Joe Benton (Bootle, Labour)

I remind the Committee that with this we are discussing 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 out lines 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

Amendment 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.'.

Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)

We have made progress—although not very much, I see from the amendment paper—and our debate has been useful and wide-ranging. When we adjourned, I had addressed amendment No. 31 and was part way through addressing amendment No. 32. As I had explained to the Committee, I was taking the amendments in a slightly different order, so as to make my speech appear logical, as far as was possible.

I should like to make a couple of comments, following on from our wide-ranging debate. We had such a long debate on the nature and definition of a film production company and issues around that, because that goes to the heart of the issues explaining the decision to move away from the old tax treatment of films to the new tax treatment set out in the clauses.

The majority of the debate on Tuesday was about the definition of a film production company. Some Opposition Members, including the hon. Member for Chipping Barnet (Mrs. Villiers), felt that the criteria that we were setting out in the definition of “film production company” were both too broad and too tight, and would exclude some genuine film production companies that might not cover all aspects of all three stages of the processes defined in clause 32.

As I explained on Tuesday, the definitions in the clause are designed to ensure that the Government’s relief is properly targeted on genuine film-makers—those who really make films—so the definition requires the company to be responsible for all phases of film production, not just some. However, as I explained on Tuesday, it does not require the company to be directly responsible for all parts of all phases; nor does it prevent the company from sub-contracting some of the work to others.

We fully recognise that the stages to which the legislation refers—development, pre-production, principal photography and post-production—are, in practice, not sequential, and that there will be overlap between them; and we accept that a company may take over some pre-production work for which it will not have been fully, directly responsible. We also fully understand from our discussions with the industry that the film production company achieves much of what it wants through others, and that sub-contracting is absolutely standard practice. However, to qualify for the tax relief, the film production company needs to be the film-maker—the person who has the vision for the film and who is charged with taking that vision through to delivery. That is why they must be in control of each of the three stages.

During Tuesday’s debate, worries were expressed about the requirements being too tight. Now that I have explained that there is no expectation that the company will do all the work itself, or be responsible for all of every stage, I hope that the hon. Lady will be  more comfortable with the clause. There was also concern that by using standard industry terms, such as development, pre-production and so on, without explicitly defining them, we are laying ourselves open to being misled and to allowing the new relief to be abused in the same way as what it replaces. However, as I explained on Tuesday, it must be right to use terms that the industry uses and understands, in order to ensure that it can operate the relief in reality. So if, for instance, developments in the industry mean that new things need to be done during pre-production, they are automatically included.

The hon. Member for Braintree (Mr. Newmark), who is not currently with us but who was certainly here on Tuesday, asked a good question about how we intend to prevent the deliberate manipulation of the divide between development and pre-production. He feared that a less scrupulous film-maker might disguise what were clearly development costs as pre-production costs. Although Treasury Ministers are responsible for the making of tax policy, the administration of the system is the responsibility of Her Majesty’s Revenue and Customs. It will be responsible for ensuring compliance with the new tax rules, and for the proper interpretation of “core expenditure”, just as it ensures compliance with the rest of the tax system. As we shall discuss later, if all else fails, the remedy lies in paragraph 3 of schedule 5, which gives the Treasury the power to specify what is included or excluded in respect of expenditure qualifying for the enhancement. Any attempt to disguise expenditure as something that it was not would allow film production companies to claim tax relief to which they were not entitled. The power in the paragraph deals with that issue.

On Tuesday, Committee members suggested that the rule that a company working in partnership cannot be a film production company would in practice exclude all co-productions, as they are by definition companies in partnership. That is absolutely not the case. From our extensive discussions with the film industry, we know that although it is standard practice for film makers to work collaboratively with others on international co-productions, they are not “in partnership” in the sense intended by clause 32(2). Separate film production companies are set up in every co-producing country, each being responsible for delivering its own contribution to the film as a whole, and each company can claim whatever tax relief is available from its respective Government.

