Clause 31
Finance (No. 2) Bill
4:30 pm
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I beg to move amendment No. 30, in page 29 [Vol I], leave out lines 3 and 4.
I join the rest of the Committee in warmly welcoming you to the Chair, Sir John. I also congratulate the Economic Secretary to the Treasury on his recent appointment. I look forward to a constructive and positive debate on film tax this afternoon.
Before turning to the substance of amendmentNo. 30, I should like to start with some general remarks about part 3 and the Government’s new film tax-break regime and its history. Strictly speaking, the latter might be more suited to the debate on clauses 46 and 47, but as it is important that we learn from our mistakes, it would be useful to take this matter at this stage in order to set the scene and background for the new framework proposed and the Opposition’s amendments to it. I am conscious of the need to make progress, so as I have indicated informally, I should be happy for the debate on the amendment to cover the clause stand part debate without the need for any separate discussion of the clause.
I start by declaring that my sister-in-law is a film producer. I do not think that it counts as a declarable interest, but I thought I would mention it just in case. Like the Government, the Opposition believe that it is important to work to ensure that the UK provides a competitive and attractive environment for the film industry for commercial and cultural reasons. However, although we understand the Government’s motivation in their film tax-break regime and we, too, want a successful and sustainable film industry in the UK, we have serious concerns about their effectiveness in that area to date.
The Chancellor’s film tax regime has a chequered history. The costs of film tax relief spiralled from£10 million when it was initially introduced in 1997-98 to £520 million in 2004-05 and to a staggering£560 million in 2005-06. They are huge sums when one takes into account the fact that the UK’s entire cinema sales were only £770 million last year. It seems clear that many used the tax breaks in a way that the Treasury did not intend, and that a significant proportion of the revenue lost to the Exchequer did not directly benefit film producers and production.
Many of the funding arrangements developed under the section 42 and section 48 reliefs that we are proposing to abolish had much more to do with reducing the tax bill of a limited number of high net worth individuals than any desire to make films. The outgoing regime depended on investors to provide funds through complicated sale and leaseback arrangements, which gave rise to a veritable industry of tax avoidance schemes. As Revenue and Customs set out in its recent consultation paper, that led to considerable problems. It said:
“Whilst the current film tax relief has ensured the production of many valuable British films, the financing structures that have been used to access them have affected their value for money for the taxpaying public, calling into question their fairness and effectiveness. The repeated use of tax avoidance schemes around the current film tax relief has also involved significant Exchequer cost and there remains a clear Exchequer risk in the current reliefs. This has resulted in fluctuating and, at times, untenable levels of Exchequer costs over the years the reliefs have been in operation.”
Some of the aggressive structures allowed investors to make high rates of return that were almost risk-free, and some schemes apparently allowed investors to claim more in tax relief than they invested. Loopholes included so-called double dipping, which enabled film producers to claim tax relief twice on the same production—on production costs and the sale and leaseback of the final film.
In September 2003, the Culture, Media and Sport Committee stated:
“The historical cycle of change in the tax regime was presented to us by the majority of witnesses as a huge disadvantage to the industry.”
Although acknowledging the problems flowing from aggressive avoidance schemes, the Chartered Institute of Taxation said recently:
“We think there has been too much tinkering with the tax system. As with other relieving provisions, the government introduces a relief and then expresses surprise when taxpayers obtain the benefit of it.
Then the relief was withdrawn or redrafted.
More careful thought and consultation would have resulted in better legislation.”
Since the Chancellor first introduced his tax break, the rules have been amended in the Finance Acts in 2000, 2002, 2004, 2005 and now again in 2006. The continual change has caused uncertainty, damagingthe competitive position of the UK as a destination for the film industry.
The announcement of a further review last year unsettled the industry yet again. Harry Hicks, a film tax consultant with Grant Thornton, commented:
“The quicker we see the new legislation in full, together with HMRC’s proposed interpretation of its practical application, the better. In the meantime, I fear that many projects will be prevented from going ahead whilst financiers and bankers simply sit on the fence and wait and see how the new tax breaks will operate in practice”.
