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UK musicians face 12.5% tax hit if they lose this case

The Court of Appeal is to hear a test case in December asking for a reversal of a recent judgement that would add 12.5 percent to a freelance player’s National Insurance costs. The Goverment has been cracking down on NI exemptions for self-employed ‘actors and entertainers’.

Musicians’ representatives argue that the tax authorities are using a sledgehammer to crack a nut. Tere are obviously much bigger tax dodgers than travelling players. But if the appeal fails, Christmas will be a good deal bleaker in many musical homes.

Here‘s the tax stuff.

 

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Comments

  1. Bleak indeed, for not only will musicians caught by these new rules (if indeed the legal challenge to them does fail) be having henceforward to fund their own NIC1 “contributions”, their employers will additionally find themselves obliged to fund employers’ NIC1 “contributions on their behalf at a rate of 13.8%, which is hardly likely to provide any incentive for contractors to continue to pay musicians in what is already a severely cash-strapped time for the economy in general and for musicians in particular, is it?!

  2. It seems to me (qualification, I am no tax expert) that there are two ‘cases’ here in the classical music world.

    1. is for straightforward, truly freelance players, generally paid by the day, working for many different ensembles, orchestras, solo recitals, etc.. This action is unlikely to have too much effect on them, as they are covered under the usual freelance provisions. The new actions seems to be concerned with those on longer-term contracts, where the pay is calculated by way of a salary for an on-going position (albeit not a permanent job). I doubt ‘true freelancers’ have too much to worry about (and hope the MU is making some fairly decent preparations if they are concerned).

    2. is the group of players who purport to be freelancers but are in reality not. This would cover most of the players in the London ‘self-governing’ orchestras, for example, who are engaged on a freelance basis, but who spend the vast majority of their working time working for the same organisation. As far as I can see, the current status quo in this environment is decidedly dodgy, if not outright wrong, in terms of the clear tax and employment rules as have applied for years.
    Musicians in these circumstances being small in number, I suspect HMRC hasn’t turned their attention to them. But in terms of working patterns and contractual situations, it’s extremely similar to the situation IT Contractors found themselves in a few years ago (and not entirely dissimilar to the whole IR35 thing): in other words, the musician is to all intents and purposes employed by the organisation, except they lack a contract of employment.
    (It should further be quite clear in employment legislation that if someone works for you for greater than x% of the time, they could have a successful appeal to be awarded the same benefits as a bona fide employee, as they are deemed to be employed).

    Since the ITV ruling seems to deal with a half-way house between these two scenarios (ie people ‘employed’ for weeks or months at a time), it seems likely that (1) will be fine and (2) will not.

    In essence, both employers and freelancers under (2) may well have been have been dodging tax – evading rather than avoiding – for years.

    • Re Anon’s comment, group (1) has plenty to worry about unfortunately. For example, a one-off film session now becomes subject to class 1 NI – the musician effectively becoming an employee of a company for just 3 hours work! The main issue here is not so much the deduction from the musician’s wages, more that the company must now pay the 13.8% employer’s contribution i.e. it just became 13.8% more expensive for an orchestra to hire an ‘extra’ or for a US production company to record a film soundtrack in London. There is a serious concern that, if this judgment isn’t overturned, a vast amount of work may disappear or go elsewhere – that is the danger for ‘truly freelance players’.

      • Really? Is there a source for this – ie does the MU rates table reflect this? I find it quite bizarre.
        If true, that has huge ramifications for freelancers in all industries (and I imagine we’ll see a rise in musicians trading through Personal Service Companies, as many already do).

        Still, if we expect other employers of other employees to pay such a tax (which ends up funding our orchestras and providing employment for our musicians), shouldn’t we expect music employers to have to pay it as well?

        • I can confirm that the interpretation of the ruling means that musicians engaged for one 3-hour session are deemed to be “employees” for NI purposes- to the extent that following a recent large film project which involved considerable re-writing and consequent ad-hoc booking, I am now the proud owner of no fewer than THREE P45s (“Details of employee leaving work”) issued by the production company. HMRC is taking the music profession into a world which is more Kafka than Carroll.
          Am I now expected to register as an employer and Employers’ NI if I engage a plumber? If not, why not?

