Posted on 1 July 2019
Theatre Tax Relief is a valuable, and often under-used, tool for theatre production companies. Simon Littlejohns, Head of Tax at Birmingham accountants Friend Partnership provides an insight into how theatre tax relief works, and what production companies need to bear in mind to maximise the tax relief.
For more advice on securing Theatre Tax Relief for your production, please contact Simon Littlejohns.
Could you tell us a bit about the tax reliefs available to companies engaged in the creative industries?
There are a lot of reliefs available to those involved in the creative sector. HMRC has a separate department that is dedicated to creative industries. This covers things like films, theatre productions, animation and video games and so forth. Because so much is covered by this department, it is well worth businesses involved in the sector looking very carefully at the rules to see what benefits there may be for them.
Could you tell us more about the tax benefits that are available to theatre production companies?
There are two main benefits for theatre companies.
One is an enhanced deduction for corporation tax purposes, so if a company is spending on a theatre production it will get a greater tax deduction than if it were not.
Secondly, if the company is loss-making, it can surrender its tax losses for a repayable credit from HMRC.
What tests does a theatre production company need to meet in order to be able to make a claim for Theatre Tax Relief?
As you might imagine, there are a host of tests that a company needs to meet, and it’s always imperative to look at the fine detail.
- The most important place to start is ensuring that the company is staging an artistic piece of work. It has to be something that is artistic, like a play or an opera production for example.
- The production needs to be commercial and undertaken with a view to profit.
- It also has to be a live production in front of a paying audience.
- There must be no advertising element to it, or a competitive element to it, and
- Wild animals cannot be involved in the production – so circuses and such like cannot benefit under the rules.
- 25% of the expenditure must be on goods and services from within the European Economic Area.
- It’s also important, and we see this with a lot of tax rules, that the activity is not being undertaken purely to secure the tax reliefs. If HMRC believe that a production is simply being undertaken to avoid or reduce tax liabilities the Theatre Tax Relief will be denied.
- As a final point, the company itself must be solely responsible for the production. From inception right through to its closure, the company must be responsible for all elements.
What costs can a theatre production company include in its claim for theatre tax relief?
The relief is designed to deal with pre-production costs. This means the costs that a company might incur in bringing a production to the stage, such as auditions, set design, the creative input from the writers and any royalty costs for the use of protected material.
The running costs of the production are excluded from the Theatre Tax Relief rules and cannot feature as part of a claim.
These running costs include legal costs, accountancy costs, storage costs, or anything to do with the ongoing running of the production.
It’s very important for companies to look at their accounting systems to make sure that they can capture the costs in the right pots; HMRC will look very closely to make sure that everything is dealt with correctly.
Occasionally a production company will need to recast after the first performance, can those costs be included?
Yes, they can. If a production needs amending after its first viewing or staging and the company incurs costs for recasting then those costs can be included. This is because the Theatre Tax Relief rules capture all costs a company incurs in bringing a production to the stage. It’s only the actual running costs that need to be excluded.
Can you tell me how the Theatre Tax Relief claims are calculated?
Unfortunately, the calculations aren’t straightforward, and it would be very difficult to explain them in detail here. But, as a helicopter view, what one has to do as a theatre production company is look at the expected outturn for the production run as a whole, and then for each separate accounting period, apportion the costs and income to the individual accounting period, by reference to the progress of the production through its total run. It sounds a bit complicated, but basically the calculations work on a cumulative basis.
It’s very important that the production company can to identify costs and also come up with a sensible forecast for the outturn for the production.
In simple terms, the end result is that the theatre production company will have an 80% uplift in its qualifying costs as an additional deduction in its corporation tax computation. It is a very simplistic answer, but for most theatre production companies that we have been dealing with, an 80% uplift is the end result.
With the calculations, the company will have an uplifted corporation tax deduction of 80% of the spend. This means if they spend £100 on preproduction costs, another £80 will be deductible in their corporation tax computation, giving that company a saving of 19% of the 80% as an additional deduction – a clear tax benefit for them in going down this route with the Theatre Tax Relief rules.
Put plainly, if a company has spent £100 on qualifying costs, it will have another £80 to deduct from its taxable profits, which clearly gives it a sizeable tax saving.
Is there an upper limit in terms of Theatre Tax Relief?
It’s all about how much the company is spending on the qualifying costs. There is no upper limit, so it can lead to some very material tax savings for the company involved.
Can a production company get cashback from HMRC?
Yes it can, and this is one of the big attractions of the Theatre Tax Relief rules. If a production company has tax losses, it is able to surrender those losses for a payment from HMRC. The amount of the payment will depend on whether or not the production is touring or non-touring. For non-touring productions, 20% of the losses can be claimed back from HMRC, and that percentage rises to 25% for touring productions.
Touring productions are, essentially, those that are either staged in six or more different locations or at least 14 performances staged in two locations. The loss that the production company is able to surrender is the lower of the tax loss for the period or the enhanced deduction. The company will need to look at those two figures to see which is the lower figure, and that is the figure that can be used for the purposes of the tax credit claim.
