Saffery Champness LLP and Nordicity have been asked by UK Music to evaluate the case for a tax relief centred around the music industry.
In recent years, the government has introduced several highly successful creative sector tax reliefs (Film, High-End Television, Video Games, TV Animation, Children’s TV, Theatre, Orchestras, and Museums and Galleries). The tax reliefs have all followed the same or very similar criteria (e.g. some have a cultural test and some do not) that the Government use in evaluating proposals and have a common high-level structure.
Whilst our work will be examining all options, within the scope laid out by UK Music, it is likely that any successful case to the government will follow the same evaluation criteria and structure. These are therefore set out below.
Evaluation criteria
Effectiveness. The reliefs must be effective at delivering cultural and economic benefits. The changes should support the changes should support those involved with new music content creation in the UK. Evidence from responses will be used to ensure that the proposals achieve the policy aims and deliver a positive economic and cultural impact
Affordability. The changes must be affordable, in line with the Government’s objective for long term sustainability in the public finances, and represent value for money to the taxpayer.
Simple and straightforward to administer. The Government is committed to simplifying the tax system. The new reliefs should not result in unnecessary administrative burdens for businesses or those administering the reliefs
Sustainable and not open to abuse. These reliefs should be designed to be effective for the longer term by reflecting, as far as is possible, the business models of the music industry both now and in the future. The reliefs should not create additional avoidance opportunities
Compliance with [EU] State aid rules. The Uk has left the European Union. At the time of writing however, it is unclear what State Aid regime the UK will follow from 1 January 2021. It is therefore prudent to plan that any new relief will need to gain State aid approval akin to those enforced by the European Commission in line with the guidelines in this area.
Preferred structure
The preferred structure of all the cultural reliefs listed in the second paragraph above is a corporate structure centred on a single entity which can claim the relief (the sole exception to this is Museums and Galleries where touring exhibitions can involve more than one entity). HMRC see this as a necessary condition to limit the scope for any avoidance activity. This corporate entity will be responsible for bringing the project through from inception to final product. A corporate entity/structure can be a company or organisation, such as a record company or music publisher, or it can be an individual creator, such as a musician or composers, that is set up in such a way for a defined project.
The relief is based upon the expenditure related to so doing (referred to as “core expenditure”) and a percentage enhancement of this is allowed. This will either produce a reduced profit for tax purposes, or, more likely, a loss which can be surrendered for a payable credit.
It is a feature of these reliefs that the corporate entity does not have to have a tax liability in any year to access them and claim the credit. This allows early stage companies as well as established ones such access.
The payable credit for the various reliefs is generally set at 25% (there are some minor exceptions).
A simple example of how this works is below
A company makes a programme with total core expenditure £1m, all of which is UK expenditure. The programme was commissioned by a broadcaster which pays £1m for it.
| Income from broadcaster |
1,000,000 |
| Core production expenditure |
(1,000,000) |
| Basic profit/loss |
nil |
| Enhanced deduction at 80% of UK core expenditures |
(800,000) |
| Enhanced loss |
(800,000) |
The Enhanced Loss can be surrendered (up to a maximum equal to the Enhanced Deduction) to HMRC in return for a payable credit at 25% so in this case £200,000.