Sean Egan takes a long-term view of the proposed theatre tax relief, suggesting how it could benefit subsidised and commercial theatre companies.
Theater der Künste (CC BY 2.0)
The proposed theatre tax relief is undoubtedly good news for theatre. Much has been written about its potential as a watershed in the relationship between government and the arts and it is clear that HM Treasury and HMRC are doing all they can to ensure that the relief is straightforward to obtain and not mired in red tape.
I feel there needs to be some comment on the likely long-term effect that the relief may have on the theatre industry. My experience is drawn not just from advising arts organisations, both commercial and subsidised, but also advising film producers, so I have first-hand experience of how the film tax credit works.
Companies will need to find low-cost ways of managing the additional accounting requirements
The structure of the theatre tax relief naturally fits commercial theatre in the same way that the film tax credit fits a film industry which is profoundly commercial in outlook. The key to making the theatre tax relief work for the whole industry is for the subsidised sector to understand that it benefits charities and commercial companies alike – even if charities do not pay corporation tax. As long as theatre charities are companies (and most are), they can benefit either by running the qualifying trades through the charity or by setting up a subsidiary company to house production expenditure. I expect most producing charities will have one single subsidiary rather than one per production. Co-productions will be run either through a sole-purpose vehicle for that production or by one of the co-producers on behalf of the others.
So what are the issues for subsidised companies?
- Companies will need to find low-cost ways of managing the additional accounting requirements and develop the knowledge and resources for making applications for the tax relief. This will be crucial for lower budget productions or the benefits will be swallowed up by the costs.
- Companies who co-produce may develop expertise in claiming tax relief effectively and offer this service to their co-producing partners.
- Venues will need to overhaul their accounting systems to distinguish between theatre costs and qualifying production expenditure. Those which are both production houses and receiving houses will need to review their deals for incoming shows and may seek to increase charges to reflect the tax relief the incoming production may be able to claim.
- Charities will need to review their governance structures. If a substantial portion of expenditure is undertaken by a subsidiary, the charity and its trustees will need a robust series of checks and balances to ensure that they discharge their charity law and company law duties. There will inevitably be more financial reporting with particular emphasis on cash flow.
And the challenges for commercial companies? The interesting question is how producers will distribute the benefit. Will investors get better deals? Will producers seek to retain the tax relief or treat it like extra box office income, or just reduce the capitalisation and cashflow the tax relief? Will producers charge higher fees? Will casts be larger and/or better paid? And will theatres demand higher rents? Probably all of the above – but the question is in what proportion.
In film the tax relief is generally treated as distribution income and goes towards recouping equity financiers. Specialist providers offer to cashflow the tax relief in return for a fee. So it will be interesting to see if similar services are provided in theatre.
Some arts organisations will not benefit directly or only minimally, such as receiving theatres and productions where the set-up costs are low but marketing and running costs are high. I expect that local authorities may need to review how they own venues in order to access the tax relief. Though the relief can be seen as more naturally benefiting larger productions rather than smaller subsidised productions, it is in the interest of the sector as a whole to ensure that the benefits are widely spread. With local authority arts funding set to decrease in coming years, there are parts of the sector that face an uncertain future. I would urge co-operation to ensure that the tax relief benefits all in the sector to some extent, rather than becoming the domain of large commercial productions.
Sean Egan is a business affairs consultant with over 25 years’ arts and media experience.