          • I’m very surprised, but accept it! I doubt this will last, however, it’s just not a logical fit.

            As far as plumbers are concerned, I suspect the majority trade through a Personal Service Company, or as part of a bigger company, so no, you wouldn’t have to register to employ them. Of course for some perhaps you would, which is another reason why this seems so daft, and surely can’t continue long-term., without removing the entire notion of ‘freelance’ as we know it.

        • Dear Anon,

          I was at an MU meeting for contractors (fixers) at which all of this was discussed. It has HUGE potential to decimate much of the industry which we already lose out on in a big way to places like Prague, as far as film work goes. The further East you travel, the cheaper the musicians’ and singers’ rates are.

          This will drive work away from the UK but it will also affect weddings, church jobs etc etc. Anything that is governed by time and also has the potential of overtime is a potential target.

          Is the the father of the bride REALLY going to pay 13.8% more to his musicians and singers for the NI employer contribution? You may think I’m exaggerating but the problem is real and with us now.

          • It’s not even just the mere imposition of that 13.8% employers’ NIC1 – it’s the additional costs associated with the setting up and management of payrolls and all the other legal obligations that an employer, as distinct from just a contractor, has to face – and, in addition, HMRC/DWP will be facing themselves with ever greater complexity in having to deal with increasing numbers of people who will be both employed and self-employed.

            I can well imagine that some musicians will form companies to offer their services as a way of getting around this kind of thing, but it won’t come cheap.

            It won’t matter all that much to what extent HMRC/DWP tries to invent employed status for a handful of self-employed people, state retirement benefit will still be woefully underfunded and always will be increasingly so, for the very reason that you mention; given my understanding that increasing proportions of this and other state benefits are now having to be (and presumably will continue to be) funded out of government borrowings, the writing is surely already on the wall and I, for one, do not have much future expectation of receiving state retirement benefit funded in part out of borrowings the the government cannot afford to repay on demand if asked to do so.

            What next? Composers having to be “employed” by the licensees of performance venues and broadcasting organisations and owners of record companies for the purposes of paying their royalties?

            This whole idea is almost as daft as it is dangerous and I do hope very much that the legal challenge to it will be successful.

          • Alistair – exactly. It’s clearly so messed up that I’m fairly confident a solid challenge would win. The extended logic destroys any notion of freelancing, and makes everyone who engages a tradesman an employer, which is obviously not the intention of Parliament.

            The writing is probably on the wall for the LPO / LSO / RPO self-employment structures, though, but that’s a separate case I think, and one where they’ve been sailing too close to the wind for quite some time.

  3. “Musicians’ representatives argue that the tax authorities are using a sledgehammer to crack a nut.”

    This is sadly typical of the approach of many authorities in the UK, including the police – give an impression of diligence by going for the low hanging fruit but avoid the hard (or dangerous) cases.

    • Strikes me as a question of perspective. Here, you see musicians as individuals being clobbered; and I’m guessing you see a big corp – let’s say Starbucks – as a big nasty entity which deserves to be hit.

      But the tax authorities see “artists” or “entertainers” as a similarly big corporation or unit (and certainly the intention of the Union(s) is to organise them in this guise when it comes to responding to authority); and the individual employees of Starbucks, whose wages would be hit by any action there, see themselves as the individuals.

      It just depends which side you’re on as to how you see it. I fear that here, as elsewhere, it’s a case of “shouldn’t happen to us, no, we’re the nice people, surely it should happen to those people over there?”

      • “and I’m guessing you see a big corp – let’s say Starbucks – as a big nasty entity which deserves to be hit.”

        No, I don’t. UK companies trading abroad do the same. International tax treaties were devised to deal with issues like this. There are also similar issues with VAT where UK companies have traditionally been very aggressive.

        Comparing like with like, however, I’m sure Revenue & Customs see entertainers as easier targets than large companies. Just how big is the LSO’s legal department, exactly?

        • The size of the LSO’s legal department isn’t relevant (nor is the size of the legal department of an individual Starbucks store). If this ruling is industry-wide, you’d expect an industry body (or group thereof) to fight it. So we’re talking about the combined ‘might’ of the MU, BECTU, EQUITY, ABO, and probably a bunch of other acronyms too.

