Actors (Taxation) (Hansard, 27 February 1990)

§ Mr. Tom Arnold (Hazel Grove)
I am grateful for this opportunity to raise the issue of the tax treatment of actors and actresses, because I wish to alert the House to a proposal by the Inland Revenue to treat actors and actresses—particularly newcomers to the profession, about whom I shall have something further to say later—as employed by producers and therefore subject to tax under schedule E of PAYE as from 5 April this year.
I am delighted to see the Financial Secretary to the Treasury here, although he may be somewhat weary at having to contemplate traversing yet again the ground which he covered at the meeting on 25 January with my hon. Friend the Member for Arundel (Mr. Marshall) and my right hon. Friend the Member for Shoreham (Mr. Luce), who represents the Society of West End Theatre. I am also pleased to see my hon. Friend the Member for Altrincham and Sale (Sir F. Montgomery) in his place because he also represents that society and has shown a keen interest in the theatre for many years.
I must declare an interest, which is in the Register of Members' Interests, and to which I have drawn hon. Members' attention publicly on a number of occasions over the years. Before and indeed after entering the House I was a producer and I have employed many actors and actresses. I do not employ any at the moment, but there is always the possibility that I will at some time in the future, and I am still a member of the Society of West End Theatre.
I am somewhat out of touch, on a day-to-day basis, and I must confess that I was not aware of the latest developments until I was approached by a firm of solicitors, Wright Webb Syrett of 10 Soho square, which has acted for many branches of the theatrical profession over the years. The firm acts for the Personal Managers Association and for numerous stage and film actors, actresses and producers. There is a general feeling that the impact of the proposals will pose a serious threat to the theatrical profession—a profession which I think we all recognise has a tradition second to none, and which contributes enormously to the culture of our nation.
Briefly, stage performers have traditionally been taxed under schedule D, a position endorsed by the High Court in 1921 when Lilian Braithwaite successfully argued that she was assessable under that schedule in respect of profits which she derived from her profession.
In 1972, however, in the case of Fall v. Hitchin, a ballet dancer engaged at Sadlers Wells was held to be employed and therefore taxable under schedule E. It seems that the Inland Revenue, on the basis of that somewhat aged case, now proposes to adopt the proposition that all stage personnel should be taxed under schedule E. Let me make it absolutely clear that, so far as I can judge, the Revenue's behaviour has been impeccable. It has listened at length and courteously to all the representations. It has replied, sometimes voluminously, to the various points that have been put to it and it has allowed a great deal of time in which the profession could make arrangements.
However, the Revenue's view is necessarily narrow, and tonight I urge the Government to take a wider view of some of the implications of what is proposed. Equity, the 251 actors' trade union, and the theatres national committee have jointly made representations to the Revenue, so far without success. The Inland Revenue seems determined to proceed with its intention. That is not satisfactory. To start with, actors and actresses have differing circumstances, and the Revenue will be faced with expensive appeals. Those appeals will, as a result of the change, proliferate.
There are a number of other consequences which I believe are serious. The Inland Revenue is saying that newcomers must be taxed under schedule E after 5 April. Theatres in the regions in particular will be greatly affected, because those theatres tend to attract newcomers to the profession and in many cases they already operate under grave financial limitations. All the signs are that the actors and actresses affected by the change will demand higher salaries and that the employers, be they repertory theatres or individual producers, will be asked to bear the costs. To meet that demand they will have to reduce some of the concessions which they offer to their customers at present, and that will be in direct opposition to the policy that they have been urged to follow by the Arts Council. But there is no other way in which they will be able to maximise their revenue to meet the additional costs. There is a real threat that a number of the smaller repertory theatres may have to close as a result of the proposal.
Apart from the huge administrative problems, I believe that great injustices will result from the distinction between allowable expenses under schedule D and those under schedule E. Under schedule E, allowable expenses are those incurred wholly, exclusively and necessarily in the performance of the employment; artistes, however, incur considerable expenses that would not be allowable according to that definition.
Under schedule E, touring and living expenses would have to be borne out of taxed income. That includes the cost of travel to and from venues for rehearsals and performances away from home; self-promotion, including printing and advertisements, photographs, blocks and so forth; the cost of theatre tickets for agents, managers and press; audition expenses, telephone calls, postage and stationery; singing and dancing coaching, including the hiring of rooms; theatre laundry; the cost of repair to wardrobe and props; the cleaning of wardrobe and props; the cost of replacements to wardrobe and props; the cost of renewing wardrobe and props; chiropody for dancers, especially ballet dancers; hairdressing; insurance; and professional fees. That load will be too heavy for most artistes to bear.
