Orchestra Tax Relief (OTR), part 2: Getting set up

This introduction is the second of three documents on Orchestra Tax Relief (OTR). It gives you an overview of how to set up and run a production company to claim OTR.

If you have not read part one of our guidance – OTR: Is it for you? – we suggest you read that first. It gives a brief overview of how OTR works and a quick guide as to when it might be worth it for your group (including a decision-helping flowchart and some sample calculations).

This guidance comes with two associated toolkits:

We suggest you read the guidance below before using the toolkits.

Definitions

Throughout this documents when you see:

Parent organisation – we mean your music group – your existing organisation, whatever structure that may have
Production Company - we mean the new company we recommend you set-up to produce concerts for you parent organisation and claim OTR.

Content

Why should we set up a production company to claim OTR?
What is involved in setting up a production company?
How is the production company linked to my parent organisation (music group)?
What do I need to do to manage and run a production company?
Managing the relationship between my parent organisation and the production company
Some other practicalities

1. Why should we set up a production company to claim OTR?

Whilst you can submit a Company Tax return as an unincorporated association (as many of you are), you cannot submit an OTR claim if you are not an incorporated organisation.

If you are currently unincorporated, you should therefore set up separate production company to claim OTR. Your parent organisation (music group) then sub-contracts the production of your concerts to the production company:

your parent organisation pays the production company a fee for putting on the concert
the production company handles all the costs involved in putting on the concert
any income (tickets sales etc.) continues to go to your parent organisation

This arrangement creates a surrenderable loss for the production company which is filed in a Company Tax return to HMRC to claim OTR.

Sound complicated? It is a little. But whilst the set-up will involve some work, it will become easier once you are established and Making Music is offering lots of help.

Is there another way?

If your parent organisation is already incorporated (e.g. a company or CIO) then you can submit a Company Tax return and claim OTR through your organisation without setting up a separate production company.

However, we still recommend the separate production company route. Our template documents help set up the model, and our OTR claim service is only available to groups using a separate production company.

Why is the production company model better?

It allows you to maximise the OTR payment you receive. The separate production company model means you can ensure the maximum possible loss is declared on the Company Tax return – so the maximum possible OTR payment comes back to you.
If you claim through your (incorporated) parent organisation, any income (tickets sales etc.) would be counted. Making a profit on the concert, or having other income, will in that case affect the loss you can declare – and so the amount of OTR payment you get.
Although the initial set-up is a bit complicated and there will be some ongoing additional admin, it does mean the accounting – ultimately - will be simpler.
The production company model means all costs relating to OTR are in one place and not mixed up with anything else (e.g. membership fees etc.). This separation will make it easier to manage your parent organisation’s accounts and easier to manage your production costs for OTR – which means actually claiming OTR will be simpler on an ongoing basis, with much reduced scope for errors.

Why does Making Music only offer help submitting Company Tax returns and OTR claims if we use the separate production company model?

We want you to maximise the amount you get.
We want to offer the service as affordably as possible. To do this we need to keep our costs down and our costs are staff hours. The more complex a claim, the longer it takes. The separate production company model will help keep the claim simple and so help us keep costs down.

2. What is involved in setting up a production company?

This is something you only have to do once.

It’s fairly straight forward to set up a production company. The best option, we have been advised, is a Private Company Limited by Shares. We have a template Memorandum and Articles of Association available to members for free for exactly this (OTR 2.3).

We also have guidance on setting up a production company (OTR 2.2), and on filling in the required form for Companies House (OTR 2.5).

As you will see from those documents, setting up a company is not too difficult and it costs £40.

This is the first step towards claiming OTR and needs to be done as soon as possible because…

The production company needs to be in place BEFORE you spend any money on any aspect of the concert it is producing. It is responsible from start to finish for the concert, so you cannot set up a production company NOW and claim for a concert which is halfway through production, even if you then only claim for the costs going forward. That production company will NOT have been responsible from the start and this would be considered tax avoidance.

3. How is the production company linked to my parent organisation?

If your parent organisation is an incorporated body (e.g. a charitable company or CIO), it will be the sole owner and shareholder of the production company, which is then a wholly owned trading subsidiary of your parent organisation.

But if your parent organisation is – like most of our members - an unincorporated association (whether a charity or not), it cannot legally set up or own a trading subsidiary, and the company will therefore need to be set up by individuals. In that case, any production company you set up will technically be independent of your parent organisation. But there are certain things you can do to strengthen the link between the two.

The production company will need at least one Director. We recommend:

That you have at least two directors (who are also the shareholders) and that the directors are also committee members/trustees for your parent organisation - this will help link parent organisation and production company.

Can the production company have directors/shareholders who are not also on the committee of the parent organisation?

