Clause 32
Finance (No. 2) Bill
5:15 pm
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I beg to move amendment No. 47, in page 29, line 14 [Vol I], at end insert
‘; but notwithstanding the provisions of this section, a company is only a “film production company” if it meets the conditions for film tax relief as set out in section 38 of this Act.'.
John Butterfill (Bournemouth West, Conservative)
With this it will be convenient to discuss the following: Amendment No. 64, in page 29, line 17 [Vol I], leave out lines 17 to 20 and insert—
‘(a) undertakes (whether on its own account or whether it is responsible to a third party)—
(i) principal photography and post production of the film, and
(ii) delivery of the completed film,'.
Amendment No. 31, in page 29, line 18 [Vol I], leave out ‘pre-production'.
Amendment No. 65, in page 29, line 22 [Vol I], leave out ‘pre-production,'.
Amendment No. 32, in page 29 [Vol I], leave outlines 24 and 25.
Amendment No. 33, in page 29, line 26 [Vol I], at end insert—
‘(3A) The Treasury may, by regulations—
(a) amend subsection (3); and
(b) provide that specified activities are or are not to be regarded for the purposes of this Chapter as film making activities;
and in this subsection “specified” means specified in the regulations.'.
Amendment No. 46, in page 29, line 27 [Vol I], after ‘company', insert
‘resident in the United Kingdom (and not resident in another place in accordance with the law of that place relating to taxation)'.
Amendment No. 34, in clause 34, page 30, line 19 [Vol I], after ‘on', insert ‘development,'.
Government amendment No. 26.
No. 35, in clause 35, page 30, line 37 [Vol I], at end insert—
‘But for the purposes of this subsection—
(a) services provided in relation to rented equipment shall be considered to have been performed in the United Kingdom where the equipment is used in the United Kingdom; and
(b) where goods are initially supplied in the United Kingdom, their subsequent transport and use outside the United Kingdom shall not prevent the relevant expenditure from being treated as UK expenditure.'.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I do not propose to press amendment No. 46. Having reflected on it, I do not believe that it would be a positive change to the Bill.
Clause 32 is one of the most important and controversial parts of the new film tax structure. It defines the meaning of “film production company” for the purposes of the Bill. The clause represents one of the most significant changes to the old rules, focusing the tax advantages solely on film production companies to ensure that what the Chancellor called grey middlemen cannot get the tax advantage. As we have heard, the clause focuses the scheme on the people making the films, not on the groups of high net worth investors.
The new framework proposes that only companies falling within the definitions set out in clause 32 can be capable of qualifying for the new film tax breaks. A number of film industry sources have expressed anxieties about the definitions; many are worried that legitimate productions will miss out because of how clause 32 is drafted. In its helpful briefing, the British Screen Council stated that
“the provisions of clause 32 are very proscriptive and make it extremely difficult for genuine film production companies to qualify”.
It felt that a simpler and clearer definition should be considered.
In amendment No. 33, I proposed to allow the Treasury to refine and update the definition through regulations. The use of secondary legislation in the tax context is always problematic, and I am also conscious that it would give rise to a degree of further unpredictability and instability. However, it could be useful for the Committee to consider the idea, given the definition’s drawbacks, which I shall outline.
First, I turn to the issue that we have already started to address: that of TV companies. As we have heard, any company falling within the scope of the Bill’s definition of a film production company is covered even when it cannot qualify for the tax break. Hence, a number of companies will not be able to benefit from the advantages of the film tax regime, but will be subject to the disadvantages. As we have heard, that will concern a lot of TV companies, although not only TV companies could be involved.
Those making training videos or safety or promotional films, or airlines that produce films with guidance on safety measures could also be affected. My amendment No. 47 would remove companies from the scope of the legislation unless they were making a film that would qualify for the tax relief set out in clause 38—that is, the enhanced deduction or film tax credit.
That would leave TV producers governed by the ordinary rules on company taxation and the existing rules set out in the Finance (No. 2) Act 1992. I have tabled consequential amendments on clauses 46 and 47 to make that possible. They would deal with the problem that we have discussed because TV companies would no longer be at risk of having to draw up separate accounts for every episode of a single series.
However, there is another pressing reason to take such companies out of the framework. In general terms, the framework set up by the Bill requires that a relevant proportion of income from the making or exploiting of films is brought into account for tax purposes on an estimated basis, before it is earned. That includes income from merchandising and the use of characters and music, as well as directly attributable income.
The effect is that tax liability will be accelerated and tax will be due on income that has not yet been earned. I do not wish to anticipate our debate on schedule 4, but although applying the provisions to film companies that can qualify for the tax break is controversial, it seems even more harsh to apply what I think is a problematic regime to companies not eligible for the tax break at all. That would mean subjecting such companies for no reason to a regime harsher than that applicable to companies in other industries.
It would be useful if the Economic Secretary explained the motivation behind that new regime in schedule 4. If it is to do with a tax break and seeks to deal with some kind of tax loophole, there is no justification for applying it to companies that are not capable of qualifying for the tax break in the first place.
Rob Marris (Wolverhampton South West, Labour)
Just to be clear, is the hon. Lady saying that, for example, each episode of “Coronation Street”, which would not meet the 26-parts rule that we discussed, would have to be treated as a separate film? Is that how she understands the legislation?
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
Yes, my understanding is that that is how it works. I urge the Committee and the Economic Secretary to consider the problems in respect of TV companies.
The Committee should consider a second point about clause 32.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
Another key problem with the definition of film production company in clause 32 is that subsection (3) requires a company to be involved in and responsible for multiple activities before it can qualify as a film production company and potentially obtain the tax break.
Paragraph (a) seems to require that a film production company should be responsible for all activities that are listed. They include,
“pre-production, principal photography and post production...and...delivery of the completed film”.
Paragraph (b) requires the film production company also to be involved in the planning and decision making in relation to those activities, and paragraph (c) introduces a further requirement that the company
“directly negotiates, contracts and pays for”
those rights, goods and services.
An initial problem arises because there is no statutory definition of terms such as “pre-production”, “principal photography” and post production. It could be cured by regulation if amendment No. 33 were agreed to. Alternatively, the early publication of guidance notes would I am sure be welcome. However, even if that problem were dealt with, the definition would still be at odds with the way in which the industry works. It seems unrealistic to expect a single company to be directly responsible for all the listed activities in subsection (3).
