Theatre Tax Relief – Anthony Pins’ Reaction to Government Consultation Document

Below, Anthony Pins, Partner and Theatre Expert here at Nyman Libson Paul shares his intial reaction to the Government’s consultation document released yesterday (27th March 2013) on Theatre Tax Relief (TTR).

To sign up to regular updates from NLP on TTR please click here.

To view the Government consultation document please click here.

On 27 March 2014 HM Treasury released its consultation document for the proposed Theatre Tax Relief (TTR).  Our initial view is that it is very much in line with expectations, being based on the now well established Film Tax Relief, but that there are still some key areas which will need to be ironed out, either in the legislation, or through practice in due course.

The basic relief will work in the same way as the Film Tax Relief (FTR) – an enhancement of production expenditure which can be “cashed in” or used to reduce taxable profits.  If our experience with FTR is anything to go by, the vast majority of producers will cash in the credit.

The enhancement is 25% for “touring” productions and 20% for others.  However, as already noted, relief is restricted to 80% of production spend, so in practice the real rates of relief will be 20% or 16% respectively.  Marketing and advertising costs are expressly excluded, so we estimate the actual net benefit to a typical West End production may be in the region of 11-12% of the total budget.

The consultation document addresses some of the key definitions, in particular what will constitute a “tour”, and what expenditure will qualify (or indeed specifically not qualify) for relief.

The suggestion is that a “tour” would be defined as “at least 14 performances in two or more … premises” or “in at least 12 or more different… premises”.  We assume the intention is for a minimum of 14 performances in total across the tour.  The first definition would appear to open up the increased touring relief to, for example, a play choosing to start with a  short preview in the provinces before coming into the West End, and we could for example see Edinburgh productions playing a one night “teaser” elsewhere beforehand.  Producers will need to weigh up the cost of putting on the extra performances against the value of the increased tax credit.

In terms of the qualifying costs, the proposal is that costs will only start to attract relief once tickets have gone on sale.  This area needs to be more tightly defined in the legislation, since whilst it is intended to exclude speculative costs relating to projects with no end product, it would be harsh to deny relief for what may be significant pre-production costs which do relate to a genuine production, simply because tickets have not yet gone on sale.  It is possible (and hoped) that the consultation document has simply been poorly worded in this respect, but it is a good example of why the drafting of the final legislation is so important.

On the other hand, being able to claim relief on recasting costs is a bonus, which the long-running shows will be eyeing up keenly.  There is no mention of relief being restricted to productions opening post 1 September 2014.

Whilst the mechanics of the relief are based on the FTR, there are in fact some very significant differences.  There is no “cultural test” to ensure a production is “British”,  and there is no requirement for qualifying expenditure to be made in the UK – the only condition is that 25% of the core expenditure must be in the EEA.  Therefore we may well see, for example, large overseas tours basing themselves in the UK in order to take advantage of the relief.

The business claiming the relief must be incorporated in the UK and, as with the FTR, the claim is made via the company’s corporation tax return. Because of this we also anticipate some changes in the generally accepted accounting practices for theatrical productions, which in the majority of cases are presently dealt with “off balance sheet”.  Producers will become obliged to file accounts at Companies House, and in the case of the larger productions, will require a statutory audit.  Will this finally herald the public disclosure of box office takings, as is the norm on Broadway?!

We also expect to see changes in typical funding models, with the tax credit possibly being cashflowed separately to angel contributions.

Subsidised producers, whilst not precluded from claiming relief,  face another challenge – that of “aid intensity”, which limits the total amount of funding from all government sources.  Calculators out…