John Butterfill (Bournemouth West, Conservative)

I remind the Committee that with this it will be convenient to discuss the following amendments: No. 42, in schedule 4, page 165, line 26 [Vol I], at end insert—

‘(1A) Where a company incurs expenditure on the development of a film that is abandoned before pre-production and subsequently begins to carry on a trade as a film production company in relation to another film, the expenditure may be treated as expenditure of the trade of the second film and as if incurred immediately after the company began to carry it on. Provided that the same expenditure is not to be given more than once.'.

No. 53, in schedule 4, page 166, line 19 [Vol I], leave out paragraphs 7, 8 and 9 and insert—

‘7 For the purposes of this Schedule profits and losses are calculated in accordance with generally-accepted United Kingdom accounting principles.'.

No. 55, in schedule 4, page 167, line 4 [Vol I], at end insert

‘; and accordingly—

(a) where, within six years of the end of the first period of account, it becomes clear that the original estimates were incorrect, the film production company can elect in writing to amend the original tax computations to reflect the correct position;

(b) income taxed under the provisions of paragraph 7 of this Schedule shall not be taken into account for tax purposes in a subsequent period of account.'.

No. 41, in schedule 4, page 167 [Vol I], leave out lines 6 to 17.

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

I welcome you back to the Chair, Sir John. We had a long debate this morning on a number of the clauses relating to schedule 4, and I was just coming to the end of my remarks. I had referred to all five amendments—  amendments Nos. 40, 42, 53, 55 and 41—and I was answering a final question from the hon. Member for Chipping Barnet (Mrs. Villiers) on transfer pricing. I concluded by saying that we did not think that there was anything novel in the situation for transfer pricing that will face the film industry. It will be no different from the normal way in which transfer pricing rules apply. The normal rules will apply and although that may be uncomfortable for those who attempted to use them for tax avoidance reasons, we do not think that there will be a problem to trouble any genuine film makers. On that basis, I ask the hon. Lady to withdraw the amendment.

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

I welcome a number of points in the Economic Secretary’s response to the debate. I welcome his clear indication that development costs for films that never go into production could be deducted according to ordinary tax law principles. Even if he is not prepared to accept my amendment, which suggests that they should receive the enhanced deduction, it is welcome that they have not accidentally been excluded from the ordinary regime.

I also welcome his reassurance that film production companies will definitely be able to correct estimates if they prove to be incorrect. That was my understanding of what he said. I still have some anxieties as to how that tallies with the Bill’s terms, but his reassurance on that point is welcome.

I take issue, however, with his repeated assertion that what is proposed in schedule 4 is in line with standard industry budget and accounting practice. As I acknowledged in my speech on the amendments, there are some structures that involve special purpose vehicles, where the proposed new framework might not produce a significant burden. However, as the British Screen Advisory Council points out, not all film producers will want to use that model. It states that if so, the requirement to look out for estimated income could be problematic both for independent film makers and large production companies. It is almost impossible to predict the success of a film in advance. The new obligation would run counter to the process of tax buying accounting treatment and could result in companies paying tax or receiving less by way of tax credit on income that never materialises or well ahead of receiving that income. It also questions its application to films, such as television programmes, that do not attract the tax credit. That illustrates the concern across the industry since that organisation represents a broad-ranging coalition of film industry interests. In contrast, the Economic Secretary seemed to imply that those issues were somehow dreamed up by an incorrect brief from KPMG. I wanted to assure the Committee that they are more widely felt.

I reassure the Economic Secretary that it is not the intention of any of my amendments to leave the Government scheme open to abuse. I stand entirely by what I said in opening the debate. My amendments have been tabled with a view to exploring important issues regarding the computation of profits for film production companies. At the end of the discussion, I remain to be convinced that the move to the new method of calculating profit and loss is necessary to prevent the abuse of the film tax scheme, but I take on  board his comments. I will reflect on them, particularly those about amendment No. 41 and possible abuse relating to deferral.

In the light of that, I will not press any of the amendments, but I hope that the Economic Secretary will reflect with care on whether this punitive new regime is necessary to prevent abuse of the film tax scheme. I beg to ask leave to withdraw the amendment.