Taxation - Entertaining the specialist method

The Inland Revenue has, for many years, had a specialist Lloyd’s underwriters unit and a foreign entertainers’ unit dealing with non-resident entertainers and sportsmen performing in the UK.

The general principle of specialisation within the Revenue has considerable benefits, not only from the Revenue’s point of view, but also from that of the taxpayer and his adviser. An example which immediately springs to mind is the music business, where UK groups and individuals generate an enormous amount of income – a very high proportion of which emanates from overseas – to the benefit of themselves and the country.

Typical music industry structures involve inter-related activities, including publishing and performing rights, constituted as a partnership, company or series of companies. A specialised unit would have the appropriate knowledge and understanding of industry practice and might enable some of the anomalies affecting the industry to be addressed.

Celluloid industry encouraged

The film industry has managed to get its message across effectively, and special reliefs have been introduced to encourage film-making in the UK through the tax system. The music industry probably requires the removal of anomalies rather than any special treatment.

It is, for example, often difficult to persuade the Revenue to give double tax relief where, say, an artiste is performing in the USA through a company set up to employ him, which is looked through for US tax calculation purposes.

The company is nonetheless essential in view of the potential liabilities to litigation, but causes problems where the Revenue treats the amount of US tax paid as a company liability and refuses to give credit against the schedule E liability on remuneration drawn – which probably eliminates the company’s income.

Problems also arise in areas such as the timing of recognition of income advances, which traditionally are recoupable but non-returnable once product has been delivered. They are therefore normally recognised as income at that time. Recording contracts, however, often require the artiste to bear the recording costs, which are funded by the recording company and recouped from future royalties.

Under the new provisions requiring sole traders and partnerships to prepare accounts on a true and fair basis – which would normally imply an accruals basis of accounting – it may be necessary to spread recording costs over the likely earning period of the product, which may in turn mean that funding from the recording company has to be reconsidered as a limited recourse loan rather than a non-returnable recoupable advance in order to comply with the matching principle.

Avoiding scaring artistes away

The precipitate withdrawal of the foreign earnings deduction has resulted in highly publicised cancellation of performances in the UK, and we do not want to end up with the situation which has arisen in Germany, where artistes often refuse to perform in the country because of the inflexibility of the tax rules.

In this country, the Foreign Entertainers’ Unit has, by and large, been helpful in agreeing sensible projections and withholding tax agreements, because they are specialists who understand what is reasonable.

But while this article has used the music industry as an illustration of where a specialist Revenue unit could be helpful to both sides, there are other areas where similar units could be helpful, for example, medical partnerships, sportsmen, large professional partnerships and so on.

I would finally like to air a suggestion put to me; that there could be value in setting up a forum of tax advisers to the music industry to discuss some of the common problems facing clients, with a view, perhaps, to arranging periodic meetings with the Revenue, such as those which currently take place with the Shares Valuation Division.

If anyone thinks this is a good idea perhaps they would write to me.

Nigel Eastaway of TaxServe is chairman of the technical committee of the Chartered Institute of Taxation.