10 June 2022
The Autumn Budget 2021 announced a generous increase to the rates of cash tax credit that museums, galleries, theatres and orchestras may claim on qualifying expenditure. These measures are a much-needed boost for organisations badly hit by public closures during the coronavirus pandemic.
What many don’t know is that there is no requirement to be paying tax in order to claim the reliefs. These cash credits are available to all charities and companies, even if they do not typically prepare tax returns.
The team at RSM has a proven track record of helping clients of all sizes to navigate these reliefs and are able to bring their deep industry experience to help organisations obtain the full benefits they are entitled to.
What are creative sector tax reliefs?
Creative sector tax reliefs allow qualifying companies and charities to claim a cash credit on the costs of developing new productions or exhibitions. The pre-Autumn Budget rules enabled unrestricted cash payments up to a maximum of between 16 per cent and 20 per cent of qualifying spend to be claimed, administered through HMRC.
The creative tax reliefs originally started out with film tax relief, before applying to animations, high-end TV, children’s TV, video games, theatres, orchestras and, most recently, museums and galleries. The amount of cash credit available is based on the level of qualifying expenditure on new ‘productions’. Despite the title, it is important to note that companies or charities do not need to be tax-paying to benefit from the reliefs, and that any cash received is unrestricted – so organisations are free to spend the funds any way they wish.
There are various qualifying conditions for the claimant company and the type of production that’s being undertaken. Although the criteria are relatively straightforward to understand, in practice there are often grey areas that will need to be worked through when determining eligibility.
For films, animations, TV and video games (but not the other creative reliefs) a cultural certificate must be obtained from the British Film Institute to certify that the production is British. This is a points-based system, where points are awarded for attributes such as location, language and content. HMRC will not approve any of these claims if a cultural certificate has not been provided.
How the credit is calculated
Assuming that there is a claim to be made for a particular production, claimants should calculate the credit available for each qualifying production separately. This is done by streaming all income and expenditure for that particular activity. An additional deduction is then available for the qualifying spend (broadly, the activities involved in getting the production ready for the general public, but not the running costs once the production is open).
The additional deduction is the lower of 80 per cent of core expenditure and the amount of core expenditure on goods and services provided from a defined geographic area (either the UK or EEA, depending on the relief).
To the extent that this deduction creates a loss, then that additional loss may be surrendered for a tax credit, usually at rates of between 20 per cent and 25 per cent.
The benefit for a loss-making production may therefore be greater than for a profitable one, as illustrated in these examples using a 25 per cent tax credit rate:
|Income for production||1,000,000||200,000|
|Expenditure for production||(500,000)||(500,000)|
|Additional deduction at 80%||(280,000)||(280,000)|
|Tax saving (assuming 19% tax rate)||53,200|
|Tax credit at 25%||70,000|
The relief itself must be claimed for each accounting period, for productions taking place within that period, via a company tax return submitted to HMRC.
Budget changes and enhanced rates
The pandemic has had less impact on the film, animation, TV and video games industries than many other sectors. Studios and development teams, after the initial disruption, have been able to adapt their working practices, and demand for at-home entertainment rose sharply during the pandemic.
Unfortunately, the same cannot be said of arts-based organisations reliant on in-person audiences, such as theatres, orchestras, museums and galleries. These organisations, which are also generally charitable enterprises, have suffered greatly from not being able to stay open to the general public during large portions of 2020 and 2021.
The government’s Culture Recovery Fund, a £1.57bn fund supporting cultural organisations through the pandemic, has provided short-term support to the sector and the Autumn Budget announced a generous increase to the rates of creative sector tax relief for museums, galleries, theatres and orchestras. These measures have been welcomed as doors reopen to the public after lockdown.
Rates for tax credit have been temporarily increased for theatre tax relief, orchestra tax relief and museums and galleries exhibition tax relief. Claimants are now able to obtain a cash benefit up to a maximum of between 36 per cent and 40 per cent of eligible expenditure.
The rate changes substantially enhance the available benefits and apply with immediate effect, although rates of relief will taper back down to the original levels by 1 April 2024:
|27 October 2021
to 31 March 2023
|1 April 2023 to
31 March 2024
|1 April 2024
|Theatre tax relief: non-touring / touring||20 / 25||45 / 50||30 / 35||20 / 25|
|Orchestra tax relief||25||50||35||25|
|Museums and galleries exhibition tax relief: non-touring / touring||20 / 25||45 / 50||30 / 35||20 / 25*|
* subject to sunset clause
When do the enhanced rates apply?
HMRC has clarified that the enhanced rates of relief apply only to productions where production activities had not commenced before 27 October 2021. For example, theatres that were already rehearsing for their winter shows at this date would be able to claim relief on those productions only at the old rate.
The industry is also waiting for clarification on what constitutes ‘commencement’ of a production, as this may have a big impact on decisions on timing, because the rates of relief taper back to their original levels. It’s important to be having early discussions to ensure that maximum relief can be obtained, and this is a topic that RSM is assisting a number of charities with.
Orchestras, specifically, are able to elect for a series of concerts to be treated as one trade. This election helps to reduce the administration for claimants, but needs to be submitted to HMRC in advance of the first concert in a series. The production activities could be deemed to have commenced for all concerts within the election at the same date as the first concert. HMRC has indicated it will allow such concert series elections to be amended so that orchestras are not prevented from claiming the enhanced rates of relief on productions that were included in historical concert series elections.
Sunset clause extended for museums and galleries
Museums and galleries exhibition tax relief was the only creative sector tax relief that included a sunset clause, initially to 1 April 2022. This had been a cause of great concern for the sector. While there is disappointment that the sunset clause has not been completely removed, announcement of an extension of the sunset clause to 1 April 2024 provides a measure of additional certainty.
We are well aware of how valuable this unrestricted funding is to the sector and HMRC’s own research also supports this. However, the take up for this particular relief has not been as widespread as expected. It is hoped that the enhanced benefit and extended sunset clause will encourage more charities to claim the relief.
In addition to the rate changes, there were some minor clarifications regarding the types of production that can qualify and changes to ensure the reliefs are better targeted, such as making it easier for touring museum and gallery exhibition production companies to claim relief.
What should cultural organisations be doing now?
These tax reliefs are often poorly understood by both claimants and their advisers. In particular, smaller charities will rarely deal with tax advisers and will often rely on the suppor10 june t of their accountants rather than specialists. As a result, misconceptions as to which types of entity can claim are still widespread, as are misunderstandings as to what costs can be included and how complicated the claim process might be.
Larger claimants have often benefited most, as they have more resources to navigate the process, but the increase in the rates of payable credits mean that all companies and charities with relevant activities should be looking afresh at these reliefs. Submitting a claim for a cash tax credit is often much less onerous than grant applications, and the funding received is unrestricted – unlike many grants, which usually come with conditions attached. The substantial increase in rates of credit make it essential for all organisations to revisit these reliefs and ensure that claims are maximised.
RSM has a track record of working with clients of all sizes across all creative industries to help them navigate the legislation and obtain the full benefit they are entitled to. We have worked with various industry bodies to help promote these reliefs, and as a result have a working knowledge of many of the issues which may arise when preparing a claim. Our flexible fee structure also means that we can ensure that organisations are only paying for the support they need.