I have left until last the most onerous charge of all—one that is causing considerable confusion and has a number of curious features. I understand that henceforth the fee paid by an artist to his agent will also be chargeable against him for tax purposes. That is unfair, and likely to lead to real difficulties: perhaps the Financial Secretary can clarify the position.
In a letter dated 31 July last year, Mr. Peter Lewis, director of the personal tax division of the Inland Revenue, wrote: On agents' fees, it would not be appropriate for the Revenue to advise on the contractual changes needed to ensure that actors assessed under Schedule E do not pay tax on agents' fees. But we thought it might be helpful to you to suggest that you consider whether the present arrangement under which these fees represent a slice of the actor's income which he in turn has to pay over to the agent is the only 252 possible one. While the detail of the relationship between actor and agent is probably unique to your industry, we were conscious that the same problem does not arise in other agency situations such as the temporary agency workers supplied by employment agencies. There the agency obtains its commission direct from the client not through the worker. If similar contractual arrangements were introduced for actors the difficulty with agents' commission you have identified would not arise. It is entirely a matter for the industry to decide whether or not possible changes of this kind should be considered, and if they are possible, whether or not they should be implemented. But we would, of course, be happy to give our views on the tax consequences of any new arrangements you contemplated introducing. Curiouser and curiouser. The Revenue has shown a remarkable naivety in what appears to be a suggestion that theatre managements should pay agents direct. That cuts across the whole legal concept of agencies. The Revenue makes an analogy with that of employment bureaux, but such bureaux are specifically not permitted by statute to charge the principal—that is, the employee. They can charge only the employer. Section 6 of the Employment Agencies Act 1973 makes such behaviour a criminal offence. We are none the wiser about the Revenue's intentions.
At a meeting on 10 November 1989 the Inland Revenue suggested—I quote from a memorandum of what took place— that an application could be made to the IR Board for extra statutory allowances but that if a generous interpretation of the rules concerning allowable expenses under Schedule E was made there might be no need for such an application. The need for consistency of interpretation would be important in such an event. Does the Inland Revenue expect actors and actresses to pay their agents and then to have to pay tax on those fees? The position is unclear. The Inland Revenue says that it proposes to leave the matter in the hands of tax inspectors. That is unsatisfactory, and I invite the Financial Secretary to comment upon it.
At the meeting on 25 January I understand that the Financial Secretary said that he would let the industry's representatives have the Government's considered view after the Budget. I hope that it is not too late for the Government to think again and to introduce into the Finance Bill a clause that would restore the position to what it was when actors and actresses were taxed under schedule D and allowed to claim various expenses. I strongly believe that, if the proposal is allowed to go ahead in its present form, grave damage will be caused to regional theatre in particular, that there will be a proliferation of appeals and that that will not be the end of the matter.

§ Sir Fergus Montgomery (Altrincham and Sale)
I am grateful to my hon. Friend the Member for Hazel Grove (Mr. Arnold) for allowing me to take part in his Adjournment debate. My hon. Friend's father was a distinguished impresario. When I was young I used to go to the Empire theatre in Newcastle upon Tyne. It was a variety theatre, with once-nightly productions that were invariably "Tom Arnold presents" productions. That was always a sign of class and of a good show.
The theatrical profession is insecure. If one is a Laurence Olivier, or a John Gielgud, or an Alec Guinness, one will have a marvellous time, be at the top of the bill, have one's name above the title of the play and earn a great deal of money. However, there is a higher percentage of unemployment in the theatrical profession than in any 253 other occupation. The Inland Revenue's proposal that actors and actresses should be taxed under schedule E is causing great concern. Traditionally, they have been taxed under schedule D.
My hon. Friend emphasised that, under schedule E, allowable expenses are those that are incurred wholly, exclusively and necessarily in the performance of the employment. Actors and actresses incur considerable expenses that would not be allowable under such a definition. The agent's fee would not be allowable. An actor or actress needs an agent to get a job. I believe that the agent's fee is still 10 per cent. of earnings. Touring and living expenses would not be allowable.
The theatre does not depend just on the west end. We have a thriving provincial theatre. My hon. Friend and I represent constituencies near to Manchester, and we believe that Manchester stages the best theatrical events outside London. Actors and actresses appear there in touring productions and give a great deal of pleasure.
