Written evidence submitted by Musical
Theatre Matters UK (arts 224)
A POLICY THAT
WILL:
ABSTRACT
British Theatre is considered by many to be
the best in the world. Yet because of the way that theatrical
angels—the venture capitalists of the Theatre industry—are
taxed in this country, British Theatre is being placed at a disadvantage,
and is in danger of losing its power in the world, both culturally
and economically. New, emerging, and established British producers
are handicapped compared to their American colleagues, whose angels
enjoy a more supportive tax system.
The consequence of this is a significant loss
of Tax revenue, both in the short term and in the long term. Barriers
to entry for British producers, and therefore for British writers,
caused by the way angels are taxed, mean that many of the most
profitable new shows in the West End or on tour are American imports
with American backers who are able to take advantage of the more
supportive American Tax rules.
Not only does HMRC lose the tax that would be
received from the income of British backers of hit shows, but
also those profits are not available to be re-invested in new
and emerging British talent at the grassroots level. Instead,
money goes out of the British economy to be invested in emerging
talent in America, fostering the next American hit, which then
comes into the West End to take more money out of the British
system. British artists, no matter how talented, cannot have hits
if their work is never produced.
Grassroots low budget, high risk theatrical
productions create a disproportionately high number of jobs per
pound invested. They are also the lifeblood of the theatre, creating
an environment in which the next generation of the industry can
be nurtured and developed. This is true of producers—the
entrepreneurs of the theatre world—as much as writers and
performers. It is also true of angels.
By making a small adjustment to the way angels
are taxed, we can level the playing field, making backing Commercial
Theatre more attractive and accessible—as it is in the USA.
British producers will be able to compete with their American
colleagues, and a new generation of successful British producers
will emerge. Profitable shows will be backed by British angels,
and tax revenues will increase. Even high risk groundbreaking
shows that do not make profits will, we believe, be either revenue
neutral or net contributors to revenue under this system. On every
level, both in the short term and the long term, this policy will
increase tax revenue.
This paper aims to show that taxing British
angels in line with those in America will increase tax revenue,
increase employment, boost the economy, and also ensure that the
future of British Theatre is as glorious and influential around
the world as its past.
THE PROPOSAL
Angels in the UK are taxed as though Theatre
were a hobby—that is, if they make a profit from Theatre
then they will be taxed on it, but if they make a loss they are
not entitled to put that loss against their other income.
Angels in the USA are taxed on the basis that
Theatre is a business—if they make a loss they can put that
loss against income from any other source.
We propose that British angels should be taxed
on the basis that Theatre is a business—one they may be
passionate about, but a business nonetheless.
How Much Will This Cost? We believe it will be
revenue neutral, and may even increase tax revenue.
How is it possible that creating an apparent tax
relief where none currently exists will cost nothing?
We believe there are two reasons why changing
the taxation of angels will increase tax revenue. (1) In the short
term it will allow productions to happen that otherwise would
not, and those productions will have a positive impact on tax
revenue even in cases where losses occur and angels receive relief.
(2) In the long term this will lead to more—and more successful—British
productions at every level, which will generate increased tax
revenue, not only from earnings on productions in this country,
but also from successful transfers of productions around the world.
1. Removing the Barrier to Entry—the
short term consequence
The current situation acts as a barrier to entry
for new angels considering entering the industry. This in turn
acts as a barrier to entry for new and emerging producers. The
short term consequence is that many potential productions never
happen.
New and emerging producers don't have access
to established angels (that is, those that have income from successful
productions they have previously backed, and therefore can off
set losses against other income from Theatre). They rely on new
angels to back their shows, and under the current system new angels
run the maximum risk, as they cannot write off any losses.
This massive disincentive discourages new angels
from taking their first steps in the industry. In turn, this makes
it far harder for new and emerging producers to launch their careers.
Changing the tax status of angels will encourage
new angels into the industry. This in turn will allow producers
to create productions that otherwise wouldn't happen. It will
allow the groundbreaking high risk productions vital for creating
a vibrant industry in the future to go ahead—many of them
productions that simply will not happen under the current system.