The Committee knows that all industries break down their activities into specialist areas, and the division and specialisation in the film business is more marked than in any. Some of the specialist production companies in Britain are world leaders in their field, and if a single company must undertake all those activities to qualify as a film production company, many in the industry are concerned that it would mean depriving many genuine film production companies of the support of a tax break. For example, when a company films overseas, it is standard practice to hire a local production company to organise much of the work and carry out many tasks in relation to the film. In some countries, there may even be a legal obligation to hire a local firm for such activities.
Rob Marris (Wolverhampton South West, Labour)
In paragraph (a) the second word is “responsible”, as the hon. Lady will be aware. As I read it, it does not say that in order to be a film production company, the company concerned has to carry out the activities itself; it says that it has to be responsible for them. I have a joint mortgage with my partner. I am responsible for it. If she makes the mortgage payment, it is made. I remain responsible for it, but it is not I who has made that mortgage payment.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
If the Government adopt that same interpretation and do not require direct involvement when they construe “responsible”, it will be a positive move and it will make the framework much more workable. There is a particular problem in paragraph (c) where it refers to “directly”. It says,
“directly negotiates, contracts and pays for rights”.
However, the hon. Gentleman is right. I hope that a sensible interpretation might modify any practical problems.
Brooks Newmark (Braintree, Conservative)
But is there not the concept that companies must also be—I believe this is the expression—actively engaged in each of those activities? The concept of actively engaged goes beyond what the hon. Member for Wolverhampton, South-West implied.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
Both interventions indicate that it would be useful to obtain more clarity about that point. If one were to take a flexible interpretation, as the hon. Member for Wolverhampton, South-West proposed, it would mitigate the problems. However, if one were to take a more conservative interpretation—[Hon. Members: “Hear, hear.”]—I am not sure that that is the right word. Perhaps I should say a more restrictive interpretation.
I hope that the Minister will make it clear that a film production company is permitted to subcontract parts of the film-making process. That is the point. Without the ability to subcontract the listed activities, many companies will fail to qualify for the relief that I am sure the Government intend they should benefit from. If the terms of the clause do not include the flexibility to subcontract, the tax relief will either be very narrow or lead to a wholesale restructuring of the film industry. I do not think that the Government intend either of those results.
Jeremy Wright (Rugby and Kenilworth, Conservative)
Does my hon. Friend agree that if one looks ahead toclause 41, which I appreciate we will come to later, it is clear that the Government anticipate that a great deal of work will be done by qualifying film production companies abroad? The provisions require that 25 per cent. of spending be done within the country’s UK spending. It is clear that the Government accept that a great deal of work on some productions must or could be done outside the UK, so it makes sense to accept in clause 32 that a good deal of work must be done by other companies also.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
Yes, we must take a realistic view of how the film industry works if the tax break is to be effective and workable. We must ensure that film companies can subcontract and still claim relief, particularly in relation to filming overseas, as the hon. Gentleman said. I tabled amendment No. 64 to deal with that problem and to make it explicit that FPCs can subcontract without losing the tax break. I hope that the Minister can give us some assurances on interpretation.
There is a particular problem with pre-production. Paragraph (a) states that one of the activities for which the company must be responsible is pre-production. The effect is that any company not involved in pre-production will not be able to qualify for the film tax credit. Generally, pre-production tends to cover rehearsals with actors, deciding on a film location, building a dressing set and sorting out the finance for the project—activities that occur in the run-up to the roll of the cameras.
Amendment No. 31 would delete “pre-production” from paragraph (a) and amendment No. 65 would delete it from paragraph (b), which refers to involvement in the planning process. If the amendments were adopted, FPCs could still qualify for the tax break even if they were not involved in pre-production work. That is important because many companies are set up as special purpose vehicles specifically to produce a particular film. A film’s development and pre-production are often done before that special purpose vehicle is set up. Hence, it is common practice for the company making the film not even to exist during pre-production. Even if we took a flexible approach to being “responsible for” and even if it were possible to subcontract, we would still run into a significant problem if pre-production remained one of the compulsory activities for a film production company to be involved with or responsible for, because of the overall structure of the film industry.
From what I have read of the Revenue’s publications and consultation document, I understand that it knows that SPVs are commonly used in the film industry and recognises that they are useful vehicles. I understand that the Government are not seeking to change that, so I ask them to look again at pre-production. Unless that term is deleted from the section, it will become much more difficult to make a film using an SPV. SPVs often do not come into existence until film production and principal photography start because until that stage, the studio or entrepreneur might not know whether the project will actually go ahead. Once all the preparation work is done, a vehicle is set up to make the film.
Stephen Hesford (PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office; Wirral West, Labour)
Would not the problem be solved—I think this is what the Minister may be getting at in the proposed clauses—if there were a clear link between those who bring the matter to pre-production and those who then go into production, whereby they would be one body, rather than entirely separate vehicles? They would then all be responsible, even though technically and legally they may be separate companies.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
That would not work within the framework of the Bill as it is drafted, because the Bill deals specifically with individual companies, so if the same company that makes the film does not undertake the pre-production, it cannot qualify for the tax break. That is the problem that the Opposition are getting at.
Stewart Hosie (Spokesperson (Chancellor of the Exchequer; Home Secretary); Dundee East, Scottish National Party)
Is the problem not compounded by paragraph (c)? It may well be the studio that negotiates contracts, perhaps pre-production and afterwards, and pays for rights, perhaps for a book or a play, and which negotiates merchandising rights and enters into contracts concerning them. However, the real production company that undertakes the filming would have nothing to do with it. The clause—especially the combination of paragraphs (b) and (c)—makes it almost impossible for the real production company to gain the benefits, because that company almost certainly would not undertake all the activities that are referred to.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
Yes. I shall address those points in a moment, but I agree with the hon. Gentleman.
To conclude my remarks on pre-production, my understanding is that the proposal made in the clause was not a requirement of the initial framework set out in the pre-Budget report. The PBR dealt with principal photography and post-production, but it did not require the film production company to be involved in pre-production. It is interesting that the Department for Culture, Media and Sport guidelines on the area, which were published only a few weeks ago, after the Finance Bill, did not mention pre-production either. There seems to be a difference of opinion, and it would certainly be useful if the Economic Secretary outlined why the Government have changed their mind between issuing the PBR and publishing the Finance Bill.