Yes, but we recommend these be a minority of directors. The reason is that for the production company to claim OTR it needs to be the one making the decisions about the concert. If there is crossover in personnel between the two organisations then this will be easier to manage. If the directors are completely independent then they could in theory make their own decisions about the concert.

Declaration of Trust

We also have a template Declaration of Trust (OTR 2.4) that you should use to further strengthen the link between the parent organisation and production company if the parent organisation is an unincorporated body. It basically establishes that the shareholders will act on behalf of your parent organisation.

When those directors/shareholders leave your parent organisation and you would like new ones to take on that role, there is also a template for handover of shares in the production company (OTR 2.11).

For more guidance, templates and sample documents, see the ‘Setting up a production company' toolkit (OTR 2.1-2.5).

4. What do I need to do to manage and run a production company? (ongoing)

Annual

Confirmation statement (formerly annual return) to Companies House, online, £13
Produce statutory annual accounts – see ‘OTR Part 3’ & associated toolkits; Making Music service available to help you with this
Submit statutory accounts to Companies House; Making Music service available to help you with this
Remind directors/shareholders to complete a self-assessment tax return

As and when/ongoing

Keep records; you must have a register of directors, shareholders, company secretaries (if you have one), and persons with significant control or relevant legal entities
Keep details of directors/shareholders up to date at Companies House
When/if shareholders change, use the template for handover of shares (OTR 2.11)

For more guidance, templates and sample documents, see the ‘Running a production company' toolkit (OTR 2.6-2.11).

5. Managing the relationship between parent organisation and production company (ongoing)

You commission the production company to produce the concert(s) your parent organisation is planning; we suggest this is done with an annual contract (OTR 2.7), in line with the production company’s financial year.
The production company then emails HMRC an ‘Election’, i.e. letting them know details of the concerts it is bunching together in one ‘trade’, meaning OTR for all those concerts can be claimed in one go, rather than separately on a concert by concert basis. This Election (see OTR 2.9) will reflect the concerts the production company has been commissioned by you to produce on your behalf.

Please note: if you only produce one concert a year or only want to claim for one concert, that is fine and means you do not have to email HMRC an ‘Election’, you just submit your claim at the end of the production company’s financial year.

a). Commissioning the production company to produce your concerts

We have a template contract (OTR 2.7) to establish this arrangement – together with some specific guidance notes on how to use it (OTR 2.8).

The contract can, and we suggest should, include multiple concerts (where applicable: see above);
We recommend you use it to contract the production company to produce all the concerts that take place within the production company’s financial year.
The production company can then submit one OTR claim at the end of its financial year for all the concerts (rather than having to complete one claim per concert).
In order to treat all concerts in one financial year as one ‘trade’, the production company needs to email an ‘Election’ to HMRC before the date of the first concert in the series (see below and OTR 2.9).

It makes no difference whether or not you align the financial year of the new production company with that of the parent organisation. The default financial year for the new production company will be 12 months from registration. However, your Treasurer may prefer to align the financial years of the two organisations. You can find more detail about this in the 'Setting up a production company toolkit'.

The contract between your parent organisation and the production company works on the following basis:

The expected budget and other details for each concert are set out in the contract
The contract commissions the production company to produce the concert(s)
The parent organisation agrees to pay the production company a commission fee equal to concert budget less the amount of OTR
So if the concerts cost £5,000 and the OTR claim is £800, then the parent organisation ultimately only pays £4,200 for the concert production
The entire income (e.g. ticket sales) related to the concert goes to the parent organisation, not to the production company; the production company’s only two sources of income are: the fee from the parent organisation for producing the concerts and the OTR payment.

Adjusting the concert budget after the contract is signed: the contract allows for the final concert budget, and therefore the fee to be paid, to be adjusted in line with the actual concert costs.

Cash flow: OTR is paid retrospectively, so you will be wondering where the money is coming from in the first instance for the production company to pay for the venue, the conductor etc.

The agreement spells out that the parent organisation is responsible for the cash flow of the production company, and this could be achieved in a number of ways.

One way of doing this is:

Once the concerts budgets are set for the year the parent organisation agrees to extend an interest free loan a loan of up to, £5,000 (for example) to the production company to cover its costs for one or several concerts within that year.
Note: the loan does not have to be paid in one payment. You can agree a loan up to a certain amount and disburse it in smaller payments throughout the year.
At the end of the year, the production company surrenders a loss for producing the concerts to HMRC, anticipating OTR of £800
HMRC agrees and pays OTR of £800 to the production company
The production company invoices the parent organisation for a fee of £4,200.
The production company retains £4,200 of the original £5,000 loan to cover its fee and pays £800 to the parent organisation - which it can do because it has received that amount from HMRC as the OTR payment.