Far from excluding companies that make films in that way, clause 32(4) makes special provision to ensure that co-productions can access the new tax relief in the same way as others. The rules in subsections (2) and (3) are designed to exclude partnerships of companies in which one partner’s only contribution to the film is to provide finance. Such an exclusion is essential to ensure that profitable companies not otherwise engaged in the film business are not able to badge themselves as full making partners and open the door to precisely the kind of abuses and avoidance to which the film tax relief regime has been subject in the past, and which the reforms and clauses are designed to prevent.

Rob Marris (Wolverhampton South West, Labour)

Will my hon. Friend clarify whether he is talking about “partnership” in its everyday sense, using standard  industry terms, or whether in the Bill the word is intended to be used in a legal sense, such as that used in the Partnership Act 1896 or whatever?

Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)

I hoped that I had made that clear already. It is common practice for there to be co-productions and for film makers to work in “partnership” in its colloquial sense. As for the legal use of the term applied for tax purposes, partnerships in that sense will not qualify for the enhanced relief. To qualify, a company must be a film production company as defined in clause 32. I am grateful to my hon. Friend for allowing me to make that absolutely clear, as I hope it now is.

Having spent a few minutes bringing you up to date and clarifying a few of the points debated on Tuesday, Mr. Benton, I shall deal with some of the outstanding points made by the hon. Lady and others on Tuesday.

The hon. Lady suggested that the approach to defining UK expenditure in clause 35 was in some way determined by the European Commission. There was absolutely no truth in her statement. On the contrary, the definition of UK expenditure reflects our policy aim of encouraging producers to make full use of film-making skills, facilities and infrastructure in the UK.

It is true that, as is required, we have been discussing with the Commission the securing of state aids approval for the new relief, but the Commission has not indicated any concerns about how we define UK expenditure, nor requested that we change the definition in any way. We have, for example, reduced the qualifying limit from 40 per cent. to 25 per cent., and we made that decision on the basis of the points put to us during the consultation. In our view, the definition is well within the ambit and requirements of the state aids rules. We are confident that those discussions will proceed apace.

The hon. Lady also referred to a recent British film, which she suggested would have difficulty qualifying for the new relief because it was filmed largely outside the UK. I cannot comment on any individual film, at least in so far as it might or might not benefit from tax reliefs in future. On Tuesday, comments were made on films that we had and had not seen and enjoyed, but I shall not refer back to those discussions; at times, they became a little lurid.

I cannot comment on any individual film, nor speculate on whether it might have taken advantage of tax relief in the past. However, productions for which filming has taken place predominantly or wholly overseas will be entitled to a level of benefit lower than that of productions filmed in the UK. That is entirely in line with the Government’s policy aim, set out clearly in the legislation, of encouraging film makers to make full use of facilities and infrastructure in the UK. This is an enhanced tax relief for making British films in Britain, so it is not our intention to support overseas film industries.

Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)

I understand from our discussions on the reliefs that the intention is not to foster British talent—to get British film makers to bring things to the starting line—but to help those production companies once  there has been a green light, everything is ready to go and all that process has been secured; to make an Olympic analogy, it is not to help with the training to get people to the starting line but to ensure that they have the kit once they get to the start of the race.

Does the Minister think that the post-production skills for which the UK is well known often mean that companies are in a subsidiary partnership? Therefore, according to subsection (5) they might not benefit from the relief because they might not be the company that is “most directly engaged” in the activities referred to in the rest of the clause.

Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)

We discussed the development phase on Tuesday. The Government do a number of things to support it, not least the different ways in which the Department for Culture, Media and Sport supports the fostering of new talent and supports new scriptwriters. That is done in a range of ways through public spending.

We are discussing the application of enhanced tax relief, which is for the production of British films. In our view, the production starts from the green light, pre-production phase. We discussed that at length on Tuesday and I hope that the situation is clear. It is not a tax relief that excludes from benefit films that have a part of that activity occurring overseas or collaborators from abroad. An important part of what we are doing is making Britain an even more attractive place for Hollywood film producers to make their films in. This is about making films in Britain, which I also wished to clarify in response to the amendment tabled by the hon. Member for Chipping Barnet.

