Orchestra Tax Relief
The Government published draft legislation in December. It is expected that this will be passed without significant (or even any amendment). The new provisions apply to expenditure incurred on or after 1 April 2016 so it is important that those able to claim the relief start planning now.
Background
The relief is modelled on Theatre Tax Relief which came in last year and itself was based on Film Tax Relief. The structures of these measures are the same and the definitions used are similar in many cases. The underlying principle is that qualifying activity is intended to be stimulated reducing corporation tax being reduced or HMRC making a payment in respect of qualifying concerts. In effect therefore the cost of the concert is reduced so that this can encourage investors to invest or enable producers to produce more and larger concerts.
After publication of the Theatre Tax Relief provisions representations were made on behalf of orchestras and musicians pointing out that costs of orchestras could be included in claims for Theatre Tax Relief as part of a dramatic production (eg an opera or ballet) but not for musical performances which did not have a dramatic element. These representations successfully led to Orchestra Tax relief being announced in the 2014 Autumn Statement. A consultation followed and a further proposal was issued by HMRC in March 2015 taking account of responses to the consultation.
What does Orchestra Tax Relief cover?
It covers ‘Orchestral Concerts’ which are concerts by instrumentalists. The instrumental performance must be the focus of the concert so does not apply to a backing band, but vocal performances with an instrumental group can be included. The unwritten intention is that this definition complements the definition of ‘theatrical production’ in Theatre Tax Relief so that productions where there is dance or other live performances where the focus in not on the instrumentalists will generally qualify for Theatre Tax Relief. Where the focus is on the instrumentalists Orchestra Tax Relief applies.
Who can make a claim?
A claim can only be made following submission of a corporation tax return as for Theatre Tax Relief. The company which produces the concert or concerts can make the claim – it has to be involved as the lead producer from the whole of the production process. This is a key area in terms of planning and taking advice. In particular, co-productions need to be assessed so that parties are clear who the company making the claim will be and the co-production agreement needs to reflect the terms of the Orchestra Tax Relief provisions. Individuals and partnerships cannot make claims so if need be should consider setting up a corporate vehicle. Corporate charities can make claims even if they pay no corporation tax.
As for Theatre Tax Relief companies may choose to set up a special purpose vehicle (‘SPV’) though which all the expenditure on qualifying concerts are incurred. Using an SPV can enable the sum claimed to be greater in some circumstances but equally, the amount that can be claimed may be the same (particularly for subsidised organisations) when not using an SPV. If an SPV is set up there is additional administrative work and contractual arrangements need to be put in place as between the parent company and the SPV to enable Orchestra Tax Relief to be claimed.
Which concerts qualify?
The concerts must have live performers, be in front of paying audience or for educational purposes and at least 25% of the ‘core expenditure’ must be expended on goods or services from the EEA. The EEA is the EU plus Iceland, Liechtenstein and Norway. The term ‘educational purposes’ is treated in the same way as for Theatre Tax Relief and is not positively defined. It is expected to cover performances in schools, Universities and Conservatoires.
Though it is called ‘Orchestra’ Tax Relief, it can apply not just to orchestras but also to ensembles, chamber groups, military bands and many different types of instrumental groups.
In the original consultation the requirement was for there to be 14 performers who were drawn from each of the following four sections: string instruments, woodwind instruments, brass instruments and percussion instruments. The aim was to limit the relief to orchestral orchestras. Concerns were raised that it excluded brass bands. The revised proposal reduced the required number to 12 performers and removed the requirement that players had to come from more than one section. This liberalisation was tempered to some extent by excluding performances of rock and pop music. This revision was excellent news for not only brass bands but also for jazz bands and larger groups playing different types of music, which might collectively be referred to as ‘world music’.
The draft legislation provides that concerts need to have at least 12 instrumentalists and for none or a minority of the instruments to be electronically or directly amplified.
I can appreciate HMRC’s concern above all to exclude pop and rock concerts on the basis that they are not considered to need or deserve this sort of support, but the newly formulated test excluding amplification is unclear. The intention is clearly to enable orchestral concerts to qualify but especially in larger venues there will be an element of amplification. I assume it is intended that microphones can be used but it may be that the measure seeks to exclude the use of all pickups. It would be helpful therefore if HMRC would clarify what they mean by ‘directly amplified’. For instance, it may be that it is intended that electric pickups which use a magnetic coil (typically used on electric guitars) are considered ‘direct amplification’ but contact pickups which are essentially just microphones are not. Even so as a non-expert both types can, I believe, be used for acoustic guitars and violins.
How much can be claimed?
The amount of a claim will usually be 25% of the allowable qualifying expenditure, which in turn is 80% of the core expenditure. So a claim will usually amount to 20% of the core expenditure. Core expenditure is the expenditure incurred in producing the concert but not indirect costs, speculative expenditure and performance costs. Indirect costs in this context means items such as marketing and storage and performance costs means cost of the actual performance (such as costs for performers and travel costs to the venue for the performance). Essentially this replicates the distinction in Theatre Tax Relief between development, production, running and closing costs – where only the production and closing costs could form part of a claim.
So if the total costs of a concert are, say, £10,000 of which half are incurred in preparation and rehearsal and half in performance costs and indirect costs, then the amount of the potential claim might be £1000.
Concert series election
Each concert is treated separately and claims should be separately submitted and calculated for each concert. There is a helpful exclusion to this general principle so that companies can elect to treat concerts as being in a series and submit a claim for the series as a whole. Elections need to be made to HMRC before the date of the first concert in the series and cannot subsequently be withdrawn. Elections can apply to concerts in different accounting periods so the effect will be to hold over the concerts in one accounting period to a later period. This helps cut the administrative burden on the company but will mean that the Orchestra Tax Relief is not received in respect of the concerts in the first period until 12 months later (as it will be part of the following year’s claim). Care needs to be taken when making an election to ensure the right decision is made.
Conclusion
Overall Orchestra Tax Relief is great news. The experience of companies who have made claims for Theatre Tax Relief will be useful given the similarities between the two reliefs – though there are additional areas that need clarification.
Companies need to ensure that well ahead of 1 April they are clear about whether they are going to use an SPV and whether they will make any elections in respect of concert series.
This article is intended as an introduction. The draft legislation is necessarily more complicated and detailed so individual advice should be taken for individual questions.
Sean Egan is a lawyer with over 25 years’ experience working for Arts and Media clients and advised a wide range of clients on Theatre Tax Relief
Sean Egan Consultants Limited
sean@seaneganconsultants.com / 07879 228221
7 January 2016
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