Rob Marris (Wolverhampton South West, Labour)
I think I understand the hon. Lady’s point. However, when I look at her proposed amendments it seems to me that it would have been logical to include an amendment to delete subsection (2), which says:
“There cannot be more than one film production company in relation to a film.”
Why did she not do that? Is she suggesting that the companies that undertake pre-production before an SPV is even formed should not be counted as film production companies at all, or should not get tax breaks, or both?
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
That might be one way to tackle it, but I do not think one need go that far to tackle the problem. I suspect that deleting subsection (2) might have problematic knock-on effects—I certainly believe that the Economic Secretary would be concerned if the Committee proposed deleting it. I agree that such a deletion might mitigate the problem, but it could have unintended consequences.
On the point raised by the hon. Member for Dundee, East (Stewart Hosie), there are problems with subsection (3)(c) which I have sought to address through amendment No. 32. The amendment proposes deleting paragraph (c), which requires the FPC to be directly involved in negotiations, to contract directly, and to pay directly for rights, goods and services in relation to a film. As the hon. Gentleman said, the structure of the industry can make compliance with paragraph (c) difficult. The British Screen Advisory Council has said that requiring a single company to be directly involved in all negotiations makes matters difficult, for similar reasons to those that I have outlined in relation to the earlier part of the clause.
There is a particular practical problem with the requirement to contract directly for goods, rights and services. As with pre-production, the rights may have been contracted for and bought before the SPV was brought into existence in order to make the film. There are additional problems, however, in that some key directors and actors may not wish to contract with the SPV. Some writers and directors, together with certain artists—American actors in particular—may insist on contracting with a signatory to the relevant actors’ guilds agreements. For example, many US actors will contract only with a company that has been approved by a screen actors’ guild.
Many film producers in Britain whom the Government, I am sure, would want to benefit from the tax break will not fall into that category. Currently, the usual practice is for the actor to contract with a US-based company that has the relevant SAG approval. That American company then invoices the British company for the cost of the arrangement. That indirect relationship is not contemplated in paragraph (c), so the measure could again make it difficult for several sensible and genuine film productions to fall within the scope of the tax break.
Rob Marris (Wolverhampton South West, Labour)
I bow to the hon. Lady’s superior knowledge of common arrangements with certain American film stars, but would such arrangements not come under the rubric of “services” in paragraph (c)? The services would be provided by the American intermediary, as it were, to provide a named actor for a particular British production.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
That could be a way to approach the matter. We might be stretching things if we tried to persuade a court to interpret the measure in that way. If there were a requirement to contract directly for something, the court’s interpretation is likely to be that it would expect a company to contract directly with the actor. A very flexible interpretation might solve the problem, but I would be worried if we relied on that kind of tenuous interpretation. The Economic Secretary might be able to reassure us on the point, because I do not believe that he would want to exclude film production companies that enter such arrangements. If he were to provide such reassurance, that would give us comfort. A significant degree of uncertainty needs to be dealt with.
A third problematic issue about the clause is a horizontal one, which stretches across a number of the subsections and relates to co-productions. In this instance, I should like to quote a copy of a letter from a firm of accountants, Malde and Co., who got in touch with me about this issue. It stated:
“The Revenue’s emphasis in clause 32(3) that an FPC should be responsible for ALL the activities set out in subclauses (a), (b) and (c) of clause 32(3) virtually rules out any possibility of an FPC embarking on film production activity as a co-producer with another genuine film production company”.
Subsections (3) and (4) both specifically exclude companies working in partnership and specifically refer to activities “otherwise than in partnership”. I would be grateful if the Economic Secretary would explain why companies working in partnership will be excluded. Some in the industry are concerned that that blanket exclusion may adversely impact on the film industry. Virtually all co-productions seem to involve companies working in partnership. Depending on how one views the law, the mere fact of two companies working together could be sufficient to qualify as a partnership. The exclusion of all partnerships from the film tax credit scheme could therefore limit its scope considerably.
Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth and Camborne, Liberal Democrat)
On the point about co-productions, subsection (5) states:
“If there is more than one company meeting the description in subsection (3) or (4), the company that is most directly engaged in the activities referred to...is the film production company in relation to the film.”
Does the hon. Lady share my concerns that the British film industry is well known for its post-production skills? In those cases, there may be significant British involvement, but because the company might not be “most directly” involved, it might not qualify under the clause.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
That certainly is a concern. It is important to realise that British companies, particularly our indigenous film producers, are heavily dependent on co-production to get their projects off the ground, and we are talking particularly about co-productions with other European countries. If the framework is to work, we must ensure that it works for co-productions. Clearly, in the past, there have been problems with partnerships that have been used as part of the avoidance schemes. I think that there is a consensus that we want to see the back of them. However, my understanding is that many of those tended to be partnerships between individuals, and such individuals cannot take advantage of the tax break because it applies only to companies.
Perhaps there is also anxiety about partnerships between a film producer and a financial company and the Government wishing to prevent the financial entity from being a partner and gaining the tax break designed for the film production company. However, as we have already explored, where there is a partnership, it will be the company working on the film that qualifies for the tax credit; it is clearly provided for in subsection (5) that only one company can qualify, and that is the one most directly engaged in film making. It would be useful to hear the Economic Secretary’s thoughts on what yardstick will be used to determine which company is most directly engaged in film-producing activities.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
Yes, but then I would like to make a bit of progress.
Rob Marris (Wolverhampton South West, Labour)
The hon. Lady says some interesting things about co-production, but subsection (4) refersto a qualifying co-production, which is specifically defined in clause 36. As far as I can tell it is nothing to do with the interesting and important point that she is making about co-production.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I will take the hon. Gentleman’s word on that, but still I think that there is an important point to address. I would welcome the Economic Secretary’s reassurance on how co-production will be treated under the framework generally.
Amendment No. 34 deals with clause 34, which defines production expenditure and core expenditure. My amendment is about the definition of the latter. Core expenditure has a crucial part to play in the framework before us, because it determines the size of the tax break. Amendment No. 34 seeks to add development costs to the expenditure that can qualify as expenditure giving rise to the tax break. Development costs include scouting for a film, looking for good film ideas, purchasing an option to buy the film rights of a book at some point in future, and script development. Such activities have genuine costs that make up part of the production process.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
The hon. Lady made the case that we ought to exclude the development or pre-production phase from the ambit of the relief, because it is only when one starts the principal photography phase that engagement should occur. However, she now makes the case that development costs should come within the ambit of the tax relief. Is that not an inconsistency?
