Clause 32
Finance (No. 2) Bill
5:15 pm
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.