His firm predicted a downturn in the film business in 2006. It would be useful if the Minister gave us an insight into recent levels of investment in the film industry. Pinewood’s profits fell from £6.5 million to £571,000, which it attributed in part to the uncertainty caused by the pending new regime.
Problems were also reported with several other films: “Lassie” was due to be filmed at the book’s original British locations but was moved to Ireland, “The Libertine”, starring Johnny Depp, moved to the Isle of Man, and, most controversially, James Bond’s 21st film outing in the remake of “Casino Royale” will be the first of that long-running series to be shot predominantly overseas. Pinewood, Bond’s traditional home since “Dr. No”, lost out to Barrandov studios in the Czech Republic. Tim Adler of Screen Finance commented:
“For the Government to allow its most high profile civil servant to go abroad is extraordinary”.
Certainty is of key importance, and it will be the theme of a number of the amendments that I table. If there is significant uncertainty about how our rules operate and will operate in future, that will deter the large US studios from investing in the UK and making films here. Uncertainty probably has an even bigger impact on indigenous, independent film producers, because it impacts so significantly on their ability to raise finance for their film projects. They are unlikelyto have the ready cash available, so they must borrow to finance their projects. If this regime is to be successful, we must ensure that film producers can borrow against the tax credit. If the rules are uncertain, the risks will be higher and the banks will be reluctant to lend; where they do lend, it will be at significantly higher rates. Currently, few if any banks are willing to lend pending resolution of the new structure.
While we regret that it has proved necessary to introduce yet another revision of the rules, we agree with the Government that changes are necessary to deal with the problems I have outlined and the significant loopholes in the existing framework. There is no doubt that the proposed new framework is an improvement on the current rules and that it has received some positive comment from many of those who are affected by it. In particular, the Opposition agree that it makes sense to amend the framework to try to ensure that the benefits can be claimed only by the companies who are making the films.
We still have several reservations about the proposals. I have tabled a series of amendments that seek to elicit clarity from the Government about a number of points that have been raised with me by the film industry and by those who are affected by the new framework. As I said, the amendments were tabled in a constructive spirit to try to ensure that we end up with a framework that achieves the goals that the Government have set.
Turning to clause 31 and amendment No. 30, the clause defines the meaning of the word “film” forthe purposes of the tax regime. Anyone who produces a film as defined by the clause will automatically fall within the new framework, although they will qualify for the tax break—the enhanced deduction or tax credit—only if they also comply with the conditions set out in clauses 32 to 41.
I want the Committee to consider clause 31(2), on films produced as a series. Amendment No. 30, which I moved, seeks to delete paragraphs (a) and (b) from the clause and deal with the fact that the Bill currently provides that unless a series complies with all of the criteria set out in subsection (2) each film will be treated as a separate film for the purposes of taxation. Paragraphs (a) to (c) require that the series has no more than 26 episodes, that the total length is no more than 26 hours and that it
“constitutes a self-contained work or is a series of documentaries with a common theme”.
The cumulative conditions of subsection (2), particularly paragraphs (a) and (b), could cause considerable practical problems if the legislation goes ahead as it is. For example, a TV series that has a significant number of short episodes would fall outside the cumulative conditions of those paragraphs. There seems no sensible reason to treat such a series as separate films for the purposes of taxation, nor is there any obvious reason why a series of more than 26 hours should not be treated as a single unit for film tax purposes.
As the Chartered Institute of Taxation pointed out in its briefing on the Bill, the cumulative conditions would give rise to a considerably increased compliance burden because of the requirement to treat each episode of a series as a separate trade. Schedule 4 treats each film as a separate schedule D case 1 trade. For example, TV companies producing long-running soaps will be required to keep separate tax records, monitor costs and estimate the total future income for each individual programme. They will have to track the loss position for each separate episode, and that will involve considerable extra cost.
