straightforward.
Overall the relief should create an important new source of revenue for subsidised producing organisations. It will necessitate changes in the way in which organisations produce and will require those involved to acquire new knowledge and skills in order to be able to effectively utilise the relief. Harbottle & Lewis has been actively involved in the industry working group which has led on the development of the relief and we are committed to helping the Subsidised Sector maximise its benefit from the relief through advice, training and the development of customised solutions for the sector.
The consultation document can be found here and is open for responses until 8 May 2014. Draft legislation setting out exactly how the relief will operate is anticipated to be available in June. Equally important is the draft guidance from HMRC which should be available in August. The relief will be effective from 1 September 2014.
11 April 2014