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
No, I do not believe so, because we are talking about two different concepts. I am arguing that development costs should be taken into account as core expenditure because they are expenditure that needs to be incurred to make the film. The fact that a particular company may not have been involved in the development process should not bar that film from qualifying for the tax relief. The terms are used in two different contexts in the statute, and it is overly restrictive in the definition of “film production company” to require companies to be involved in development and pre-production. However, I see no reason why development costs should not be part of the expenditure that qualifies for the tax break.
Certainly, many in the industry share the feeling that development costs should be considered part of core expenditure. It would be useful to hear from the Economic Secretary why those costs have been excluded. One of the problems is that the distinction between development and pre-production is blurred; it is difficult to see where one starts and the other stops. That blurred distinction could give rise to disputes with the Revenue about the quantum of the expenditure, and about which expenditure counted for the purposes of the tax break, thus giving rise to the uncertainty that we are seeking to avoid. That, of course, is compounded by the fact that there is no definition of either term in the Bill.
There is a particular problem with the issue of purchase of rights—copyrights, and rights to script and music that are necessary for a film. It is a specific example of the blurred line between development and pre-production, which may cause difficulty if development is not included as part of the core expenditure.
Rights acquisition costs are normally viewed by the industry as part of pre-production rather than development, although at the initial stage the purchase of an option to buy rights such as book rights tends to be viewed as falling into the category of development. Using that argument, most rights acquisitions would fall under the clause as they are part of pre-production. However, the Treasury’s frequently asked questions document states that the acquisition of pre-existing rights is a development cost, which therefore falls outside the scope of subsection (1). It would be helpful if the Economic Secretary could expand on the distinction drawn in the document between the purchase of pre-existing rights, which it states cannot be taken into account in quantifying core expenditure, and rights that are generated during the production of the film. Further detail about that would be very useful.
To close my remarks, I want to mention the concern expressed by the company that I quoted before on the matter of development costs. It said:
“These are not phantom costs but genuine ones.”
It argued:
“Development expenditure is and always has been nothing but a genuine cost of film production and we cannot see your rationale”—
it is the Treasury that is being addressed—
“in excluding it from the definition or meaning of core expenditure.”
Amendment No. 35 and Government amendment No. 26 relate to clause 35, which is another of the controversial clauses and defines UK expenditure, which, along with core expenditure, will be a key determinant of whether and how much tax credit is payable. Subsection (1) provides that UK expenditure covers services performed in the UK and goods supplied in the UK. The film producers association, Pact, has stated that
“the requirements for EU approval (under State Aid rules) of the new credit have resulted in a narrow definition of UK qualifying expenditure being adopted, which is very unhelpful to lower budget co-productions.”
Given the amendments that have been tabled, there seems to be consensus among the Front-Bench teams that we need a clearer definition of goods and services in this context. First, clarification of the distinction between the two would be useful. Would that distinction, in this context, echo the VAT rules under which the supply of goods tends to cover cases in which there is transfer of title, and the supply of services covers all other cases, including equipment rental?
We also need further clarity on the place of performance of the supply of goods and services. Both amendment No. 35 and Government amendmentNo. 26 would address that point, albeit in slightly different ways. Paragraph (a) of my amendment is intended to gain clarification of what is meant by
“services performed in the United Kingdom”.
It provides that if goods and equipment are used in the United Kingdom, although they are rented or bought from an overseas supplier, they would qualify as UK expenditure. Paragraph (b) is intended to clarify the meaning of
“goods supplied in the United Kingdom”.
It would deal with the situation in which costumes and cameras are supplied in the UK and transported overseas.
The Government amendment covers, I think, the same ground as the first part of my amendment; it deals with the concerns behind it to make it clear that goods or services that are consumed in the UK count as UK spend for the purposes of clause 35 and it is clearly an improvement on the Bill. From that perspective I welcome it, but it seems to exclude the latter part of my amendment—the possibility that goods and services supplied in the UK and used overseas could count as UK spend. That is unfortunate given that the type of work that can be done in the UK and consumed abroad is an important part of the UK film business.
The Government amendment confirms the Government’s statements that spending on British crew, actors and craftsmen cannot count as UK spend when it takes place overseas. I see the appeal of that restriction, in that films made in the UK are likely to have a more direct effect in the promotion of UK culture around the world. However, one should bear in mind that films set overseas can promote British culture effectively as well.
One example that springs to mind of a very successful British film is “The Constant Gardener,” which was set largely in Kenya but filmed partly in the UK and Germany. Presumably, it would have a problem qualifying under the UK spend rules in the new framework.
Many small UK producers are worried about the extent to which the restriction on the UK spend is likely to curtail the usefulness of the tax credit. They argue that British talent can be showcased on overseas shoots as much as on domestic ones, and I should be grateful if the Economic Secretary would outline the rationale behind the restriction. It seems that it is motivated purely by the views of the European Commission and the threat of action in the European Court of Justice. As we have already heard today, it is a matter of concern that despite the Government’s tough rhetoric on tax harmonisation, the involvement of the European Commission and the ECJ on tax matters is still progressively increasing. That was extensively discussed in relation to group relief.
The Paymaster General chairs the Primarolo group, which has examined the UK’s film tax rules in the past. It would be useful to hear from the Minister whether any problem is anticipated in respect of the new rules by the group that bears her name. I am sure that the Committee would also value an update on whether the Minister anticipates any problem in clearing the new rules with the Commission. As I have said on several occasions during debate on this part of the Bill, uncertainty has a crippling effect on the British film industry. I am sure that it would value reassurance that there is no danger of sudden changes forced on the Government because the Commission felt that there was a problem in respect of EU rules in this context, or in any other part of the Bill. With that, I look forward to the comments of the Committee.
Philip Dunne (Ludlow, Conservative)
I remind the Committee of the history of the Government’s plans for the film industry, which have been somewhat turbulent, to put it politely. Shortly after they took office in 1997, they set up the ill-fated film partnership scheme. It is a cause of constant surprise to me that despite the wealth—I use the word advisedly—of experience of the film industry and the entertainment industry more widely of Labour-appointed Members in another place, the Government were not able to call on them for help in devising a scheme that would meet the objective of encouraging the film industry in this country without exposing it to the concerns that we are now trying to address—that is, the extent of tax avoidance by the very wealthy.