Rob Marris (Wolverhampton South West, Labour)
Does the hon. Lady think that the British taxpayer should subsidise through tax breaks the production of soap operas?
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
No. I was just coming to that. TV companies cannot qualify for the tax break as their programmes are not intended for theatrical release, but, because of the way the legislation is structured, they come within the taxation framework that is being introduced. They are concerned about getting an additional compliance burden without any chance of getting a tax credit. That is why I am discussing the clause with particular reference to TV companies. I am not suggesting that we should extend the tax credit to cover them—that would be inappropriate—but we must mitigate the compliance burden that clause 31 would impose.
I have also tabled an amendment that we shall discuss later which would take TV companies that do not qualify for the tax break out of the overall taxation framework in the Bill. That would also deal with the problem.
I hope that the Economic Secretary will explain why he thinks it inappropriate to consider a series of short episodes to be a single film and a single trade for the purposes of taxation.
To conclude, clause 31(2)(c) deals with the connection that there needs to be between films in a series. Perhaps the Minister would like to expand on that. It seems that it could involve subjective judgments as to whether a series of films is sufficiently connected to qualify under paragraph (c). One example that springs to mind is the series of Harry Potter films. Would they be considered sufficiently connected to come within the paragraph? If we leave uncertainty and subjective judgments in the framework, they could lead to disputes about the level of the tax credit, which of course will drive up the cost of borrowing against it. That was one of the general points in my introduction. I look forward to the comments of members of the Committee and the Minister.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
May I start by echoing the words of the hon. Member for Chipping Barnet (Mrs. Villiers) and say that it is a great pleasure and privilege to serve for the first time on the Front Bench in a Committee under your chairmanship, Sir John? I thank you for your indulgence in allowing us to debate the amendments and discuss clauses 31 and 32 at the same time. In discussing those two clauses, I shall deal with several issues that were referred to by the hon. Lady and that are pertinent to the Bill.
I thank Opposition Members for their kind, warm words of welcome last week to those on the Front Bench and particularly the hon. Member for Fareham for his comments a moment ago. I served for 20 hours last year during the proceedings on the Committee dealing with the Finance (No. 2) Act 2005 and, until today, I would not have recognised the concept of becoming over-excited in Committee. After the fine speeches of the hon. Member for Fareham and my hon. Friend the Member for Wolverhampton, South-West (Rob Marris), I would not say that I was over-excited, but there have certainly been moments of interest.
I shall start by following the lead of the hon. Member for Chipping Barnet in making some introductory remarks about chapter 3 in general and clause 31 in particular. I will then turn to the points that she made about the amendment. I have some comments to add to hers about the context of the new tax credit for British films. She made many points about that context with which my hon. Friends and I could agree. At times, it was almost as if she had seen some of my speaking notes, so I shall make sure that I do not repeat any of her words.
The importance of British cinema to our cultural heritage was obvious from the hon. Lady’s comments in welcoming the importance of the clauses. It plays an important role in Britain and around the world in building a sense of national identity and propagating it beyond our borders. Our aim in the clause is to continue to provide and enhance the support necessary to encourage a sustainable British film industry in what is an increasingly competitive environment. That can be done in a range of ways. For example, the Department for Culture, Media and Sport supports the film industry in a number of ways directly through grant support. However, the tax system also plays an important role. The UK is not alone in this: many countries around the world do the same. All large countries use their tax system to some extent to provide incentives to support film production.
As the hon. Lady said, the previous tax reliefs for British films have been in place since the beginning of 1992 and, in 1997, they were enhanced and tailored to meet the needs of small films. In that time, as she explained, expenditure on British film production has risen from around £98 million in 1992, when the reliefs were first introduced, to £569 million in 2005. Over that period, attendance at cinemas in the UK hasrisen from 98 million at the beginning of the 1990s to 264.7 million last year. It has clearly been the case that as the strength of the British film industry has grown—along with its use of tax relief—cinema audiences have grown as well.
