360 Deals – The Basics

This is the first part of a series of articles looking at 360 deals. Part 2 will look at the issues an artist should consider when offered a 360 deal. Part 3 provides a summary of the range of commercial terms that are available. Part 4 examines some of the alternatives.

The Basics

Under a traditional recording agreement, the record label would pay you a royalty (or a share of profits) from sales of your records. With a 360 deal, the record label will additionally want to take a share of your income from all other sources within the entertainment industry. So, typically, this may include a share of all or part of your publishing, live work, merchandising and sponsorship.

What’s The Rationale?

The record labels claim that the traditional form of recording agreement is no longer financially viable. The labels say that their revenues are falling and, at the same time, it is becoming harder, and more expensive, to successfully promote and market artists. On top of this, there is a significant increase in the supply of music onto the market. This means that the ‘hit rate’ of the record labels developing a ‘successful’ artist is falling.

The labels go on to say that because of the above factors, receiving income from record sales alone will simply not pay the bills!

Do I Have To Accept A 360 deal?

It depends! If your record deal is from a US record label then you almost certainly will have to accept a 360 deal. 360 deals have now been used in the US market for several years, and the position of record companies has become entrenched. That doesn’t mean you can’t still negotiate a good deal with your US record label – just that you will have to accept that 360 rights will form part of the deal is some way, shape or form.

In the UK, my experience is that many record labels simply do not ask for 360 deals. Those record labels that do ask for these rights will readily give them up if pushed hard enough. There are some exceptions – with a relatively small number of labels insisting on 360 rights on a ‘deal or no-deal’ basis. Even then, most UK record labels will not insist that your songwriting income (or publishing rights) be part of the deal.

What Are These Deals Worth To The Labels?

The BPI recently reported that almost £76m was generated in 2011 from 360 deals with artists – an increase of 14% on the previous year. By comparison, the retail value of record sales (physical and digital) reduced by 0.5% between 2012 and 2013 from £1,048.4m to £1,043m. Income from 360 deals is therefore an attractive growth area for the labels.

Finally…

There have been a number of high profile railings against 360 deals. Neil Warnock, CEO of The Agency recently described 360 deals as ‘immoral’, stating that “No company should own everything that an artist does.”.

Alan McGee, former Creation Records boss has also stated in his Guardian music blog that

It was trailblazers such as Peter Grant here in the UK and Shep Gordon in the States who fought for artists, winning them a percentage of the door at gigs. They pulled artists out of the slavery of 1970s deals. Didn’t we all applaud that? Wasn’t it great when the Beatles started their own label?

In a 360-degree deal, this is what the records company is doing: ripping off the door at the gig. Let’s call it like it is. Where is the morality in that? The cops would bust someone for stealing at the door. And everyone would applaud. So what’s going on here?

Because music is free and the traditional record industry model obsolete it doesn’t give the industry the right to move into the business of promoters and merchandisers.

Many new artists will not have the profile or negotiating position to refuse a 360 deal – particularly if it is the only contract on the table. There are alternatives though. These are identified in Part 4. In the meantime, if you are forced to negotiate a 360 deal, then head over to Part 2 to read about how to make a 360 deal work for you.

If you need help negotiating your 360 deal then please call me, Mark Roberts, on 0161 826 9309.

Image copyright © Peat Bakke. Licensed under a Creative Commons License.

Alan McGee’s Top 5 Tips for Aspiring Music Moguls

Oasis

BBC Radio 6 this morning hosted an interesting interview with former Creation Records boss Alan McGee. Alan is of course famous for managing the careers of The Jesus and Mary Chain, Primal Scream, My Bloody Valentine, Oasis and The Libertines.

During the interview Alan was asked for his top 5 tips for aspiring music moguls. His answers were as follows:

Don’t ever believe them when they say “give in”. Follow your own instincts.

Try and get a great lawyer – because you’re going to need him.

Try and get an accountant that thinks about tax – that is tax conscious.

It’s always about the song – ultimately.

If you’re not enjoying it – get out.

Great advice from someone who has walked the walk… If you need help with your music business activities then please feel free to call Mark Roberts on 0161 826 9309 for a free, no-obligation discussion.

Image copyright © Will Fresch. Licensed under a Creative Commons License.

Tour Promoters – How to Reduce Withholding Tax

Guitarist on stage

In our post “Withholding Tax, Tour Promoters & Overseas Artists” we looked at HMRC’s withholding tax system and how it applies to overseas artists performing in the UK. In essence, promoters must deduct a 20% withholding tax from all income generated by the non-resident artist.

However, it is possible to apply to the Foreign Entertainers Unit of HMRC to reduce the amount of tax withheld from 20%.

When should I make an application to reduce withholding tax?

Your application must be made at least 30 days before the date the payment is due.

How do I make an application to reduce withholding tax?

You can simply make an application in writing. However, the easiest way to apply is to complete the HMRC form FEU 8. The application can be made by you in person, or with the assistance of your accountant.

When making an application, you will be required to provide the following information in respect of the artist:

  •     dates of arrival in and departure from the UK;
  •     whether the artist is likely to return to the UK in the same tax year;
  •     a projection of actual or estimated total income;
  •     the date of each performance and the name and address of the venue;
  •     a schedule of the projected actual or estimated expenses which will be incurred; and
  •     a copy of any relevant contract (these do not need to be signed).

The application should give sufficient information to show how any figures have been calculated.

Has my application been successful?

If your application is successful, the Foreign Entertainers Unit will send you a form FEU 4. This is your confirmation that you can pay a reduced level of withholding tax. Please note that no reductions from the standard rate of 20% can be made until a form FEU 4 has been received.