How long does it take to receive the tax credit from HMRC?
I’ve had claims for theatre productions that we deal with coming back within three or four weeks, which is pretty good in anyone’s book. At the moment, I believe the timing has gone out a bit to six to eight weeks – even so that is still pretty quick. It’s very important for the production companies as cash may be tight, and any amount they can get back from HMRC would be very welcome.
In my experience, the knowledge of the Theatre Tax Relief rules is increasing, but I still come across companies that are not fully aware of how the rules work. I still think that there is a need for production companies to pay attention to the rules and examine them in detail, as they may be missing out on valuable reliefs which will be lost to them if they don’t act quickly enough.
If I’m thinking about making a claim for theatre tax relief, what do I need to do?
What a company needs to do is to be able to identify the qualifying costs. It’s accounting systems need to be able to split the cost between those that qualify and those that don’t, because they are running costs. In addition, the company needs to be able to forecast. It must prepare a forecast for the production’s total outturn. It also needs to ensure that it is working with professional advisors who fully understand the rules and can make the appropriate claims on the company’s behalf.
As a Theatre Tax Relief specialist, how do you go about making a claim?
The claim needs to be made as part of the company’s corporation tax computation. It can’t be made in isolation; it’s not possible to just submit a Theatre Tax Relief claim to HMRC.
It is part and parcel of the compliance routine for the company. The company will need to have a set of financial statements on which the corporation tax computation is based, and the Theatre Tax Relief claim will be part of that computation. It’s very important that the computation is prepared in a way that HMRC will recognise. They have a template that they work to with regard to Theatre Tax Relief, and if the computation mirrors that template then HMRC are going to be very willing to tick it off, and they probably won’t ask any further questions. It’s very important that the advisers are alive to those issues, so they can prepare the computation in the appropriate way.
Can a company go back to earlier productions if they haven’t made a claim for Theatre Tax Relief?
Yes, they can. This is something I’ve been advising on with a number of theatre production companies, where they suddenly realise that they haven’t made a claim and are wondering if they can now do so. There are strict rules with regard to how far back a company can go. They can only amend a return if it’s within a certain deadline. Typically, that will be 12 months from the date that the last return was filed. So, it is a short window, but it does give companies the opportunity, if they’ve missed a year, to go back to the previous year as well as the current year, and it might just put them in a better position.
How does HMRC assess claims for Theatre Tax Relief?
HMRC will check the expense headings against their template to make sure that the appropriate categorisations have been used. If everything is in order and they see what they expect to see, they are unlikely to ask any further questions.
Who should a theatre company use to help them with their claim?
Typically, a company will go to their professional advisors, but I have been approached in a number of situations where the company’s advisors or the company itself are not familiar with the rules, and they need someone with the experience to enable them to get a claim across the line. We are more than happy to work with businesses where we have no previous connection if they want us to deal with their Theatre Tax Relief claim. We have plenty of experience and can bring that with us to any number of different situations.
What planning would you recommend a company does before a production starts?
The most important aspect for any theatre production company is ensuring it has the appropriate accounting records, so that it can identify the costs that are relevant for a claim and prepare the necessary forecast. It sounds simple, but it’s a very important first step.
Secondly, companies need to look at their accounting periods. If there is a short production run, for instance if it’s only running for two or three months, it’s very important to think about the company’s year-end for that production.,
It is always advisable, and if possible, to have an accounting reference date shortly a production ends so that the accounts can be prepared and the computation submitted in very short order to reduce the time between the end of the production and the tax being paid, or the tax credit coming back to the company.
As an example, if a company has a production that’s going to end on 30th June, but it has an accounting reference period ending on 31st December, then it will have to wait until December to produce its accounts and computations – a six-month delay. In such situations, we have changed the accounting reference date to 30th June, which, as you can see, will shorten the period of time between the production ending and the receipt of any tax credit monies from HMRC
In addition, if the production company has a production that’s going over a number of months, or even a number of years, they also need to look at the accounting reference periods, to see whether there is anything to be gained by changing the accounting reference periods in the first few months of the production. It might just give them a better opportunity to get a tax credit claim through HMRC.
For instance, I have spent a lot of time reviewing various client situations where I have been considering the accounting periods. With appropriate planning we have been able to expedite claims, because of the way that we’ve structured the arrangements.
Are Theatre Tax Relief claims worth the effort?
I certainly think that they are, and all the companies that I have dealt with in recent years and months have said exactly the same. There is a little bit of effort in making sure that the information is captured but, in cashflow terms, for a lot of those businesses, having material sums of money coming back into the company from HMRC has helped them tremendously. And even if the company is not in tax credit territory the reduction in the corporation tax bill as a result of the enhanced deduction is equally attractive. So, I personally think it is a win-win situation.
I have not, to date, had any claim refused, which is a tremendous result in my view.