The hon. Lady mentioned “Harry Potter and the Goblet of Fire”, and many other British films have been produced in recent years. In the last year and a half, “Charlie and the Chocolate Factory”, “Nanny McPhee”, “Pride and Prejudice” and “Bridget Jones: The Edge of Reason” were released. I have seen some of these films, but I must admit I have never seen other British films such as “Layer Cake”, “Kinky Boots” or “Ladies in Lavender”. I am told, however, that the production of these films was based in Britain.
In response to the hon. Lady’s point about the danger of the number of UK films dropping off, I point out that, in 2004, the number of British productions was 133. In 2005, during which the debate about these reforms was ongoing, the number fell, but only marginally—from 133 to 124. Numbers for this year will show the continuing engagement of the British film industry in the production of films.
Unfortunately, as the hon. Lady said, there is another side to this story. Throughout the lifetime of the old reliefs that the Bill will deal with, there have been examples of abuse and of people using those reliefs not as an aid to film production but as a convenient way of avoiding tax. That is why anti-avoidance legislation aimed at protecting the Exchequer from abuses of film tax reliefs has been enacted regularly. Such reliefs have featured in a number of Finance Bills.
The hon. Lady referred earlier to the consultation document produced last summer, which contains a full explanation of how the previous reliefs, which were inherited in 1997 and continued since then, have been subject to abuse, particularly from sale and leaseback schemes and, more generally, because people who are not really film makers or producers used such reliefs for tax purposes. There is a very long list on page 13 of the consultation document of all the different times in Finance Bills from 2000 onwards that action has had to be taken to try to tackle that abuse and those problems.
We announced in last year’s Budget that there would be a formal consultation on a new approach to reliefs for the film industry to remedy the defects of the predecessor regime. As that consultation document exemplifies, there has been an intensive, constructive consultation over last summer, leading up to the details of the new relief being announced in the pre-Budget report in 2005 and a complete change in the conceptual basis on which film taxation support will be provided.
The change will mean that the targeting of the relief will now shift directly to the film production companies, rather than indirectly through the financiers, investors or other intermediaries. That means that not only will film makers no longer have to share the benefit of the reliefs with others, but it will also bring an end to the tax-driven sale and leaseback structures used extensively by film financiers to access relief, which has been the source of so much tax avoidance in the past.
A further significant way in which the new relief differs from its predecessors is that, for the first time, its value to film makers is directly related to the amount of work actually done in the UK. Previously, eligibility for tax relief was determined by the certification of the film as British under schedule 1 of the Films Act 1985, and the way in which the certification rules worked meant that it was possible to claim the relief on the total production budget, even where little, if any, filming took place within the UK. Instead, the new relief provides a direct incentive to make full use of film making skills, facilities and infrastructure in the UK.
Another important feature, which we will debate later when we get to the loss provisions and the details of schedules 4 and 5, is the way in which this relief is now designed to encourage genuine sustainability in the British film industry. The value of the reliefs will be greatest where film is profitable and where its income is retained within the UK, rather than sent offshore, and there are also incentives for film makers to reinvest profits from films in the UK, particularly in the production of further British films.
Together, the various elements of the new relief constitute a package designed to give genuine reassurance of the Government’s continuing support to the film industry. We have already announced the rates at which the relief is set, which will mean that small budget films will be able to claim a guaranteed minimum benefit worth 20 per cent. of qualifying production costs, while large budget films will be able to claim a benefit typically worth 16 per cent. of qualifying production costs. By targeting the new relief at film producers, the provision will be much better focused and more effective in fulfilling the Government’s objectives for the film industry. As John Woodward, chief executive officer of the UK Film Council, has said, the new relief marks a new era for the future growth of our industry, which operates in a highly competitive global marketplace.
We take seriously the comments of the hon. Member for Chipping Barnet about the importance of moving forward expeditiously to ensure that we have no unnecessary uncertainty. It is important that we move expeditiously through the debate on the clauses and amendments, because there is a danger that, if we take too long over the details, we will add to the uncertainty rather than resolve it. Margaret Matheson, a producer, from Bard Entertainments, has said:
“Yes, there will inevitably be delays involved in the changeover. That is unfortunate, but this time next year we will have forgotten about it.”