Having addressed amendment No. 31 the other day, I turn to the specific remaining amendments tabled in advance of the Committee. Amendment No. 32 seeks to weaken the definition of “film production company” by removing the requirement that such a company 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. For the reasons that we discussed on Tuesday and again today, I hope it is now clear that any company that is not involved in negotiating, contracting and paying for the fundamental elements of a film is not a film maker—a film production company—for the purposes of the tax relief.

I stress that this part of the definition does not include the word “all”. There is no requirement that the film production company must be responsible for all negotiating, contracting and paying in relation to a film. That would not reflect film-making practice. It is common for certain elements of a production to be delegated or contracted out to a third party, but the intention is now clear to the Committee. I urge hon. Members not to press the amendment to a Division.

Amendment No. 65 also seeks to remove the requirement that a film production company must be actively engaged in production, planning and decision making during pre-production. For the reasons I set out today and on Tuesday, I again urge the Committee not to press the amendment to a Division.

Amendment No. 64 goes even further than the other amendments proposed by the Opposition. It seeks to remove entirely the requirement that a film production company must have any responsibility for pre-production, principal photography and post-production of the film. Instead, it proposes that a film production company should be required to undertake only principal photography, post-production and delivery of the film, including where it undertakes such activities on behalf of a third party.

As I said this morning, a company that does nothave overall direct responsibility for all stages of making of a film is not the type of company at which the Government want to target the relief. A host of specialist subcontractors exist in the film world, and undertake various activities, but we are not targeting the relief at them either; we are aiming it at the person who is making the film and the bringing together of all those activities in the film production company. Again, I urge the Committee not to press the amendment toa Division.

Amendment No. 34 deals with a slightly separatebut not unrelated issue: the types of production expenditure that form the basis for calculating the film tax relief. It would include expenditure incurred on film development under the definition of core production expenditure. We discussed that at length when I explained where we have drawn the line. The Government support young talent being brought on in the pre-pre-production phase, the development phase. However, that is not the target of the tax relief. I urge members of the Committee to reject the amendment.

Amendment No. 47 goes completely against the intention of chapter 3. It would exclude from the basic tax treatment a film that does not qualify for enhanced tax relief. It would do so by imposing a requirement that a film production company must be making a film that satisfies the conditions of clause 38—that the film is British, is intended to be shown in a cinema and has spent at least 25 per cent. of its total budget in the United Kingdom. Such conditions can be met with certainty only on completion, and the new relief includes the mechanism to allow provisional claims while a film is being made. However, the new relief does not provide—as it would under the amendment—that should one of the conditions not be met, a different set of tax rules will apply.

We discussed such matters on Tuesday when debating the preamble to chapter 3, and clause 31. I made it clear that it is vital that we replace and update the old legislation under section 40A to D of the Finance (No. 2) Act 1992, which set out the way in which taxable profits of all film companies were previously calculated, whether or not they met the greater stringency of the tests to qualify for the enhanced tax relief. Those sections of the 1992 Act are outdated. They are cast in terms that were appropriate to, and fitted in with, the language of the old reliefs. We want a single modern system that creates a level playing field for the industry. To have two different systems running side by side, especially when there will always be a level of uncertainty about whether a film will qualify for the full relief until the process has been completed, would be cumbersome and overly bureaucratic. It would make it difficult for film makers to operate. We therefore prefer not to create a muddle  caused by two different systems. We urge the Opposition to reflect further on the amendment and withdraw it.

Amendment No. 35 would amend clause 35, which sets out the meaning of United Kingdom expenditure. The clause is subject also to Government amendment No. 26. There is a case for explaining the Government’s rationale for their approach towards United Kingdom expenditure for the purposes of the new relief. The provision of relief only on expenditure in the UK marks a significant shift in how the Government’s support to the industry is targeted and delivered. Under the previous regime, when a film was certified as British, relief was given on the entire production budget including costs that were incurred by filming overseas. United Kingdom film tax relief was unique in that respect.

When the previous reliefs were withdrawn, every other country and jurisdiction that gave support to film making through the tax system did so on the basis of domestic rather than worldwide expenditure. Not only was that an anomaly, it was an inefficient way in which to deliver the Government’s objectives for supporting the British film industry. Because tax relief was given, even when the film production took place overseas, it failed to provide an effective incentive for film makers to use the skills, infrastructure and facilities of the United Kingdom. That was directly contrary to the objective of helping to maintain a critical mass of film-making infrastructure and talent within the UK. It is for that reason that the new relief is provided exclusively on film making in the UK.