          Starbucks has c. 12k employees in the UK, incidentally, while the MU has around 30k members. *BECTU around 26.5k, and EQUITY c.36k).

          • And how am I (an individual contractor) meant to fund all of the necessary changes that will be forced upon me? Out of my own pocket. I don’t have legal departments helping me. It’s not just the big corporations who will be affected by this, the little guys and gals are also (already) in the proverbial poo.

          • An individual Starbucks store is not a separate legal entity, so it’s a silly comparison. Industry bodies deliver more hot air than action.

            I don’t think that Revenue & Customs is going to feel intimidated by the MU. In any case, R & C will pick their battles very carefully.

          • Barry – well, quite. But that says more about the MU than Starbucks. Unions purport to stand up for their members; to be a strong, big collective; and all the other advantages we might ascribe to Starbucks, in this example. If they fail to deliver, that’s different… (and as a ‘contractor’, you might be better off joining the PCG quick – their record of success against HMRC is quite significant. They’ve quite a bit of experience dealing with them…)

  4. Wow, that’s clearly where all the tax revenue’s been hiding.

    • I sense sarcasm: but if the taxman believes the lack of NI contributions on freelancers earnings to be a problem, then yes, it is where it’s been hiding. There are est. 1.56m freelancers in the UK; if they were all caught by the net then at an average salary of £25k, the “missing” NI would be over £10bn…
      (I don’t believe they will be, mind)

      • Can confirm ITV are abiding by the ruling as it stands. All X Factor sessions now have NI taken off. The BBC Orchestras are paying as normal apart from Film and TV soundtracks which in a lot of cases are now being witheld because no one knows what to do. If the corporation pay it, or more to the point the outside contractor, then they become liable to 13.8%

        The X Factor soundtrack sessions happen once a week during the live run for 4 hours. And this is deemed as employment. Frankly the whole thing is mad and would mean that the RPO and LPO would go bust overnight!

        Great job Whitehall!!!!

        • Well, if the LPO and RPO went bust overnight, that would gain the Treasury £2m-odd in direct grant funding (or make it available for other orchestras to pay better salaries) raise the calibre of available players in the pool for the LSO, Philharmonia, and the myriad other smaller bands in London (OAE, ECO, OSJ, CLS, ASMF, Sinfonietta, etc etc).
          Resultant post-shakedown higher standards, and fewer concerts in total, should result in fuller halls, (the same audiences want to hear the same pieces) meaning the remaining orchestras require less funding to keep going, the big donors and endowments can be concentrated rather than spread thinly, and the bands can be more adventurous in their programming.

          Great job Whitehall?

          • This is so simplistic that it beggars belief.

          • Yes. It was intended to be vaguely ironic. The current case doesn’t mean, as suggested above, that the RPO and LPO would go bust: they’d just do fewer concerts, get out the begging bowls, change their programming, and do what they can to get by.

            Mind, that may have been simplistic, but would you like to offer an alternative view instead? Simplistic, but not wholly inaccurate were those orchestras to go under, I suggest.

  5. The other point is that all freelancers pay class 3 and 4 NI. So why do I now need to fund more state pension provision?

    • Presumably you won’t.
      Class 3 (voluntary) and class 4 are payable on self-employed earnings; earning to which these ‘new’ rules apply are those from employment, not from self-employment.

      So on your tax return, you’ll need to fill out both an employment page (for which the NIC’s under discussion above are relevant) – the earning from which would not be assessed for Class 2 / 4. Then also the self-employment pages, which would be assessed for Class 2 etc., but obviously not Class 1.
      (Class 3 is voluntary)

      The other answer to your question is that state pensions are woefully underfunded, and there are more and more people becoming entitles to receive it (and living for far longer after retirement); that’s why you need to fund more of it…

  6. Another aspect of this is that employers get hit even worse than employees in at least two ways in addition to the fact that their rate of NIC1 is even higher than that of employees.

    Firstly, employees have an upper earnings limit, currently £42,475p.a., above which they are charged at the much lower rate of 2%, whereas employers are charged at the rate of 13.8% with no upper limit (each, however, does have a lower limit equivalent to £7,592 and £7,488 respectively below which no NIC1 is chargeable).

