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VAT and income tax when a member leaves a band

What would be the correct treatment for VAT and income tax when a band member leaves?

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I was discussing a potential client scenario with a colleague and it threw up some interesting points. I’d be interested in the opinion of the larger community.

The scenario involves a commercially successful band. For the purpose of the scenario, let us say it is Take That.

Let’s assume they do not have a limited company. They are clearly in a partnership as a group and, due to their income levels, they would be registered for VAT as a partnership.

Then, one day, Robbie Williams leaves the band. However, due to the continued popularity of the existing recorded music, he is still entitled to significant royalty income after his departure.

Where there is some debate is on the correct treatment for both VAT and income tax purposes.

VAT on royalty payments

My colleague thought the income received by Robbie after he left the band would not be VATable. He cited “post cessation”, although I could not find any reference to this is the VAT statutes or guidance. However, I understand his stance to be that there is no longer a business being carried out by the taxpayer so it does not fall within the scope of VAT definition (S4 VATA 1994).

My belief is it must still be taxable for VAT after his departure. Essentially the existence of royalties means a business continues. The question is instead whether it is now on him personally or the old partnership. I think this depends on the accounting after his departure:

  • If the record label still pays the gross royalty to the group, the new partnership (without Robbie) will report the VAT and pay out Robbie’s share.
  • If the record label agrees to pay Robbie’s share of the royalty directly to him this would now form part of his personal taxable income and he would account for the VAT on a personal registration. I think he would still need to register personally here even if he retired from music and simply lived off the old royalties (but I wonder if anyone can confirm that specific point).

Income Tax

My colleague advised that it is normal for the income from a old music group to be reported as post-cessation income (and maybe why they thought there was an equivalent for VAT). While I can understand the logic of this treatment, I do wonder if this is correct and I have seen different approaches.

I think there are three possibilities:

  1. Report the royalties as post-cessation as the income is from a trade that Robbie is no longer deemed to part of.
  2. Report the royalties as self-employment. This is perhaps more logical where the musician continues with a solo career (as Robbie did), which is essentially the same trade.
  3. Report the royalties as partnership income. This last point is more a theoretical argument and in reality would probably not be possible. The issue, that is mostly relevant for musicians, other creatives and anyone that receives royalties for historic work, is whether you can say a trade truly ceases. To illustrate the point, take a successful solo artist. If they “retired” from writing new music and touring and chose to live off their historic royalties, they would still be viewed as having a trade because the income streams continue.

For me, this creates a logical issue for successful music partnerships. When one member leaves then can the old partnership ever truly cease? This is different to a traditional partnership of accountants where there can be a line drawn in the sand for historic income as new income from old music can always be generated.

In practice, the partnership continues in a new guise but retains the same UTR (and VAT number), so HMRC does not see a difference except the change in partners. Also, it would leave the remaining members needing to have different accounting for two or more partnerships. In this scenario, Gary Barlow would have three partnerships to report – original Take That, Take That post-Robbie and Take That post-Jason Orange.

Ultimately, I guess HMRC will not mind too much as the income will be taxable in any scenario (although they’d probably prefer the post-cessation as this has greater restrictions on deductible expenses).

If anyone has a definitive answer or an alternative suggestion, I would be very interested to hear it.

Thanks for reading (apologies - it is quite long!)

Replies (4)

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By Les Howard
13th Nov 2020 14:38

The person leaving the band (Robbie) is still liable to VAT on royalties received after he has left. It is a described as a continuing supply of services. There will be a question of quantum if he receives the royalties net of commission. And, there are further questions to consider if he receives royalties from outside the UK. One change will affect these with effect from 1 Jan 2021.
A full reply would require sight of contracts, etc.

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By Duggimon
13th Nov 2020 14:52

I think some of the tax issues can be clarified by addressing some misconceptions regarding royalties. While much of the income for Take That could be considered partnership income (ticket sales, merchandise, appearance fees etc.) it would be more normal for the royalties to be registered individually for each contributing member at the time of the release. That's certainly how it worked in the only record contract I ever signed.

In the example of Take That specifically, I believe almost all of the royalties would go to Mr Barlow as the writer of both the music and lyrics for a significant portion of the catalogue, there would be no even split in the partnership and the other performers would only get the mechanical royalties relating to the specific recording of their performances, not the songwriting royalties.

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By whitevanman
13th Nov 2020 15:30

Have a look at HMRC guidance in the BIM 50700 onwards re Authors and literary profits (which covers royalties). In general terms, if the recipient continues to carry on a profession the royalties are taxed as income from the profession. If however the activities do not amount to the carrying-on of a profession, they will be taxed as misc receipts. There are some circa in which PCR rules may apply.

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By Homeworker
16th Nov 2020 11:14

Musicians aren't the only ones to receive royalties. So do actors.
We have an actor client who is VAT registered and his agent issues VAT invoices for any royalties he receives for past performances. My understanding is that it is treated as business income (though not necessarily VATable if income is below the threshold) where it relates directly to the individual (NIC is also due on them).
Another client receives royalties inherited from his father, who was an actor, and it was confirmed many years ago by HMRC that these are definitely NOT treated as business income but "other" income and so not subject to NIC (or VAT).

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