Is this a double-edged sword I see before me? Abolishing concession would hit some theatre angels

Mon 14 Dec 2015

Theatrical ‘Angels’, individuals who support theatrical productions, risk losing the benefit of reliefs for some losses if HMRC carry through their proposal to withdraw extra-statutory concession (ESC) A94. This concession allows investors in theatre productions to claim income tax relief in circumstances and HMRC’s argument is that ESC A94 has become otiose following the introduction of theatre tax relief and credits (FA 2014; s 36, Sch. 4). However, the new theatre tax credits only apply to productions mounted through limited companies.

Profits are taxed as income

When (if) an investor receives a payment back from the producer that payment is first treated as repaying the investment and any additional amount received is taxable as income.

Losses are strictly capital only

But if the investor does not receive back all of their investment and there is no reasonable prospect of doing so the strict legal scope for loss relief is restricted to a CGT loss.

ESC A94 was introduced to mitigate this because, as HMRC say at BIM66601,

“Capital Gains Tax losses are of no use unless the angel has chargeable gains. So, where an angel backs various productions, the strict treatment may result in profits being liable to Income Tax with no relief for losses.”

Extra-statutory concession (ESC) A94

Under ESC A94 an angel who makes a loss on one show is currently allowed to set that loss off against profits from another by concessional application of Income Tax (Trading and Other Income) Act 2005 (ITTOIA) s 687, the residual charge for income not charged under any other provision. Losses may also be offset against other miscellaneous income of the year concerned, or carried forward and set off against miscellaneous income of a later year.

Currently if ESC A94 is adopted no CGT loss relief may be claimed but income tax loss relief under ITTOIA s 872 is available.

Withdrawal of ESC A94 would mean no automatic income tax relief

HMRC have confirmed to Mazars that they intend the withdrawal of ESC A94 to mean that no income tax loss relief would be claimable under ITTOIA s 872.

Theatre tax relief

Theatre Tax Relief is only available to companies (in the corporate, not theatrical sense) and provides them with additional deductions or repayable credits. Although this may reduce the financial risks involved it is of no direct benefit to the individual investor.

Share loss relief and interaction with EIS and SEIS

Theatrical productions are not excluded activities for the purposes of the Enterprise Investment and Seed Enterprise Investment Schemes (EIS and SEIS). There is also no restriction on investors in companies that claim Theatre Tax Relief claiming EIS/SEIS.

Therefore angels who make their investment by way of shares may still benefit from not only CGT loss relief but also income tax share loss relief if they make a loss on their shares.  However, income tax share loss relief depends on the shares being subscriber shares that are disposed of at a loss or can be claimed to be subject of a deemed disposal because their value has become negligible. That means that each production would have to be mounted by a separate company for the losses of each production to be protected by share loss relief. This would lead to significant, perhaps unacceptable levels of complication, especially for small productions. Furthermore, multiple special purpose vehicle production subsidiaries of a main promoter’s holding company would lead to nightmarish complexities and problems of control that could prevent EIS or SEIS applying. (HMRC VCM70000)

Non-corporate production vehicles

ESC A94 applies equally to investments in productions by companies and by individuals and partnerships. Theatre Tax Relief is only available to companies, so unincorporated producers do not enjoy its advantages and their investors will lose the protection of the Concession.

CGT relief will remain available, for loans to traders under Taxation of Chargeable Gains Act 1992 s 253 but here, again, we return to the problem that they may not have chargeable gains against which to set those losses. It is also possible that HMRC may argue that an unincorporated theatre production was not trading with a view to profit.

The unkindest cut

The net result is that the playing field has been tilted to favour larger theatrical producers who have the organisational resources to use production companies, preferably with the benefit of EIS/SEIS, while smaller companies and unincorporated producers (including LLPs) will see the few small tax incentives they had whittled away.