The Equity subscription would not be allowable, either. Unless actors and actresses are Equity members they cannot get a job. Furthermore, there are audition expenses. Auditions are compulsory before anybody is given a part in a production. Then there are telephone calls, postage, stationery and make-up expenses. All those are essential tools of the trade.
I hope that when my hon. Friend the Financial Secretary replies to the debate he will say that common sense will prevail and that the Inland Revenue will have a change of heart.

§ The Financial Secretary to the Treasury (Mr. Peter Lilley)
I congratulate my hon. Friend the Member for Hazel Grove (Mr. Arnold) on securing the debate and my hon. Friend the Member for Altrincham and Sale (Sir F. Montgomery) on his contribution. It is often thought that the House consists exclusively of merchant bankers and polytechnic lecturers, but it is valuable that we include hon. Members with the experience of theatrical production of my hon. Friend the Member for Hazel Grove and the experience of my hon. Friend the Member for Altrincham and Sale from the other side of the footlights. I welcome the fact that they have raised this important matter today.
The issue at stake is the standard Equity contract and whether those engaged under it are employed or self-employed. That is essentially a matter of law and not, as some people imagine, a matter of choice. People do not have the right to choose whether they are self-employed or employed. Nor is it a matter of the Revenue making its own judgments. The Revenue simply applies the law as it sees it and as it has been established by the courts. It applies a number of tests.
As my hon. Friend said, the main court case involving the theatrical profession was in 1972. It is a long time since that ruling, which was a clear one but still has not been fully implemented. There was a period of waiting for Equity to appeal, as it was a test case, but eventually in 1975 it chose not to do so. Subsequently, there was a period of negotiation. Instructions were sent out, but I understand that the new treatment was only patchily applied. Subsequently Equity discovered the inconsistencies and there were complaints, further discussions and negotiations. More recently, the final decision has been taken to apply the law, but only gradually and with 254 transitional arrangements. The transitional arrangements mean that those who have an established record of working under contract in the theatrical profession and have been taxed as self-employed will be able to retain that tax status. The new status will apply only to newcomers to the profession who do not have that established record. Over a generation it will come in fully. The Revenue has been endeavouring to establish with Equity those who will be the beneficiaries of the right to remain treated as self-employed.
The Revenue has stated that if Equity wishes to bring in another test case, it would be happy to co-operate to discover whether a different interpretation of the law was possible if Equity believes that the 1972 case is out of date, circumstances have changed or things were not properly considered on that occasion. The Inland Revenue has thus shown a clear willingness to apply the law as flexibly as is empowered to do and to co-operate as closely as possible. with the theatrical profession.
One of the principal issues at stake is that of expenses, as my hon. Friend said, and most particularly the agent's fee. He was right that the Inland Revenue told Equity that it was open to suggestions as to how expenses might be treated in a way which would mean that they had to be paid out of taxed income. The theatre employers and Equity said in November that they were considering the Revenue's suggestions that the present contractual arrangement used be revised. They told the Revenue that they might have some legal difficulty with that—perhaps the legal difficulty to which my hon. Friend referred—but that they were still considering it. They have not yet returned to the Revenue on that, nor suggested what legal difficulities they are examining, but the Revenue remains available to discuss their problems.
The fact that employment agencies are prohibited by law from charging an individual an agency fee does not mean that those who are not forbidden by law are compelled to do otherwise, but there are doubtless people in Equity and the Revenue better placed than I am to discuss such legal matters.
It has been suggested that we should legislate to determine specifically that members of the acting profession be treated as self-employed and not subject to PAYE. Unfortunately, many other groups believe that they are special cases—sometimes for reasons similar to those given by the acting profession and sometimes for reasons unique to their own circumstances. Once one started doing that, one would be on the slippery slope of determining by law where each profession stands on employment and self-employment. It is better to leave it to the general rule and to the case law that has developed as that general rule has been applied.
For national insurance purposes, actors have managed to retain employed status, which is advantageous because, unfortunately, unemployment affects many actors for significant periods. They would not wish to lose that status. I do not think that the issue can be settled by changing the law specifically for the acting profession.
I hope that the discussions between Equity and the Revenue will find some way of softening the treatment of what at present are expenses by recasting them in a way 255 that will comply with the law and will mean that they are not expenses. If it is possible to make progress on that, no one will be happier than I.
I have listened carefully to the comments of both my hon. Friends and I shall reflect further on them when I discuss 256 these matters with the Revenue. I hope that I have done my best to explain how this development occurred and to convince them that we are anxious to be as co-operative as possible.