British Orchestras are desperately seeking o defuse a tax bombshell of potentially devastating proportions. If HM Revenue and customs (HMRC) gets its way, the sector will be presented with a backdated bill for £33m in Class 1 National Insurance contributions (NIC) and future annual NI payments of around £6m.

The liability arises from compliance checks carried out by HMC. These followed amendments to the revenue's guidelines concerning special NIC rules for entertainers, effectively established to offer the protection of contribution-based Jobseeker's Allowance to actors involved in occasional film and television work.

According to the Social Security (Categorisation of Earners) (Amendments) Regulations 2003, the majority of 'entertainers' should be regarded for NIC purposes as salaried employees. As such, their employers are liable to pay Class 1 NI payments.

The regulations are aimed at reflecting the NICs position of entertainers prior to July 1998 when there was a distinction between entertainers regarded as self-employed and those regarded as employees, based on the state HMRC's Guidelines on the Special NIC Rules for Entertainers 2003. The vast majority of Entertainers are engaged on the basis of payments of salary, but a small proportion are only paid a fee for an engagement which is not dependent upon the time worked.

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MU Petition Text  •  CM Tax Bombshell Editorial  •  NFMS Tax Bombshell Briefing  •  links index -> 33 Million Tax Bill

From 6th April 2003, any payment to an entertainer deemed by the revenue to constitute a 'salary' became liable to Class 1 NI contributions. It is understood that HMRC's regulation changes followed negotiations with British actors' union Equity. Orchestras believed they were exempt from paying Class 1 NICs to occasional freelance players under the 2003 regulations, citing the revenue's special class of 'session musicians'.

Compliance inspectors from HMRC, however, investigated payments made by the London Symphony Orchestra, the City of Birmingham Symphony Orchestra, the Orchestra of the age of Enlightenments, and the orchestras of the English Touring Opera and Welsh National Opera and ruled that freelance players were subject to Class 1 NICs.

The revenue is demanding that orchestras pay National Insurance payments backdated to 2000/1 and continue paying Class 1 NICs for freelance players from april 2006.

Michael Henson, chief executive of the Bournemouth Symphony Orchestra and chairman of the Association of British Orchestras, warned that four out of five UK orchestras faced bankruptcy if the revenue gets its way. He has written to culture secretary Tessa Jowell, calling on her to make the strongest possible case for orchestras to be granted special case status by the chancellor and the paymaster general. The ABO, meanwhile, is spearheading a campaign to highlight the threat posed by the revenue's NI interpretation to the nation's orchestras.

Henson told Radio 4's Today programme that it was 'unrealistic' to expect orchestras to pay Class 1 NICs for non-contract players. 'This [ruling] is not applicable to our freelance players who want to retain Class 2 or Class 4 [ie self-employed] status,' He added that the issue of Class 1 employer contributions is relevant to every UK orchestra. 'I think it will have a severe effect upon the... orchestral sector in this country, which could lead to closures and severe alteration in the actual quality of music making that goes on here.'

ABO director Russell Jones expressed shock that HMRC is looking to extract an estimated sum from his members that almost matches the £35m stabilisation grants made by Arts Council England to English orchestras since 1999.

'Similar schemes have run in Scotland, Wales and Northern Ireland,' he said. 'These substantial additional amounts of investment have allowed the sector to develop a sustainable financial base. It has enabled considerable changes in working practices to occur which has further invigorated one of the leading orchestral sectors in the world. The ABO is extremely concerned at the un-joined up thinking, between the Treasury and the Department for Culture, Media and Sport, which has seen one department investing £35m in the sector whilst another appears to wish to remove it.'

A spokesman for HMRC told CM that the revenue was in discussion with orchestras to 'agree the best way forward'. He repeated a prepared statement, the contents of which suggest that the gap between the reality of orchestral life and the revenue's perception of it is cavernous.

'To guarantee access to the widest range of contributory benefits possible our policy since 1998 has been to treat orchestra members as employees for NICs purpose. The payment by the orchestras of Class 1 NICs means that their musicians can claim a wider range of contributory benefits and also enable them to claim Jobseeker's Allowance whilst not working.'

In addition, MHRC points to its 'excellent track record for agreeing time-to-pay arrangements with our customers when they meet it - ensuring that bankruptcy is rare. Consequently we do not believe that any orchestras will need to close.'

Andrew Stewart, published with the kind permission of Classical Music Magazine

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