Even in the worst case scenario, where a producer
raises the entire budget for their first mid-scale production
from new angels, and the show is a financial failure, losing its
entire capitalisation, the tax raised by the production (a production
that otherwise would not have happened) would in most cases be
higher than the proposed tax relief offered to the new angels
on their losses.
Case Study: An emerging producer produces their
first commercial production. It runs for three months, covering
its weekly running cost but not recouping any of its capitalisation.
(Roughly similar figure will apply either to
a small commercial tour or to a small West End play, either of
which a producer may choose as their first commercial venture.
Each production is different, so it should be born in mind that
real budgets will vary.)
In this hypothetical case, we will imagine that
a new producer puts on an entry-level production of a small play
with as low a budget as possible. It has a capitalisation of £200,000
of which half is made up of wages (including wages of those building
sets, making costumes etc). The weekly running costs for this
hypothetical play will be £60,000 of which £40,000 is
made up of wages (including wages of production staff, theatre
staff etc).
The total money taken in ticket sales (covering
the weekly running costs over 12 weeks but failing to recoup any
of its capitalisation) would be £720,000 (12 x £60,000).
VAT revenue on those ticket sales at 20% would be £144,000.
The total wages bill for the production would
be £580,000 (£100,000 + 12 x £40,000).
Income tax on those wages at 20% would be £116,000.
Therefore the tax revenue generated by this
production would be at least £260,000
Even if the angels backing the show were all
first time angels and all top rate tax payers, the maximum new
tax rebate possible in this case under Schedule D Case II would
be £80,000 (40% of £200,000).
This hypothetical production, made possible
by changing the system, would therefore raise a net total of £180,000
(£260,000 minus £80,000 in tax relief to angels)—as
well as creating employment and boosting the local economy,
If the new producer in the case study succeeded
with this production and made a profit, tax revenues would be
substantially higher, and there would be no tax rebate given to
the angels at all. (If the production broke even ticket sales
would be £920,000, and if it made a profit they would be
still higher.)
Changing the system would also have a positive
benefit for established producers trying to create innovative
productions perceived as having a higher risk. The established
producer may find they need to approach new angels (who may have
a greater interest in backing new voices and innovative artists)
for part of the capitalisation. In this case, only a small proportion
of the capitalisation might come from first time angels, yet the
tax revenue might be substantially greater.
2. Regaining Tax Revenue Currently Being
Lost—the long term consequence
The current situation results in a great deal
of tax revenue being lost in this country. The barrier to entry
means that today we have fewer experienced, successful angels
in the UK than we otherwise would. In the long term this has had
a negative effect at every level of the industry. It creates a
barrier to entry for new producers, and also for new writers.
Today's new and innovative artists are tomorrow's
success stories. Without the same opportunities for British writers,
producers, and angels, to gain experience and skill working their
way up from the grassroots to the top as their American colleagues
have, the West End (the financial engine of Commercial Theatre)
has become dominated by imports. It is impossible to calculate
the tax revenue lost because of potential British hit shows that
never happened. A recent Broadway success gives a tantalising
glimpse of what might have been.
Case Study: The tax bonanza that never was.
What could be more British than Monty Python?
What could be more British than a musical written by Eric Idle
and John Du Prez, based on the British film Monty Python and the
Holy Grail?
The musical Spamalot has made many millions of
dollars in profits for the angels that backed it in the USA. If
those angels and the production had been British, tax revenue
from those profits would have come to HMRC.
But this quintessentially British musical didn't
receive its premiere in the West End, backed by British angels,
as might have been expected. It premiered on Broadway, backed
by Americans, because, although it was a show by British writers,
it had the rare advantage of being based on source material very
successful with American audiences. The power of the Monty Python
name made it attractive to American producers.
When that Broadway production transferred to
the West End, it was backed by Americans—common practice
when a production transfers. Had it made a profit in the West
End, those profits would have been exported to the USA.
In fact the West End run of Spamalot roughly
broke even. If it had been backed by British angels, there would
have been no tax relief given (under neither the current system
nor the proposed system) as there was no loss for angels to bear.
