7 Mins
Cultural tax reliefs update
There have been several changes to the cultural reliefs available for theatres, museums and galleries, and orchestras.
For Theatre Tax Relief (‘TTR’), the meaning of ‘theatrical production’ has been altered so that the primary focus of the play, opera, musical or dramatic piece must be the depiction of a story or stories, which must be depicted through performers playing roles. A further clarification has been added that the main purpose of audience members must be to observe a performance rather than participate in it.
It has been clarified that Museums and Galleries Exhibition Tax Relief (‘MGETR’) cannot be claimed if exhibitions are not held in person (for example, online exhibitions).
There have been some further clarifications added around costs incurred from connected parties to ensure any connected party profit is excluded from TTR, MGETR and Orchestra Tax Relief (‘OTR’) claims.
For both TTR and OTR, it has been confirmed that the provision of incidental goods or services to the audience will not qualify as core expenditure, for example food and drink provided to the audience.
Now that the UK has left the EU, for theatrical/orchestral productions and exhibitions beginning on or after 1 April 2024, at least 10% of the qualifying costs must now be UK-related activities (rather than at least 25% having to be incurred in the EEA as previously).
From 1 April 2024, an Additional Information Form (‘AIF’) must also be submitted before or on the same day as the corporation tax return is submitted. The AIF contains basic details about the company/charity making the claim and its exhibitions/productions including the start dates of each production phase.
From 1 April 2025, the rates of TTR, OTR, and MGETR will be ‘permanently’ set at 40% (for non-touring productions) and 45% (for touring productions and all orchestra productions) which will be welcome news for the sector.
VAT and Independent Schools
As the general election has been announced, there has been a lot of speculation around the potential introduction of VAT on independent school fees should the Labour Party win the election.
Current position
Currently, supplies of education (and supplies ‘closely related to education’*) made by an ‘eligible body’ are exempt from VAT. The majority of independent schools meet the ‘eligible body’ criteria (as set out in the VAT Act 1994) and are therefore not registered for VAT due to the fact they predominantly make these exempt supplies. Currently, independent schools are unable to reclaim input VAT on costs which are directly attributable to exempt supplies.
*These include (but are not limited to) catering/school meals, school trips and transportation.
Potential changes
Should Labour win the next election, it is possible that the education exemption (for independent schools) may be removed and the related fees would therefore be subject to VAT at the standard rate of 20%. This would require independent schools to register for and charge VAT once the £90,000 mandatory VAT registration threshold is exceeded over any 12-month period (or register immediately if it is anticipated that threshold would be exceeded in a 30 day period alone).
Impact on Independent Schools
Without increasing fees, the additional VAT cost would have a significant negative impact on the financial position of independent schools. Therefore, it is likely that schools would increase their fees to maintain current net income levels.
However, the corollary to making taxable supplies/charging VAT on school fees, is that there would be a right to recover input VAT which is incurred on costs which are directly attributable to supplies of the (potentially) standard rated education. The recovery of input tax on costs would offset a portion of the additional VAT which would be chargeable on fees, meaning the level of the possible increase in fees to parents would be less than 20% (in order to maintain current net income levels).
Further implications would include:
- Potential input VAT repayments from HMRC in relation to capital projects within the scope of the Capital Goods Scheme (CGS) which are still within the monitoring period of 10 years for land/buildings or 5 years for computer equipment.
- If an independent school makes exempt supplies other than supplies of education, they will become partly exempt traders for VAT and will be required to perform partial exemption calculations and an annual adjustment in their VAT returns.
- The Labour party have not addressed supplies of welfare services (e.g. nursery fees) which would likely remain exempt from VAT as welfare supplies are covered by a different area of the law to education.
- The ability to reclaim input tax on goods purchased in the last 4 years which remain on hand and have not been put to exempt use as well as services received within the last 6 months.
Land and Buildings Transaction Tax three-yearly lease returns
Land and Buildings Transaction Tax (‘LBTT’) was introduced in Scotland on 1 April 2015, replacing the Stamp Duty Land Tax (‘SDLT’) regime for land transactions in Scotland. One major difference between LBTT and SDLT is that the LBTT rules stipulate tenants of existing non-residential leases must file LBTT returns with Revenue Scotland on every third anniversary of the lease.
The purpose of these additional returns is to allow for a recalculation of the LBTT payable on the lease, in the event that the rent has increased, or any additional premiums have been paid. This presents an additional administrative, and possibly financial, burden for tenants.
What is the Effective Date?
The Effective Date of a lease is the earliest of:
- the date of entry;
- the date the first rental payment is made; or
- the last date of signing of the lease.
For the purposes of completing the three yearly returns, the Effective Date of the relevant lease can be found on the Revenue Scotland acknowledgement of the original LBTT return submitted for the lease.
Which leases are affected?
Additional LBTT returns are required for all non-residential leases which were entered into on or after the introduction of LBTT, on 1 April 2015, and which were notifiable for LBTT purposes at the time. Generally, all non-residential leases are notifiable to Revenue Scotland unless:
- they are for a term of 7 years or less and there is no LBTT payable; or
- they are for a term of more than 7 years, but any premium is less than £40,000 and the yearly rent is less than £1,000.
Leases originally entered into prior to 1 April 2015 may also be affected if they have been varied after that date to extend their term.
When should the return be submitted?
For the purposes of a three yearly return, the tenant must submit a return to Revenue Scotland within 30 days of every third anniversary of the Effective Date. These returns must continue to be submitted every 3 years throughout the term of the lease.
In the case of assignation or termination of the lease, returns must be submitted within 30 days of the date of assignation or termination.
How do tenants submit the returns to Revenue Scotland?
Returns can be submitted by tenants online or by post. Revenue Scotland have set out the information which tenants will need to have to hand to complete the 3 yearly returns, namely:
- a copy of the lease showing information such as the start and end dates;
- the transaction reference of the original LBTT return;
- a note of the Effective Date of the lease;
- a recalculation of the LBTT payable on the lease, which can be completed on the Revenue Scotland website; and
- a note of the total amount of LBTT which has already been paid on the lease.
What if the tenant does not submit the return?
A tenant who fails to submit an LBTT return will be liable to penalties and interest on any underpaid tax.
What should tenants do now?
If you are the tenant under a lease which is notifiable for LBTT you should make a careful note of the Effective Date and each 3 yearly anniversary of that date to ensure that you submit all additional LBTT returns within the prescribed time limits. We would highlight that additional returns must always be filed, even where no additional LBTT is actually payable.
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