Helen Goodman (Bishop Auckland, Labour)
Surely the hon. Gentleman’s point is absolutely ridiculous. Finance Bills are considered in this House. They never go to the other House. It does not have any input into Finance Bills.
John Butterfill (Bournemouth West, Conservative)
Order. We are possibly getting into a debate on something that is not the subject of the amendment. I should therefore be grateful if hon. Members on both sides would confine their comments to the amendment under consideration and the other amendments to be considered with it.
Philip Dunne (Ludlow, Conservative)
Do I take it from that guidance that we can discuss all the amendments in one go? Or should we confine our remarks to one amendment at a time?
John Butterfill (Bournemouth West, Conservative)
I remind hon. Members that if they wish to discuss any of the amendments in this group, now is the time to do so. Once the group is finished with, it will not be possible to discuss the amendments again, even though some of them may relate to later clauses. However, they could conceivably be voted upon at a later time, if Members wished to press them to a Division.
Philip Dunne (Ludlow, Conservative)
I am grateful to you, Sir John, for reminding us how this section of the debate is being conducted.
Very simply, my point is that all the clauses and the amendments that we seek to make to them are required to deal with the Government’s policy for encouraging a vibrant British film industry, as they have so palpably failed in their previous efforts. It is worth rehearsing some of the statistics that both the Front-Bench spokesmen have mentioned. Mine are slightly different. I am sure that it is a matter of definition.
Slamming the door to tax avoidance schemes for film partnerships in February 2004 had a significant impact on the British film industry. I understand that the number of films commencing production in the UK, which is slightly different from the numbers discussed by other hon. Members, fell by almost half, from 44 in 2003 to only 27 in 2004. That is a very significant impact. It is even more significant when spending on films is taken into account: it fell from £269 million in 2003 to£118 million in 2004, with a similar but slightly less marked reduction in the number of UK-US co-productions during that period.
That takes me to the amendments, particularly those tabled by my hon. Friend the Member for Chipping Barnet, relating to clause 32 and the definition of a film production company eligible for relief. We are looking to encourage medium and small-budget films, not the major studio productions. The Minister is shaking his head. I understand that less than £20 million is the criterion that we are applying, but perhaps he will clarify if I have got it wrong. I take it from his assent that I have got it right.
Most films with budgets of that size are organised by production companies that seek to bring in production finance from whatever sources are available globally. That involves co-productions with film production companies, distribution companies or other companies around the world that are involved in some element of the film process. It might involve more than one UK company, frequently a company involved primarily in television finance and one involved primarily in pure production.
Confining the benefit of the reliefs to any one company in the context of one film under clause 32(2) misunderstands the way that the industry works. I should be grateful if the Minister would clear up the matter if I have misunderstood it. A number of companies can take on a significant role in a film, and that might be hindered if only one company per film is eligible for relief.
That brings me to amendment No. 34 to clause 34, which would define what expenditure is eligible and what is not. I am perplexed that development costs have been excluded from the definitions of production expenditure under clause 34, as we are trying to encourage the development of an industry. We must encourage it at its roots—at the smallest start and at the origin of a film.
The origin of a film typically involves taking an idea and working up to the point at which it is bankable, so that funding can be sought on the back of the proposition. That is done in what the film industry calls development. A producer engages a writer, typically either a screenwriter or an author, to develop a treatment for the film. That is what is involved in the development cost, which is the seed money for beginning a production.
If that expenditure is excluded from the benefit of relief, there will be no incentive to start making a film in this country. The funding will all be geared toward the making of the film at a later stage. Much of that is undertaken by mature and established companies, not the early stage producers seeking to develop careers in the industry. Can the Economic Secretary tell us whether his intent is merely to help established film producers in this country or rather, as I would hope to be the case, to seek to encourage new, early-stage entrants? If that is the intent, surely development costs should be included within the definition. I support my hon. Friend’s amendment.
Jeremy Wright (Rugby and Kenilworth, Conservative)
May I belatedly welcome you to the Chair, Sir John, and congratulate the Financial Secretary on his promotion?
I want to make a few remarks about the way in which clause 32 may or may not reflect reality in the world of film. I speak not as an expert but, like other members of the Committee, as somebody who watches the occasional film when I have the time. I notice when I do so that a number of production companies feature in the credits before the film starts. It seems to be increasingly common for more than one production company to be involved in the making of a film. That being so, it must be the case that clause 32 makes it extremely difficult for that situation to occur and for each of the companies involved to obtain any kind of UK tax relief, notwithstanding the ingenious machinations of any lawyer who might be involved to redefine the words “responsible”, “engaged” or “direct”.
None the less, I accept that any assistance for the UK film industry is a good thing. I invite the Financial Secretary to consider ways in which he can make it better and more effective. I made the point in relation to an intervention on my hon. Friend the Member for Chipping Barnet that there is a contradiction between clause 32—a rigorous and restrictive structure, designed to prevent more than one company from being involved in the making of a UK film and obtaining tax relief—and clause 41, which indicates clearly that in order for a company to obtain UK tax relief it is necessary only for it to have spent 25 per cent. on UK expenditure. That being so, the Government must envision that 75 per cent. of the expenditure could be spent abroad. If it is, it must be spent on companies that are based abroad. Surely if 75 per cent. of the expenditure is going abroad, 75 per cent. of the work is going abroad, so it must be obvious that lots of other companies are involved in the making of the film. The rubric of clause 32 is too restrictive.
The other difficulty that I foresee, and which was alluded to by my hon. Friend the Member for Chipping Barnet, relates to subsection (5). It is clear that the way in which the Government propose to resolve the difficulty that more than one company may appear through the first parts of the clause to be a film production company is that they require that potential conflict to be resolved by determining which company is most directly engaged in the activities listed in subsections (3) and (4). If I may put it delicately, in an industry that is not necessarily averse to litigation, there might well be a great many long, complex and no doubt expensive legal disputes simply to establish which of several companies involved in the production of a film is the one entitled to UK tax relief. I am sure that the Financial Secretary would not wish that to happen—I certainly would not—and I invite him to reflect on that when he responds.