I am not so sanguine as to believe that people will have forgotten, but once the film industry sees the scale and benefits available under this new support, we will be able, as John Woodward said, to move into a new era with substantial benefits to the British film industry for making films in Britain, with British employees and British ideas.
Amendment No. 30 would relax the test under which a series of films is treated as a single film by removing the requirement that it must not have more than26 separate parts or a playing time of more than26 hours. A series that has fewer than 26 parts can be considered to be one film, whereas a long-running series such as “EastEnders” or “Friends”, if produced in Britain, would have to be accounted for under tax purposes on a case-by-case and episode-by-episode basis. The 26-part, 26-hours test is a purely administration decision. It does not make any difference to the favourability of the tax treatment; it is only to do with the way in which the tax is accounted for.
A 10-hour episode TV drama would be treated as a single film, but a long-running series such as “Friends” or “Blue Peter”, if they were being made as a TV series, would not be treated as single films. They would instead be treated for the purposes of the tax regime as separate trades. That is not new; it simply reproduces a requirement under the Films Act 1985 that has been in force since 1999 and is based on our consultation with not only the film industry, but the TV industry.
In our view, the requirement will not involve any significant concerns. It is quite in line with practice in the industry. A series such as “Parkinson”, the “Jonathan Dimbleby Programme” or “Davina” does not begin with the assumption that it will be made in perpetuity. People will want to be sure that they are making a return case by case, that the audience figures match it, and that the costs are being covered episode by episode. On the basis of the consultations, our understanding is that that is in line with how the industry chooses to organise itself and therefore should not cause a problem. On that basis, we urge the Committee to reject the amendment.
The hon. Lady referred to the broader issue of whether we are right to try to have a single regime for the treatment of films, and TV and DVD production, whether or not they qualify for the enhanced tax relief that comes from their being made in Britain as a British film for cinema showing. For the benefit of members of the Committee, I must say that a key requirement is that at least 25 per cent. of the film has to be made in Britain, an important matter that we shall be discussing later.
The existing treatment of film production is based on the principle that film makers exploit the films to generate income from their use rather than by selling them. It is also tied to the completion of the film at which point a trade of exploitation can start. At that point, the cost of creating a film is deemed to be a normal trading expense. However, on the evidence of our consultations so far, that fits pretty badly with the way in which the industry works, how it accounts for itself and how the accounting model was put to us during those consultations.
The industry regularly makes films for immediate sale or in a way that pre-sells almost all the exploitation rights to generate income to fund the film. Rather than the tax treatment occurring at the end of the process when the film is completed, it makes more sense to calculate taxable income on a cost basis through the lifetime of the production of the film. That is why we are structuring the tax reliefs under schedules 4 and 5 to follow the principles that are used to account for income and expenditure on long-term contracts. Although the treatment is essential for the new film tax relief, it also provides a firm foundation for other film production companies, such as those making films for TV or for transfer to DVD. Nothing that we have been told by the industry suggests that the working of those industries will find difficulty with that.
Helen Goodman (Bishop Auckland, Labour)
Before my hon. Friend sits down, I have a question following on from the points made by the hon. Member for Chipping Barnet. Subsection (2)(b) says:
“the combined playing time is not more than 26 hours”.
In the consultations, did officials or Ministers consider more avant garde installation events shown in museums and art galleries that may last for more than 26 hours, with a film playing on a continuous basis, or where a film is on a loop?
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
I am grateful to my hon. Friend for that intervention. We consulted widely with the film and TV industry. I am sure that many people whom we consulted have had their avant garde moments, but I am not sure whether we consulted any specialist avant garde producers. My feeling is that if one is making an avant garde film of more than 26 hours, it would still be one episode—one film—and would therefore count as one film for tax purposes. There may be examples of avant garde film companies that have attempted to make films of more than 26 hours in length running to a series of more than 26 episodes, but it strikes me that the idea of 26 or more episodes of a 26-hour-plus film would not necessarily be a profitable enterprise. I do not think that that particular example was put to us during the consultation.