    Secondly, employees’ liability for NIC1 ends at around state retirement age wheres that of employers is never-ending; this means that employers who employ those above state retirement age have to pay the same as they do for those below that age.

    As one who has had experience (albeit a long time ago) of running a small ensemble whose members were employed on their principal contract at the time and having to go as far as seeking and successfully obtaining a Secretary of State’s decision that they should in fact be treated as self-employed for contractual purposes (as indeed they have been now for more than 35 years and still are – for the time being, at least), this subject is one that remains close to me.

    HMRC/DWP may indeed find little in MU to fear, but it’s nevertheless up to MU and its membership as a whole – as well as anyone and everyone else who cares about the performance and recording of music – to make as much noise as possible in support of the dropping of this punitive, expensive, absurd and dangerous measure.

  7. Some further thoughts on this that may or may not prove to be of any use.

    When I applied years ago for that Secretary of State’s decision, some of the parameters considered were
    (a) whether the musicians supplied their own music and their own instruments at their own expense,
    (b) whether the musicians or the contractor determined what music was to be performed and
    (c) whether or not their performance times and venues were determined by a contractor or by themselves.
    It was clear that, in (a), the musicians supplied both their own instruments (except the pianist, who the S of S generously agreed could not physically do so!) and their own music at their own expense and, in (b), they decided on their own programmes, although in (c) the performance times and venues were determined by the contractor. On balance, as I mentioned, the decision was made in favour of the musicians maintaining their self-employed status.

    It is clear that, where symphony and chamber orchestras are concerned, in (a) the musicians supply their own instruments but not the music, in (b) the contractor determines what music is to be performed and (c) performance times and venues are decided by the contractor so, as has been suggested above, maintaining self-employed status for orchestral musicians might be a harder challenge than it would be for any others. One problem, however, is that most orchestral musicians in Britain cannot survive on their orchestral salaries alone and so undertake additional work, including other performances, for most if not all of which they are treated as self-employed; likewise, orchestras are already strapped for cash and those whose musicians are currently treated as self-employed will inevitably risk finding themselves in even more parlous financial positions than is the case now unless the challenge to this new ruling is wholly successful.

    Class 3 NICs, incidentally, are not, as Anon states, “payable on self-employed earnings”; Class 2 and Class 4 ones are but Class 3 ones, as he says, are “voluntary” and not dependent upon earnings of any kind, so a “contributor” (what a bizarre euphemism that is in the present context!) does not even need any income from work in order decide to make them. Quite why anyone would choose to do this is beyond me, but that’s neither here nor there, I suppose. Ultimately, all NIC’s are, of course, tax by another much more cumbersome name, yet since there are no provisions for payment or collection of any other kind of “voluntary” tax their continued existence seems odd to say the least.

    • Alistair – thanks for the correction; I worded that badly. Meant that Class 2 and 4 for self-employed, though you could opt to pay 3 as well if you wished (why, as you note, I don’t know – unless it is to top-up previous low contributions to take you over a threshold for future rewards). I haven’t had my head around all this for a while. Advice to readers: speak to a qualified accountancy professional!

    • PS – your comment about orchestras is very valid. “full-time” bands – or near as (RPO, LPO, Philharmonia) can hardly really be self-employed by any of the guidelines as to who has control (ie who determines when a player turns up to work, what they do, using what, what they wear, when their breaks are, and so on); and nor by the quantity of work test either.

      Smaller orchestras – perhaps CLS, Orchestra of the Swan, Manchester Camerata can make a good case for using freelancers, since the personnel are slightly different for each concert, and most importantly, that they don’t employ the musicians for a significant portion of their working time. In other words, any one player has many sources of work and are demonstrably freelance.
      The taxman has for years taken a very dim view of anyone claiming to be freelance, but yet having one major employer, for whom it is clear work is being carried out “as if employed”. It is principally for this reason that I’ve never understood how those London orchestras quite get away with it, other than being so small (in the taxman’s eyes) that they haven’t really noticed.

      None of that, though, seems to be strictly what is at stake in the case under discussion and shouldn’t be confused with it; sorry to go slightly off-topic.

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