Another Tax Incentive for UK Production?

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Dave Morrison of entertainment accountants Nyman Libson Paul examines HMRC’s Consultation Document on the future NIC Status of entertainers and the potential benefit for UK productions.

Location Costs

So, the UK is the place to be right? Film Tax Credits, High End TV Tax Credits, Animation Tax Credits, Lottery Funding, a skilled workforce and world class facilities. And from April 2014, the UK could become even more competitively priced with a fall in the cost of hiring actors. Great news eh? Well maybe not for unemployed actors, but more about them later.

It’s all about Social Security taxes. HM Revenue and Customs (HMRC) are proposing a change to National Insurance regulations which could see producers save around 12% of what it currently costs to engage actors in the UK. In fact, the headline figure should really be 13.8%, the rate of National Insurance, or Social Security, contribution that employers, ie producers, are asked to pay over and above the fee agreed with any actor, but the maths work out at about 12.1% as, I’m sure you would have all spotted, and I wanted to save the editor an inbox full of emails pointing this out. Oh, and yes, I did know that politicians claim that National Insurance isn’t, technically, tax before anyone emails the editor about that too!

As you can imagine, employers aren’t always enamoured with the additional 13.8% cost that Employers’ National Insurance currently imposes. Furthermore, following a change in policy by HMRC which brought musicians within this regime, the Musicians Union have suggested that this additional cost to engagers has the effect of cutting jobs for its members. Other lobbyists suggest that it makes UK Film and TV production uncompetitive and mitigates the benefits of Film and TV Tax Credit incentives.

Fringes

At the moment, most UK actors are treated as Self-Employed for tax purposes, whilst Employed for National Insurance Contributions (NIC) purposes. This means that actors get the advantages of claiming tax deductible expenses whilst, by virtue of their NIC status, remaining eligible for Contribution Based Jobseekers Allowance when unemployed. This rather privileged position was designed to safeguard actors who are vulnerable to periods of unemployment.

There had been some exceptions to the rule outlined above, principally so called ‘Key talent’ (‘Stars’ in everyday language), certain foreign actors or through contracts suitably drafted around these provisions, where the actor would be treated as Self Employed, thereby saving producers the Employers NIC of 13.8%. On the other hand, long term contractees, such as ‘Soap Stars’ are usually treated as Self Employed.

One perceived ‘loophole’ was for an actor to be paid through a limited company, however, whilst this meant the producer wasn’t liable for Employers’ NIC, some actors are currently going through the potentially costly realisation that their own limited company probably was – ouch!

The rewrite

So what has changed? The short answer is; a bit of courtroom drama! The ITV Services Limited v HMRC case has not gone well for ITV. They argued that they should not be liable for 13.8% Employers’ NIC, however the judiciary have not only sided with HMRC, but effectively extended the interpretation to catch even more actors. Consequently, Key Talent stars are now, apparently, employees too. At the time of writing we are awaiting the Court of Appeal decision in the latest hearing, but in the meantime HMRC have decided that things need a bit of tidying up. Furthermore, HMRC have identified some other areas that need review, principally, the rules with regard to liability for Employers’ NIC on Repeat Fees.

The revised plot

The consultation document illustrates four potential proposals to address the various issues. The first two seek to address the collection of Employers’ NIC on repeat fees where rights are no longer held by the original producer.

The other two proposals (Options 3 and 4) suggest removing entertainers from the Employees NIC regime and making them liable to Self Employed NIC so that producers are no longer liable for Employers NIC. This raises questions over entertainers’ entitlement to Contributions Based Jobseekers’ Allowance.

Option 3 addresses this latter point with the idea of a special Class of Self Employed NIC with its own rate for actors which would entitle them to benefits, but HMRC go on to say that they prefer ‘Option 4′ whereby entertainers would pay standard Self Employed rates of NIC.

Controversial battle scenes

Actors’ union Equity are campaigning against Option 4 because of the potential loss of Benefits Entitlement for its members. However, it is very hard to evaluate the cost of Option 3 because HMRC has not given a full economic impact assessment. How many entertainers currently claim Jobseekers’ Allowance? How much would be saved by removing benefits? How much would be an enhanced rate of Class 2 be for entertainers under option 3?

Meanwhile the Musicians Union will, presumably, support option 4 as they have previously suggested that the imposition of Class 1 on musicians (following a review of policy by HMRC in response to the decision in ITV Services Limited v HMRC) will cost jobs! Whether Option 3 would be acceptable for musicians remains to be seen.

So, plenty of lobbying is likely to ensue. Equity are reaching out to their members and, no doubt, PACT and other interested parties will file submissions to HMRC by the deadline date of 6 August 2013. Any changes would be effective from 6 April 2014.

The full consultation document can be found here:

Ahhh, the suspense!

If you’re budgeting for a film next summer, then you may need to do two versions of the budget. Maybe your fund raising is about to get easier with less to collect? Who knows? But spare a thought for the actors and their benefits entitlements. In fact, this is where the debate is likely to focus. Unfortunately, available data does not really give a clear indication of the financial cost and impact of benefits claims. Can actors still survive using Universal Credit and other means tested benefits instead of Jobseekers’ Allowance as HMRC suggest? Equity may need to attempt to quantify this issue, HMRC and the Department for Work and Pensions (DWP) ought to try and evaluate impacts more fully if the data is accessible. Whatever the outcome, producers should benefit and UK production may have inadvertently just got another tax break!

Inevitably, until HMRC fix a release date, you’ll have to wait to find out how it all ends, just like the movies. 

DAVE MORRISON

Partner at Nyman Libson Paul and chair of the Institute of Chartered Accountants’ Entertainment and Media Group

dave.morrison@nlpca.co.uk (020) 7433 2448