The aim of clause 35 is to provide the definition of UK expenditure for the purposes of the new relief. However, representatives of the film industry have pointed out that the opening subsection of the clause might be open to misinterpretation and be problematic to operate in practice. The clause, as drafted, makesa distinction between a supply of services, which is treated as United Kingdom expenditure when it is performed in the UK, and a supply of goods, whichis treated as United Kingdom expenditure when it is supplied in the UK. In other words, to determine whether an item of expenditure counts as UK expenditure for the purposes of the clause, a film production company must first establish whether it was incurred in relation to a supply of goods or a supply of services. In some cases, that might not prove to be straightforward. For example, if a film production company hires costumes and props from a specialist supplier, which are then destroyed completely in the course of film making, the question arises whether there was a supply of goods or a supply of services. There are many other such examples. The industry has made a fair point. The lack of clarity was not intended. The clause could create uncertainty unless amended. We have therefore considered how to do so in order to solve that potential difficulty.

Amendment No. 26 will entirely remove the distinction in clause 35 by replacing the rule with one that is simpler and easier to apply. Under our proposed approach, expenditure on goods and services will be judged based on whether they are used or consumed in the United Kingdom. If they are, the expenditure will be treated as UK expenditure under the rules set out in the clauses. Conversely, if they are used or consumed  outside the UK, they will not count as UK expenditure. As we discussed on Tuesday, they will still count as a cost for the purposes of normal tax relief, but they will not qualify for the enhanced tax relief detailed in the clauses.

Philip Dunne (Ludlow, Conservative)

I rise on a point of clarification about whether a specific type of service will be covered by the clause. I think that I know the answer, but I was seeking an opportunity to raise the issue during this part of the debate, and this is the right place.

Next month, the filming of “Atonement”, based on the book by Ian McEwan, will commence in my constituency. A number of my constituents will benefit from supplying their own properties as rental accommodation to actors, actresses and production staff. Will the Economic Secretary clarify that that supply of service will be covered under the Government’s new definition and that relief will be available to the production company? I add that if he would like to visit my constituency during the filming, he might enjoy meeting Keira Knightley, as I hope to. Unfortunately, I shall not be able to benefit from the provisions, although it did occur to me. [Interruption.] The hon. Member for Tooting (Mr. Khan) asks whether I will need to declare a personal interest in that respect, and I assure him that I will not, despite my attempts to persuade my wife that we should move out.

Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)

As a novice to such proceedings, I found that to be one of the longest, most eloquent and most attractive declarations of an interest that I have ever come across. I congratulate the hon. Gentleman on having his constituency chosen as the site for the making of that film. I am a great fan of Ian McEwan’s books, and hope that the film does justice to a good read. I should love to visit the hon. Gentleman’s constituency. Maybe we could go to the Long Mynd and have a walk on the Stiperstones. As a fan of the novels of Malcolm Saville, I probably have some knowledge of the area.

I shall reassure the hon. Gentleman and ensure that my earlier remarks do not worry his constituents. I referred to the reason for needing to resolve the ambiguity, using the example of a supplier of a specialist good whose good was completely destroyed in the course of film-making, although I hope that such an unfortunate event will not befall any of his constituents who are allowing their houses to be used. Those houses will be used but not consumed during the making of a British film in Britain. I cannot comment on the details of that situation, but using a house to make a film in Britain is exactly the kind of expenditure that will now clearly come under the definition in Government amendment No. 26. I think that I can give him that reassurance.

The hon. Member for Dundee, East (Stewart Hosie) asked whether the fee for writing the script for a British film would be treated as UK expenditure even when the screenwriter in question was based in Hollywood. We have deliberately adopted an approach to UK expenditure that reflects the international nature of contemporary film-making. We recognise that a film production company will use skills and people from many countries as well as the UK. It is essential that we  do so to ensure that international films are made in Britain and qualify for enhanced relief.

