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Covering the loss on an opera production

Can we claim relief for a payment after a loss was made?

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A self-employed composer had their newly composed opera staged by a company with whom they have long-standing links. The production made a substantial loss. The composer, who has personal wealth but little income, paid the company a lump sum to cover the loss on the production and expects tax relief through the self-employed accounts. 

I am in two minds: if a loss of another business is being covered it is surely not "wholly and exclusively" for the composer's business purposes. On the other hand if the composer's works are never performed they will never make a profit so could it be looked at as a promotional cost? The Business Income Manual BIM37050 onwards seems to maybe allow this but if anyone has any opinion on this I would be interested to know. 

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By Paul Crowley
17th Jan 2021 10:33

How is production company treating this donation?

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By Tax Dragon
17th Jan 2021 10:38

Do you kind talking us through

sijolees wrote:

The Business Income Manual BIM37050 onwards seems to maybe allow this

in a little more detail?

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Stepurhan
By stepurhan
17th Jan 2021 10:39

You say he has little income. Also his opera made a substantial loss.

Does he really have a composing business? It sounds like self-published "authors" who do it to get their name officially on a book instead of to make a profit . You will know more about his activity to make a call on that, but it is the angle I would expect HMRC to take on the facts as given.

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By Tax Dragon
17th Jan 2021 14:33

That's relevant to whether a loss can be offset. Which is a good point to raise, don't get me wrong. But (I think) it's not relevant to whether the expense is deductible, if the client is a professional musician/composer.

I wonder what the composer has bought with the payment.

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Stepurhan
By stepurhan
18th Jan 2021 10:26

I was more raising the point as to whether there is a business to have a deductible expense in.

The OP has confirmed that point though, so we are back to deductibility.

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By sijolees
17th Jan 2021 10:55

Thank you everyone. The company receiving the payment will include it as income. The composer is well-known in the field with a lifetime of achievement so there is no question of this being a vanity project. New opera is not "popular" but it is not inevitable that a loss will be made on a new production.
The BIM includes the question “What was the object of the person making the disbursement in making it?” and I suppose that is at the heart of this: what is the point of writing opera if it is never produced? By covering the loss the composer hopes to encourage performance of their work in future.

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By The Dullard
17th Jan 2021 17:18

ITTOIA 2005, s 34(1) has two legs, you need to consider the second one. Whilst s 34 is restrictive, rather than permissive, and by looking at it in reverse you need to satisfy both tests. The two legs go together in my mind though.

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By jonharris999
18th Jan 2021 06:14

Is the producing company a registered charity?

Does the contract between the composer and the company shed any light ?

You answered Paul Crowley's question as "included as income" but do you mean as a donation, or as part of the income for the production? And if the latter, as what? A co-producer contributing income to a production generally expects and has the right to something in return eg a share of surplus or of gross box office. Was this the case?

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blue sheep
By NH
18th Jan 2021 07:14

Have you reviewed BIM37075 regarding motive and purpose, it seems to me that applies here - the motive seems to be that he feels bad for the production company and wants to help them out rather than securing their future for his own benefit, whereas the exact purpose of the donation is unclear.

Quoting from BIM37075 "It is the payer’s immediate purpose and not some remoter or supposedly underlying purposes that is important. It is not sufficient that the expenditure results in an advantage for the trade, the direct and immediate purpose of the expenditure is what matters"

If for example there was a contract in place that stated that in return for payment future works would be performed that would be different IMO.

Has he/she ever made suchlike payments before?

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By sijolees
18th Jan 2021 10:06

Thanks again to everyone who has responded. Looking at the legislation it says “no deduction is allowed for (a) expenses not incurred wholly and exclusively for the purposes of the trade or (b) losses not connected with or arising out of the trade”.
If the composer had staged the opera and borne the costs himself I would say there was no doubt that these conditions were satisfied and a claim for the costs would be allowed.
So would the payment to the production company also be deductible? I have not seen the contract but I doubt that it was stipulated that losses would be covered. Because the composer have a long-standing relationship with the production company I think the payment was ex gratia but trying to disentangle motive and purpose is very difficult.
At root I think the composer felt an obligation to minimise financial loss to people who had shown faith in his abilities. This has not happened before and is unlikely to occur again.

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By WhichTyler
18th Jan 2021 10:23

1. Ask to see the contract; if he doesn't have an obligation to pay it's hard to argue it is 'necessary'.
2. See if it can be treated as a personal donation under gift aid; most opera companies are also charities

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