Funding of the arts and heritage

Written evidence submitted by Musical Theatre Matters UK (arts 224)

A Policy That Will:

· Increase Tax Revenue

· Boost the Economy and

· Create Employment

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). V.A.T. 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 Misérables 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