The current system saved no tax revenue.
However, had the show premiered in the West End,
backed by British angels, and then transferred to Broadway, it
would have generated substantial tax revenue from the profits
made by the angels who backed it. All of that potential tax revenue
was lost to this country because this show—created by British
talent—premiered in New York.
The greater ease with which American producers
raise money from angels makes it easier for them to produce shows.
Generally this means that shows created by American talent are
more likely to get produced. (Spamalot is a rare example of a
New York premiere being given to a show created by British talent—for
obvious reasons that would be impossible for other British writers
to recreate.)
Greater opportunities for American writers and
producers lead inevitably to more American hits, and therefore
to more American shows transferring to the UK.
It may seem as though American angels backing
commercial transfers to the UK is a good thing because it brings
capital into the country—and if hit British productions
of new British shows were transferring to the USA on a regular
basis as well as American productions of new American shows transferring
to the UK, it would be.
In reality, in the years since the success of
Phantom of the Opera and Les Mis
rables back in the 1980s, the traffic has been largely
one way. Few new British shows—written by British writers,
produced by British producers and backed by British angels—transfer
to the USA, while each year brings a Wicked, a Jersey Boys or
a Legally Blonde to the West End.
These American hits provide employment for British
performers and entertain British audiences with great success.
They contribute to the vitality of British Commercial Theatre,
and are welcome. However, both culturally and economically we
need to see more British hits in the West End, on tour and in
production throughout the UK—and also transferring to Broadway,
and touring or being produced across the USA and elsewhere.
Successful, experienced angels will plough some
of their profits back into the grassroots of the industry, nurturing
the next generation of artists, and creating future global hits.
In America, because it is easier for angels to enter the industry,
there is a virtuous circle that boosts every level of the industry.
More angels means more productions, which means more opportunities
for producers, for writers and performers, and for all the different
artists needed to create a production. Inevitably, that means
more American hit shows.
British artists, no matter how talented, cannot
have hits if their work is never produced. In order for British
Theatre to compete effectively we need to create a level playing
field, giving British artists and producers the same opportunities
that their American colleagues enjoy.
We believe that allowing angels to write off
losses against tax will have the long term consequence of boosting
British Theatre, both artistically and commercially, increasing
its influence around the world, and also generating more tax revenue.
CONCLUSION
Commercial Theatre is a significant industry
in this country. Even in hard economic times Theatre continues
to provide employment and to boost the economy.
Every theatrical production is a start-up. Like
all business start-ups, there is risk involved. Some new companies
fail in their first year. Some will cover their costs and provide
employment, without necessarily making vast profits. A few will
be hugely successful. Theatrical productions are no different
in this respect.
Angels are venture capitalists. They make Commercial
Theatre possible. Like all venture capitalists, they take risks
that are informed by their knowledge of a complex industry, their
experience, and their sense of which start-up has that special
something that will bring it to success. Without angels there
would be no Commercial Theatre.
Producers are entrepreneurs. They rely on angels
to back their productions. New and emerging producers rely heavily
on first time angels.
There is a massive barrier to entry of new angels
-therefore of new producers, and therefore of new writers, directors,
choreographers and performers—into the industry, because
first time angels in the UK who don't have other theatrical income
are exposed to the maximum possible risk. They are taxed as though
Theatre is nothing more than a hobby.
Compare this to first time angels in the USA.
If they make losses they can write them off against their other
income. There is a tax system in place which makes their risk
no greater than it would be in any other industry, making backing
Commercial Theatre much more attractive and accessible than it
is in the UK.
British artists, no matter how talented, cannot
have hits if their work is never produced.
If Theatre were taxed as a business rather than
as a hobby in this country, we would have a level playing field.
British angels and British producers would be able to compete
with their American colleagues.
Not only does the current situation threaten
the position of British Theatre in the world, it also reduces
tax revenues.
Simply by taxing angels under Schedule D Case
II instead of Schedule D Case VI, tax revenues would be increased,
jobs would be created, and a great British art form would be ensured
a brighter future.
September 2010
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