Stewart Hosie (Spokesperson (Chancellor of the Exchequer; Home Secretary); Dundee East, Scottish National Party)
A great many issues have been discussed, and I will not go over them again. I shall restrict my remarks to Government amendmentNo. 26. The objective would appear to be to change clause 35 to insert
“goods or services that are used or consumed in the United Kingdom”
in the context of the meaning of “UK expenditure”. In the only example that I am aware of in life outside Parliament, a blockbuster film employed a very expensive team of scriptwriters—it was a large part of the cost of production of the film. As the script was the basis of the movie, that was certainly a service consumed in the UK, in Scotland, where the film was wholly set and shot. However, the primary scriptwriter and his team were based in Hollywood. Given that the script, as a service, was wholly consumed in the UK as part of the production of the movie, is it the Minister’s intention that that would be covered under the meaning of “UK expenditure”? It certainly would be if amendment No. 26 were accepted, but from the general tenor of the clause I am not sure whether it would if it were not. Will the Economic Secretary advise the Committee on that?
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
The debate that we have had on the amendments shows how wise you were, Sir John, to group them together under this clause, which defines how a film production company will qualify for relief. The essence of the reform is to try to move away from the past difficulties of avoidance.
The contributions made by some members of the Committee show the two ways in which one can attempt to critique or amend the Bill. In her opening remarks, the hon. Member for Chipping Barnet acknowledged, as have the Government, that although there has been growth in the number of UK films being produced and in cinema audiences, there has been an avoidance problem. The scale of expenditure on relief therefore needs to be dealt with. She is broadly sympathetic with the conceptual framework that I have established. Her amendments are intended to strain against and dilute the definitions set out and the requirement that eligible films be British films, made by British film makers in our country. We must tackle the problem of avoidance and move away from the idea that we are simply offering a tax relief to a financier or a partnership. I shall respond to all of her points.
On the other hand, the point made by the hon. Member for Ludlow (Mr. Dunne) was factually incorrect. He gave the impression that we are discussing enhanced tax relief for only small films. In fact, a film costing under £20 million will benefit from 20 per cent. enhanced relief, and a large film with a budget of more than£20 million will also benefit from enhanced relief, just not quite as much: 16 per cent. The reason why I—
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
The reason why I paused was that I wanted to check that I was right to tell the hon. Member for Ludlow that he was wrong. Having checked that I was right, I can now tell him that he was wrong on that point.
The hon. Lady said that the rising scale of relief was a potential problem, and the hon. Gentleman said that we slammed the door on the film industry in 2004-05. He gave the impression that he would have preferred the status quo ante, before the reforms—the tax regime that was put in place in 1992, and which we inherited in 1997. One of the problems is that, despite repeated amendments, that regime is flawed and needs to be replaced so that we can tackle the problem of avoidance. He is right; we have slammed the door on the risk of avoidance and are instead putting in place a new model that will be fit for purpose.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
Is the Economic Secretary seriously saying that the problems with film tax relief since 1997 are due to the previous Government? He may be trying to slam the door, but it is taking quite a long time.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
To be fair, I was not trying to make a party political point. A regime was put in place in 1992 and has been allowed to operate for well over a decade. In that time, the industry has seen an opportunity for tax avoidance. Despite repeated attempts to tackle the problem since 2000, we have all reached the conclusion that the fundamental model is flawed and needs to be replaced. All that I was saying to the hon. Gentleman was that if, as he believes, the scheme is a failure for tax avoidance reasons, that is a collective failure of the model inherited in 1997. If, as I heard him say, the failure was not the avoidance, but the fact that we have tackled the avoidance, we have a fundamentally different view of our responsibilities for the tax system. Our responsibility is to make sure that the tax reliefs are used for the purpose that we intend, which is to make sure that British films are made in Britain, not simply to allow people to avoid tax.
If the hon. Gentleman’s criticism of the Government’s approach in the past 18 months is that it has caused uncertainty and a fall in the number of “films” or the tax relief by slamming the door on avoidance, I think that that is the right approach. My sense was that, while we may debate some of the details, there is a consensus across the Benches about the importance of replacing a flawed model.
Philip Dunne (Ludlow, Conservative)
I am most grateful to the Economic Secretary for allowing me to respond to his remarks. My criticism was not that the provision was a belated attempt to deal with the problem of tax avoidance after the event. It was that tax avoidance had been progressively worse for a number of years and, instead of the Government coming up with measures to encourage the film industry at the same time as dealing with the avoidance, they chose to slam the door on the avoidance and spend the next 18 months coming up with an alternative regime. It would have been better to have done the two in tandem because the Government had plenty of warning that the avoidance was taking place.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
It is certainly the case that measures were put in place over a number of years in an attempt to tackle the avoidance, such as those I read out earlier in respect of the Finance Bill. There were repeated attempts to do that. The conclusion was reached that the model was flawed and that we needed to move to a better way of supporting the film industry, one that was in line with the way in which the modern film industry works and which achieves what needs to be achieved. We did not simply scrap the old reliefs. As part of the Bill, they are being removed as a new regime comes into place. We wanted to consult as widely as possible to make sure that we had a fit for purpose regime that could last into the future.
From reading the comments of experts and practitioners during the consultation, my sense is that, while there may be some debate about the details, that is what we have achieved. The Bill will provide a model that will allow the British film industry to go from strength to strength. To take the time to do that in order to get it right is the right approach to tax policy. Last summer’s consultation paper, to which the hon. Member for Chipping Barnet made reference, outlined the diagnosis of the problem and also the principles which were to guide the approach. Those principles are all being enacted in the Bill.
In the main, the consultation paper has been preserved in the legislation. However, we have made one important concession. We said originally that there had to be 40 per cent. British expenditure to qualify for the enhanced relief, but following the consultation, the Government generously decided to reduce that to25 per cent. to make sure that even more British films could benefit. The consultation was good; it was well conducted by officials as well as Ministers. If we get this right today, we will have a model which will be of benefit to the British film industry.
Moving on to discuss the amendments, the first of which has been moved and the rest of which will be moved in due course—
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
Or may not be. We will be able to cover all of the issues that are relevant to the clause as a whole. I will take them in a different order because they fall into a number of discrete groups. Amendments Nos. 31, 32, 64 and 65 are about change in the definition of a film production company for the purposes of the chapter. Amendment No. 34 seeks to widen the base upon which film tax relief will be provided. AmendmentNo. 47, which we referred to in the earlier debate, would exclude films not made to be shown in cinemas, such as TV programmes, from the basic tax treatment set out in schedule 4. Amendment No. 35 attempts to refine and clarify the meaning of UK expenditure and has been referred to by other hon. Members.
