Further to our previous updates on this subject, HMRC has now clarified the new rules and their effective dates.
The old position for investors
Individual (UK) investors were able to take advantage of a special Extra Statutory Concession (ESC A94) which allowed them to offset losses against profits made on investments in theatrical productions.
Along with most ESCs, A94 is being withdrawn, and will no longer be available after 31 March 2017. This will mean that the only relief available for theatrical losses will be against capital gains, made elsewhere. Unrelieved losses can be carried forward indefinitely for relief against capital gains.
A consequential impact on the treatment of profit distributions
The withdrawal of ESC A94, in conjunction with the demise (following the introduction of Theatre Tax Relief) of the traditional “off balance sheet” accounting used by the industry, will have an important impact on how investors’ profits are taxed. Previously profit distributions to angels were treated as deductible expenses for a production, leaving it effectively in a break even position for tax purposes. However under the new rules, such distributions will not be deductible, leaving those profits attributable to angels subject to corporation tax, prior to distribution.
Are there any exceptions?
Profit distributions to UK corporate investors will continue to be tax deductible, and hence able to be paid gross. Habitual investors may therefore want to consider this route for future investments, but should take their own professional advice before doing so.
What about ongoing productions?
Productions which have opened prior to 1 April 2017 can continue to use the previous treatment until 31 March 2019 under a “grandfathering” arrangement. HMRC must be notified by 31 December 2016.
How will this affect overseas investors?
For UK investors future profit distributions will be treated as dividends, which implies an element of tax deduction at source. However for overseas investors this “credit” may not be available, and again they will need to take their own local professional advice.
As a producer, what do I need to do?
You need to ensure productions are structured appropriately, and that investment agreements cover the point that profits may be subject to tax prior to distribution.