Making Music and Class 1 National Insurance Contributions

By Robin Osterley, Chief Executive Making Music 2 November 2005

You'll also find other articles about the issue if you click the following links
MU Petition Text  •  CM Tax Bombshell Editorial  •  CM Tax Bombshell Briefing  •  links index -> 33 Million Tax Bill

Many people will have seen the recent articles in the press regarding the £33 million tax bill faced by British professional orchestras. Naturally Making Music has now started to receive communications from our members who are concerned about the implications that this could have on them. Below is the first update on the legislation and how it could affect our members.

Background:
In 1998 the performers' union Equity successfully lobbied for a change in National Insurance legislation that enable actors to become liable to Class 1 National Insurance contributions. This would mean that they would be treated as employees for National Insurance purposes but self employed for tax purposes. The overall reason for this change was to enable actors to claim Jobseekers' Allowance while they were resting.

This situation was revisited in 2003 because it was discovered that the 1998 legislation was not working as originally intended. The purpose of the new guidelines was to clarify the treatment of freelancers in the sector.

Freelancers are not automatically treated as self-employed. Having looked at how freelancers were paid by the sector, HMCR (formally, the Inland Revenue and HM Customs & Excise) has stated that orchestras and opera and theatre companies have had full liability for Class 1 payments in respect of these workers backdated to 1998, when the original legislation was first amended.

Michael Henson, chairman of the Association of British Orchestras, said Equity had negotiated an agreement over its actors but it was not applicable to freelance orchestra players. "The revenue's interpretation is at the moment we would be, as a sector, liable for these payments," he told BBC Radio 4's Today programme. "I think it will have a severe affect upon the class-leading orchestra sector in this country which I think could lead to closures and severe alteration in the actual quality of music-making that goes on."

Following a review of five orchestras the HMCR estimated the likely cost to the professional orchestra sector of £33 million. This includes the basic National Insurance contributions liability relating to earnings, other payments liable to National Insurance contributions and costs for any penalties and interest.

HMRC have confirmed that they believe that the sector is liable for these costs, and while they are limited to collecting from 2000/2001, they have a legal obligation to collect the National Insurance contributions due and any associated interest and penalties for all subsequent years. They also expect all companies to implement payroll deduction with effect from 1/4/06.

A spokesman for HM Revenue and Customs said "it did not believe any orchestra will need to close". The spokesman said the payment of class one National Insurance contributions means musicians can claim a wider range of benefits as well as Jobseekers' Allowance. He added: "We have an excellent track record for agreeing time to pay arrangements with our customers when they need it. HMRC officials are in discussion with representatives of the orchestras to agree the best way forward," he said.

The Association of British Orchestras (ABO) is working closely with the Department for Culture, Media and Sport, and the Arts Council to lobby the Treasury for the situation to be resolved without cost to professional orchestras. DCMS have a senior official working full-time with the Treasury on this.

How this will affect Making Music members:
The current situation is most unclear unfortunately. Basically there are two risks: liability for NIC within our membership, and increased costs.

1. Liability
Our members, like many other promoters, often employ professional musicians. The concern is that our members will in this respect be liable for Class I NIC contributions for these professionals, and should have been paying these since 1998. Although the situation is far from clear cut, we believe at the moment that this is unlikely, as in very few circumstances do our members employ musicians on anything other than an obviously self-employed and freelance basis, they do not control their working hours, their working environment or how they carry out their activities. It is at least arguable that they are employing them under a contract for services, rather than an employment contract. This contrasts with the major London contract professional orchestras.

It may well be that as a result of these discussions, more carefully worded contracts will need to be negotiated with musicians from April 2006 onwards.

We are keeping a very close eye on the situation however. If the ABO negotiations end up being unsuccessful, we will need to get urgent clarification of our own position.

2. Costs
Some of our members employ professional orchestras as a whole. Here the risk is that future costs will increase, to the extent that orchestras can no longer be affordable. Additionally, many of our members will be employing smaller orchestras, who may be more seriously affected by this development, and may indeed go out of business. This would clearly have a serious effect on some of our members' activities, reducing the quality and enjoyment to be had from their activities.

What are we doing about it?
The lack of clear cut answers is unfortunate at this stage, but Making Music is very concerned not to raise too much dust at this stage in order give the Association of British Orchestras a chance to conduct their negotiations and undertake their lobbying work. But in the meantime here is the action we have taken:

We have expressed full support for the ABO, and are in regular touch with them in order to understand latest developments.

• We have written to Tessa Jowell expressing our concern at the effect this may have upon our members.
• We will be raising the subject again at a meeting on Monday 7th November with David Lammy, Minister for Culture.
• Further updates will be provided as soon as possible, and will be posted on the Making Music website.

Robin Osterley, Chief Executive Making Music

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