Our approach means in practice that UK expenditure will cover all goods and services used in the UK irrespective of nationality. That will include, to take the hon. Gentleman’s example, the cost of a script written by a Hollywood screenwriter and used to make a British film in the UK. I am sure that Committee members, as well as the film industry and Hollywood, will welcome the measures. I commend amendment No. 26 to the Committee.

Opposition amendment No. 35 covers the same ground as the Government amendment and is, I assume, motivated by some of the same concerns that we picked up during our consultation. It takes a different approach by making explicit the way that a film production company incurs expenditure on renting equipment. Such expenditure will be treated as UK expenditure where the equipment being rented is used in the United Kingdom. I fully sympathise with the desire to clarify that treatment, but Government amendment No. 26 provides a better way of doing so that clears up all the ambiguities that might arise. Unless the hon. Member for Chipping Barnet wants me to go into more detail, I urge her to ask leave to withdraw her amendment and accept that amendment No. 26 does the job for her.

Opposition amendment No. 33 would, if adopted, allow the Treasury by regulations to amend the definition of a film production company. I think that we all appreciate the Opposition’s generous assistance in seeking to provide us with amending powers that we have not asked for, but on this occasion we will decline. We do not see the need to amend the definition of a film production company at this stage. I referred earlier to powers that we will take later on to amend some of the definitions, but, as we have heard in the debate over the past hours, the definition of “film production company” is a cornerstone of this chapter; it drives the whole new, modern approach to supporting the British film industry. If we were to revise that definition, we would be revising the intent of the legislation. It would be appropriate at that point to come back to the Finance Bill, rather than simply have a power generously offered by the Opposition, which we decline. I urge the Committee to reject the amendment.

Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)

Just reflecting briefly on the debate on this group of amendments, we had a lively discussion on the border line between development and pre-production costs. I felt that the Economic Secretary was bravely trying to give an answer to the various questions raised on this side of the room about which services and activities fell on the development side and which fell on the pre-production side, but he was in some difficulty. That is no reflection on him, but on the practical difficulty of distinguishing between those two things. I continue to be concerned about the exclusion of development from the scope of core expenditure, because of the uncertainty of that border line and for the reasons that I illustrated in my speech.

I welcome what the Economic Secretary has said about a flexible interpretation of what is meant by “is responsible” for the activities contained in the clause. I welcome his comments on Tuesday that an absolutist approach will not be adopted and I acknowledge that the absence of the word “all” in the clause is relevant and helpful. I welcome his reassurance that this is not a blanket exclusion of subcontracting and that the film production company can engage with other people to undertake certain activities without danger of losing its status. However, I continue to be worried about the requirement that a film production company is responsible for pre-production, because of the possibility that it may be set up after pre-production has been completed, as I outlined in my speech. I feel that the flexible interpretation that the Economic Secretary would adopt does not deal with the problems in relation to direct negotiation and directly contracting. The terms of the statute explicitly require that direct relationship, so that precludes any possibility of subcontracting.

I welcome the Economic Secretary’s positive assurances that co-productions will not be affected by the ban on the use of partnerships in this context. There may still be some problem with drafting, and I hope that we do not, as he indicated at one point in his speech, end up having to clarify this matter in the courts, because that costs a great deal of money and is undesirable. If there were any way that further reassurance could be given by guidelines as to how the term “partnerships” is used in that context, that would be welcome. I also welcome his indication that hedoes not anticipate a problem with the European Commission in getting the rules cleared. I urge him to ensure that a final decision is taken on that so that the uncertainty is removed as soon as possible.

The Economic Secretary referred to the difficulties that would occur under amendment No. 47 if there were a dual regime for different companies. I take his point that it would make the system more complicated and it might be better to tackle the matter by reforming the novel way of computing profits and losses under schedule 4. That has led to concern about its impact on television production companies and if we amended that for all production companies, whether or not they qualified for the tax relief, we would not be left with a dual regime.

In conclusion, I shall not press the lead amendment to a Division, but I shall be grateful if the Committee is prepared to vote on amendment No. 31. I beg to ask leave to withdraw the amendment.