Clause 31
Finance (No. 2) Bill
4:45 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.