How long does it take the Foreign Entertainers Unit of HMRC to process my application?

The Foreign Entertainers Unit has indicated that they generally hope to process applications within 30 days. However, this is not guaranteed and, at certain times of year such as Christmas and during the festival season, applications can take longer than 30 days to process.

A timely application is therefore recommended.

If you have any further questions or queries then please feel welcome to contact Mark Roberts on 0161 826 9309.

Please note that the information in this post is general information only. It is not intended to be relied upon as a substitute for independent legal or accounting advice. Please consult your lawyer or accountant for advice based on your particular circumstances.

Withholding Tax, Tour Promoters & Overseas Artists

Live guitarist on stage

Every promoter will be aware of the necessity to carefully identify all income and expenditure associated with a tour. Relatively small and unexpected changes can make the difference between a profitable tour and a loss-maker. Accurate financial planning also allows the promoter to calculate attractive levels of guarantee and gauge the fixed percentage to be paid to the artist. With this in mind, withholding tax, at 20%, can punch a huge hole in your financial planning. The deduction of withholding tax may also come as a surprise to the non-resident artist, whose enthusiasm for any upcoming tour may be depleted on learning of this unexpected deduction.

The Basics

As a rule of thumb, withholding tax must be paid by anyone who makes a payment to a non-resident artist for any UK appearance. There are some exceptions, but they are limited. Payment includes not only cash, but also expenses paid on behalf of the artist such as airfares or the cost of hotel accommodation.

Withholding tax is paid at the current UK basic rate. At the date of writing (January 2013) this is 20%.

Example 1: A non-resident artist appears at the O2 Apollo in Manchester. The venue is obliged to pay all box office receipts to the artist. The total value of box office receipts is £150,000. The venue pays the artist £150,000 less £30,000 tax = £120,000.

Withholding tax must be paid not only on direct income such as guarantees and any agreed share of box office receipts, but also on indirect sources of income such as merchandising and endorsements.

Example 2: Marshall pays you a £10,000 endorsement fee to use their amps on a UK tour.

Even those that indirectly make payments to a non-resident artist must account for withholding tax. So, for example, a venue paying over monies to a promoter must first deduct withholding tax from those monies. The promoter, in turn, must also account for withholding tax.

Example 3: A Promoter engages a non-resident artist to appear at the Roundhouse.

The Roundhouse pays £75,000 less £15,000 tax to the Promoter.

The Promoter pays £40,000 less £8,000 tax to the artist.

The Promoter is liable to account to HMRC for £8,000 but as the payment he has received has had £15,000 withholding tax deducted from it he can treat the £8,000 as paid. This assumes the artist is the only non-resident artist the promoter engages in that tax quarter.

Are there any exemptions?

Yes. Withholding tax does not apply to payments:

  • made in respect of copyright, royalties or advances on royalties.
  • made direct to an entity for ancillary services. These include security, venue hire, equipment hire and ticket printing.
  • made to an entertainer for record sales where the payment is either:
    • based on the proceeds of sales;
    • a non-returnable advance on account of future sales;or
    • sales at a live performance.
  • equal to or less than the UK personal allowance for that year (currently £8,105 for the 2012/13 tax year).

Can I reduce the amount of withholding tax?

Yes. You can apply to the Foreign Entertainers Unit of the HMRC to deduct an amount other than the 20% basic rate of tax. To do so, you will need to demonstrate to HMRC that the final liability of the artist to UK tax will in reality be lower than the blanket 20% basic rate of tax. For example, you may be able to agree that the very considerable expenses associated with touring will substantially diminish the income of the artist.

HMRC generally accepts that the following expenses may be deducted from gross income, resulting in quite substantial decreases in the amount of withholding tax that needs to be paid:

  • general subsistence expenses;
  • commission, manager’s and agent’s fees;
  • UK travel; and
  • international air fares to and from the UK where the artist comes to the UK to perform and returns directly to their home country.

Other expenses may be deductible depending on the individual circumstances of the artist.

For further details on how to make an application, please click here.

How and when do I have to pay withholding tax?

You need to pay any tax due to the Foreign Entertainers Unit within 14 days after the end of the return period in which the payment was made. The return periods are 30 June, 30 September, 31 December and 5 April.

You report the amount of withholding tax payable to the Foreign Entertainers Unit by completing Form FEU 1 before the end of the return period.

Making a payment to a non-resident artist

When you make a payment to a non-resident artist, you will need to complete Form FEU 2. This comes in 3 parts.

  • Part 1 : This should be sent the HMRC’s Accounts Office at Shipley together with your form FEU 1.
  • Part 2 : You keep Part 2 for your records.
  • Part 3 : You give this to the artist as a certificate of the payment made and tax withheld.

Finally…

If you are not yet registered with the Foreign Entertainers Unit then call them on 0151 472 6488 to request a Starter Pack. This contains helpful information and all the forms you will need.

When booking venues, check their policies as regards withholding taxes. All venues should deduct withholding taxes. Ensure you receive Part 3 of Form FEU 2 from the venue so that you can pass this on to your artist.

If you have any further questions or queries then please feel welcome to contact Mark Roberts on 0161 826 9309.

Please note that the information in this post is general information only. It is not intended to be relied upon as a substitute for independent legal or accounting advice. Please consult your lawyer or accountant for advice based on your particular circumstances.

Clearing music samples

A common question asked by musicians and producers is whether they need to obtain approval for the inclusion of a pre-existing piece of music or ‘sample’ in any new recording. If approval is required, then what process will they have to go through to obtain clearance? For the uninitiated, the term ‘clearing a sample’ refers to obtaining the legal rights to use music, lyrics and/or recordings that are owned by someone else. Continue reading “Clearing music samples”