Clause 32
Finance (No. 2) Bill
12:00 pm
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.