Other ways of managing the cash flow of the production company could be:

Paying a portion of the fee due to the production company as a deposit in advance
The production company obtaining a bank overdraft
A combination of the above

Legal aspects:

Once the Board/committee of the parent organisation has agreed the contract, someone responsible for the parent organisation (e.g. a trustee/committee member) needs to sign it, as well as someone from the production company. Obviously that should not be the same person - something to bear in mind if the production company directors and the committee of the parent organisation overlap.
The members of the parent organisation’s governing body should also check their governing document to ensure they comply with its requirements in terms of how such an Agreement can be executed and by whom. For example, an unincorporated association is likely to have different requirements for execution of a contract from a company limited by guarantee. Some unincorporated association constitutions may require two people from the committee to sign an agreement to bind the organisation and a resolution of the management committee may be required to give this authorisation.
The loan (or alternative arrangements as suggested above, if they involve the parent organisation) of the cash to produce the concerts to the production company at the start of the process should also be agreed and minuted in a meeting of the committee/Board.

b). Making an Election

This means that the production company informs HMRC in writing (email is fine) that it ‘elects’ to treat all concerts in a series (e.g. all concerts due to happen in the production company’s financial year) as one ‘trade’. Please note: there is no need to do this if you only want to claim for one concert.

At the end of its financial year, the production company then has to submit only one OTR claim, rather than one for each concert.

The concerts elected to be in a series should reflect those listed in the contract you draw up between the parent organisation and the production company.

BEWARE:

Once you have made an election, it cannot be changed. However, if one of the concerts doesn’t happen, for whatever reason, that is not a problem. But you cannot ADD a concert to the series at a later stage. However, you can claim for that concert as a separate ‘trade’ if you wish.
An Election must be made before the date of the first concert in the series (i.e. it doesn’t need to be made when you actually start organising the concert, but don’t forget to do it in time!)
An Election must include details for each concert, namely date and venue; see also OTR 2.9
You will get a response from the Creative Industries Unit of HMRC acknowledging receipt of the Election. That response does NOT mean they approve the Election in any way – it is not reviewed at that point and the acknowledgement is just that: acknowledging receipt.
The Election must be in the name of the production company.

6. Some other practicalities

You need a separate bank account for the production company. All payments of costs related to the production of the concerts will have to be disbursed from this bank account. Some banks have charges on business accounts that you should be aware of. You can find more in the 'Setting up a production company toolkit'.

Who is doing the contract with the venue and the conductor etc.? The production company - if these costs are related to putting on a concert that you will be claiming for. All invoices for costs should be addressed to the production company.

Will our Making Music insurance be valid for the production company as well? Yes, provided you notify us as soon as you’ve set up a production company with its name and number.

The directors of the production company will in future need to complete a self-assessment tax return.

You are setting up a commercial company and technically they could be earning from that company. Even though they won’t, they will need to complete a self-assessment tax return.
If they already do this for their other work, they will merely have to add some details about their directorship of the company; if they don’t currently have to submit a self-assessment tax return, they will have to do so in future.
If any of your committee already do this anyway, we suggest you consider them as directors for the production company, to minimise extra work

You need to use accrual accounting for the production company because…

Expenditure for a concert in an election may straddle more than one company financial year (e.g. deposit for venue); and because the production company will usually not receive OTR and its fee from your parent organisation until the following financial year.
Accrual accounting means allocating expenditure and income to the financial year they relate to, rather than (as in cash accounting) to the financial year in which they are paid out or received.
If the accounts you are producing for your parent organisation at the moment are cash accounts, you can carry on or you might find it easier to switch the parent organisation to accrual accounts, too.

Next steps:

Toolkit - Setting up a production company: 5 documents to set up a production company

2.1 Overview Flowchart
2.2 Guidance: Setting Up a Production Company
2.3 Template: Memorandum & Articles of Association
2.4 Template: Declaration of Trust
2.5 Guidance: Filling in form IN01

Toolkit - Running a production company: 6 documents to run your production company

2.6 Guidance: Running a Production Company
2.7 Template: Agreement Parent Organisation & Production Company
2.8 Guidance: Notes to accompany the agreement
2.9 Guidance: Making an Election to HMRC
2.10 Sample: Timeline for an OTR year
2.11 Template: Transfer of Stock

Read ‘OTR Part 3 – keeping records, producing accounts & making a claim’ and download the associated documents.

We hope you find this Making Music resource useful. If you have any comments or suggestions about the guidance please contact us. Whilst every effort is made to ensure that the content of this guidance is accurate and up to date, Making Music do not warrant, nor accept any liability or responsibility for the completeness or accuracy of the content, or for any loss which may arise from reliance on the information contained in it.

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