I shall make a few general conceptual comments about what we are trying to achieve, which will help to meet some of the hon. Lady’s concerns, in particular those about what a “film production company” means and why it has been defined as it has for the purpose of the clause.
As I said earlier, the most important feature of the new relief, and a fundamental way in which it differs from its predecessors, is that it is directed at the film makers, not the financiers, a partnership or a middleman. That is deliberate, because we do not want the tax incentives to be diverted to intermediaries or investors; we want them to go to the film makers themselves. That is the fundamental goal that we are trying to achieve in order to tackle avoidance.
The purpose of the clause is to define those film makers as film production companies and ensure that those people benefit. The definition in subsection (3), to which hon. Members have already referred, follows extensive consultation with the industry. I shall not spend a huge amount of time talking about it, but there has been a reference to the nature of the film-making process. Unfortunately, I do not have a direct family member involved in the film industry, so I cannot claim the degree of knowledge that the hon. Lady possesses. She was eloquent in her use of technical terms, but I shall attempt to come close to matching her with my discussion of the creative process.
By having one “film production company”, the important thing we are trying to do is make it clear that in the making of the film and in the essence of that film, there is a being, a person, a film production company that controls the process, and that that entity, the individual or vehicle, is consistent throughout the different stages of film making, from pre-production to completion.
The first requirement is that a film production company be responsible for the development phase—the initial concept or idea for the film. In advance of the pre-production phase, there is the development phase, as the hon. Lady mentioned. It is the period before the film-making proper starts. With the development phase, in which the initial idea is put together and the film is conceived, one could say that J. R. Tolkein played a very important role in the conception of “The Lords of the Rings” film trilogy. It was an essential part of the development phase, but we would not think of the film having been made at that stage. The making of the film proper begins at the end of the development stage, when one has the story and has conceived of the idea. At that point, the tax support that we envisage for the making of the film kicks in.
Stewart Hosie (Spokesperson (Chancellor of the Exchequer; Home Secretary); Dundee East, Scottish National Party)
The Economic Secretary mentions—
Iain Wright (PPS (Ms Rosie Winterton, Minister of State), Department of Health; Hartlepool, Labour)
The hon. Gentleman is an expert on “The Lord of the Rings”.
Stewart Hosie (Spokesperson (Chancellor of the Exchequer; Home Secretary); Dundee East, Scottish National Party)
No, not in the slightest.
The Economic Secretary mentions Tolkein. What if Tolkein had been commissioned to write a Lord of the Rings-type, swords and sorcery, elves and demons concept as part of production? Would that have counted, or would it have been outside the scope?
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
The hon. Gentleman helpfully allows me to make it clear where the line is drawn. It is absolutely right that one has to draw a line to delineate the point at which we believe the making of the film begins. It is clear that when writing the book, J. R. Tolkein was not part of the making of the film. It was a much earlier stage than that. There is a long development stage, which often involves people trying to commission or write scripts. There could be a book, or the script could be for a film, a television show or whatever. During that creative process and in that development stage,the production of the film has not begun. To obtain the enhanced tax relief that supports the making of the film, the line has been drawn after that conceptual development stage.
Stewart Hosie (Spokesperson (Chancellor of the Exchequer; Home Secretary); Dundee East, Scottish National Party)
Would the storyboarding of “The Lord of the Rings” be part of production, before the detailed script is written?
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
The process in the consultation has been to separate the stages of the film-making process. The development stage takes place before the pre-production stage begins. A lot of thinking goes on in the development stage, including the writing of a script and consideration of which actors might be part of the film. All those activities take place before the pre-production stage begins and would fall under the definitions set out in the legislation. The initial conception of possible story boards for a film would take place in that development stage. That is not to say that there are no costs involved or that they could not be set against income for tax purposes. However, if we are trying to incentivise the making of a British film, we must draw a line between developing the conceptual framework and moving into pre-production. One starts to contract for the making of the film at the pre-production stage.
On the basis of the consultation, it is understood in the industry that there is a distinction between amuch broader conceptual, speculative phase, which is development, and saying, “This is a film; this is a script. We’ve gone beyond the point of creative speculation. We’ve decided to make the film and we’re now going to commission all the things that we need for it in the pre-production phase.” That is understood in the industry and therefore reflected in the amendment. There is a process called pre-production, which is a clear phase in the making of a film that comes only when one has gone beyond the speculative, creative phase and decided to make the film.
Brooks Newmark (Braintree, Conservative)
The Economic Secretary is floundering slightly. The definitions that he is offering are open to interpretation. My concern is that there will be an incentive for smart tax accountants to shove what might generally be viewed as pre-pre-production into pre-production. I am curious as to how he will get over the problem of who will play Solomon in those decisions.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
It is widely understood in the industry that after the development phase, when the conceptual phase is taking place, there is a particular point called green light. At the point of green light, the film gets the go-ahead, the studio is booked, the financiers come in, the legal documentation is brought together and the special purpose vehicle is created to bring together all the different elements of the creative phase—people, rights, obligations and risk—into one legal entity. At that green light stage, when a film moves from development into pre-production, the tax incentive starts to kick in.
Brooks Newmark (Braintree, Conservative)
Once again, the Economic Secretary shows that he perhaps does not understand the creative accounting that tends to go on. My concern—I still do not understand how he is going to get us over this hump—is that the definitions that he has come up with will not be clear and that there will be a tendency to show what was pre-green light as pre-production. I still do not understand how the Government propose to oversee that and decide who should play Solomon in those very decisions.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
The hon. Gentleman makes a good point. In defining the stages, we must ensure that the opportunities for ambiguities or avoidance are reduced as far as possible. That is exactly why we are specifying clearly that there must be one film production company responsible for all the phases from the beginning of the pre-production phase right through to completion, rather than a number of overlapping entities. There has been extensive consultation with industry figures to ensure that the terms pre-production, principal photography and post-production of a film, as set out in subsection 3(a)(i), are clearly defined and understood in the industry.