Philip Dunne (Ludlow, Conservative)
I add my congratulations to the Economic Secretary on his promotion to the Front Bench. May I also say that is a pleasure to serve under you, Sir John?
While we are on the holistic nature of the Government’s proposals, and the fact that they are trying to bring television and film production under the same regime, I am a little confused by what the Economic Secretary is saying; it seems to fly in the face of the proposals in clause 39, under which, in order to be eligible for film tax relief, productions have to be intended for theatrical release. Several examples that he cited were clearly made for television, rather than theatrical, release.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
The hon. Gentleman is absolutely right. We are putting in place a way of accounting for films, television and DVD productions for tax purposes, under which enhanced relief is available only for films intended for showing in a cinema. The point that I was just concluding, in response to my hon. Friend the Member for Bishop Auckland (Helen Goodman), is that when one commences the production process, it is not always clear whether the film will be for cinematic or TV purposes. It would not make sense to do as someone proposed and have one method of accounting for tax for films that will qualify for enhanced relief, and a completely separate and different basis for TV and DVD films that will not qualify for enhanced relief.
We do not think that the proposal will be a problem for the industry; in fact, in the main, it is in line with industry accounts, and in line with the direction in which international accounting standards are moving, in terms of their reform. It is much more sensible to move to the single system proposed in the Bill for tax accounting purposes for all films, including TV and DVD films. Included in those are films intended for cinematic showing, which will also qualify, beyond the normal setting of cost against income for tax purposes, for the enhanced relief that is set out in the schedules to come.
Some have suggested that we run two completely parallel systems—a new one for cinema films, and the old one for TV films. Our view is that that is out of line with best international practice and current TV practice, and would be complex, burdensome and over-regulatory. It is much better to move over to a single system for all TV, film and DVD production, within which the enhanced relief is available only for British films produced in Britain that are for cinematic release. Having said all that and having made a reasoned case, I urge the Committee to reject the amendment in the name of Opposition Members, and to support clause 31, allowing us to commence debate on the rest of the Bill.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I was slightly unnerved by the spooky similarity between the first part of the Economic Secretary’s speech and mine. That outbreak of consensus is welcome, although I suspect that he and I will not always find ourselves of such like mind.
The Economic Secretary also emphasised the importance of not delaying this afternoon’s debate so that we did not add unnecessary uncertainty to Bill business. I suspect that the film industry will not mind whether we take an hour or two hours to deal with the issue, particularly as most of its members are yacht-hopping at Cannes this week. I do not think that they are looking at what we are up to with great closeness. [Interruption.] My sister-in-law is not there; her film was not selected. It is important that we take time to get this issue right. We do not want to rewrite the film tax regime for the seventh time—or whatever time it would be—next year.
In a sense, it is a little difficult to respond to a number of the Economic Secretary’s points, because they tend to bleed into the debates that we will have on the coming amendments. I shall confine myself to picking up on one or two things that he said. He emphasised that the issues relating to the amendment of paragraphs (a) and (b) were administrative and did not affect the amount of tax payable. My response is to ask why we are imposing that complicated and difficult framework if it is not going to yield revenue benefits for the Government. It seems to me that we are imposing a burden unnecessarily.
For reasons that I shall go into when we explore the next set of amendments, it is impractical and not sensible to have separate regimes for TV and film companies. It is entirely possible to retain a framework for TV companies that runs along ordinary company law accounting lines, and I have tabled amendments to that effect to which I shall speak in a moment.
I remain concerned about the issue of treating each particular episode as a separate trade and have tabled amendments on schedule 4 in respect of that. I shall not press my amendment to a Division and I beg to ask leave to withdraw it, but I retain concerns about the issue and hope that the Government will take them on board.