In a way the difficulty we face was the point I was going to make in response to the hon. Member for Chipping Barnet: we need flexibility in the way in which the legislation is enacted. We need flexibility in guidance and the way in which the tax authorities treat the production company. We are not saying, as was suggested earlier, that the film company must do all the pre-production, principal photography and the third stage itself. We are not saying that it cannot work in partnership or subcontract part of the work to other companies. The important point is that, through these phases, an entity must be actively engaged rather than simply being a financial shell in order to divert tax revenues.
The way that the FPC will operate will be differentin every case and there has to be flexibility in the way in which we interpret the amount of its engagement in each of the three stages. It will not be a black-and-white situation. The important thing is that we will be able to track the responsibility of the FPC through all the three stages. Companies have to be actively engaged in making a film. The tax relief is for making a film, not for writing a book or for simply saving or avoiding tax.
Brooks Newmark (Braintree, Conservative)
I very much appreciate where the Economic Secretary is trying to go. On the one hand, he is trying to create specific definitions of what is pre-pre-production and what is pre-production, but on the other, he says that there must be some flexibility. To me, flexibility means ambiguity, so my concern is how the Revenue will interpret a piece of an advice given by an accountant as opposed to what the Government want it to be.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
It goes to the very essence of making tax policy to ensure that there are rules that are understood by people who are going about a piece of businessor undertaking a project and that have common application, while ensuring that there is flexibility to deal with the circumstances of each individual trade. No two films will look the same, or be financed or produced in the same way. The question is whether we have a model that allows us to be confident that, when attempting to subsidise through the tax system the making of a film, the FPC is actively engaged in each of the three stages.
On the basis of our consultation with the industry, we have come up with a definition that is much better than the previous one because it makes clear that, to some extent, there should be active engagement by the company in each of the three stages involved in the making of the film. The FPC could be making a film, but not rolling the cameras; it could be making a film, but not actually booking a studio or getting actors in; or it could be making a film without being involved in distribution. However, if it is not involved in any of those three activities, it is not making a film. The guidance and the tax case law, as it develops, will make clear exactly how that will be applied in practice.
Philip Dunne (Ludlow, Conservative)
It is now clear where the Economic Secretary is seeking to draw the line. I happen to think that he is making a mistake in that development cost expenditure ought to be included as a legitimate expense of a film production company, but I would like to draw his attention to a couple of clauses.
The Economic Secretary is creating confusion through the drafting. In clause 33, there is a definition of film-making activity that includes the word “development”. That is picked up in paragraph 5(1)(a) of schedule 4 which refers to
“film-making activities in connection with the film”
thereby picking up development costs from clause 33. The first line of paragraph 4(1) of the schedule refers to the development costs of a film, so the Economic Secretary seems to be clearly expressing an intent to the Committee that is not reflected in the drafting of the Bill.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
I do not think that that is right. The hon. Gentleman should find that clause 32(3)(a) is very clear. A film production company is defined as a company that is responsible:
“(i) for pre-production, principal photography and post production of the film, and
(ii) for delivery of the completed film”.
To qualify for the tax relief it needs to be involved in all three stages and the definitions are commonly understood in the industry. In the earlier phases, the costs that can be set against tax in the normal way are not part of the making of a British film for these purposes so they are not included. We had to draw the line somewhere and we consulted widely with the industry before coming to that view.
Jeremy Wright (Rugby and Kenilworth, Conservative)
I want to take the Economic Secretary back to what he said about subsection (3) when he indicated that it would be remarkable if a British film or, indeed, a film of any other nationality, did not involve one of the activities in subsection (3)(a), (b) or (c). I agree, but the difficulty is that because of the way in which the clause is drafted, the provisions in those paragraphs are conjunctive and not disjunctive. All three must be done to qualify. The difficulty that Opposition Members have highlighted is that there are situations when companies may not be involved in all those activities, but may still qualify in ordinary language as a film that deserves tax relief.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
We are trying to put into statute definitions that ensure that that the tax relief is properly applied and goes only to genuine British film makers. We do not want to introduce loopholes that allow the tax resource to be diverted elsewhere to shell companies and so on.
If “responsible for” meant that a company had to finance the relevant activities in their entirety, if “actively engaged in” meant that it had to do everything, or if
“directly negotiates, contracts and pays for”
meant that it could not involve or buy in expertise to advise it or to do some of those things, the hon. Gentleman would be making a good point. However, that is not the absolutist way in which this is being set up. We are requiring active engagement, which does not mean absolute engagement. We are not being prescriptive and we are not saying that, to qualify, a company must be responsible for every aspect of every activity. Clearly, the degree of activity will vary film by film, case by case and with some films there will be much more active engagement by the film production company in the pre-production phase or the completion phase than in others. The important point is that to qualify the film production company must have some engagement in the pre-production and completion phases. It cannot opt out of one phase or the other.
I hope that that provides some clarity for the hon. Member for Chipping Barnet because she made the same point earlier. We are not saying that a special purpose vehicle cannot be used or that the company must either work in isolation or do everything itself. We are saying that it must be engaged in, have responsibility for and negotiate each aspect of those three phases, but it may do so in partnership with others or by bringing in other services from Britain or overseas. The important point is that we will not allow the tax relief to go to a partnership. There may be a partnership, but the tax relief will go to the British film maker and the British film maker must be a film production company—a vehicle that meets each of the three tests in the clause. I hope that that provides clarity.
I come now to the details of the amendments. First, amendment No. 31, as the hon. Lady said, would remove the obligation on a film production company to have responsibility for pre-production activity. As I explained, we believe that a film maker must be actively engaged in, and be responsible, for the pre-production phase. We are not saying that that is an absolute or inflexible definition and it is possible to have a greater or lesser engagement in the pre-production phase but, on the basis of our consultations, we believe that it would be a mistake for the provision to apply if there is no engagement as that would suggest that we did not properly understand the delineation between speculative development and the beginning of the production process.
Likewise, amendment No. 32 would weaken the definition of a film production company by removing the requirement that it must be involved in negotiating, contracting and paying for the various rights, goods and services that together make up the expenditure on making a film. Again, and for reasons that I hope I have made clear, any company that is not involved in negotiating contracting and paying for the fundamental elements of making a film cannot be the controlling entity or the essence of the making of that British film, which is what we want to achieve in the provision. I stress that that does not mean all of the film.
Debate adjourned.—[John Heppell.]