Schedule 5
Finance (No. 2) Bill
Public Bill Committees, 18 May 2006, 2:00 pm
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I beg to move amendment No. 54, in page 170, line 5 [Vol I], after ‘pay' insert
‘within 90 days of the claim being made, subject to sub-paragraphs (3) and (4) below,'.
Amendment No. 54 would insert an obligation on the Treasury to pay the film tax credit within 90 days of the claim, for the following reason. Considerable concern has been expressed about the timing of the Revenue’s payment of tax credits. As we are all aware, payments of tax credits have been subject to severe administrative problems.
Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
If the hon. Lady considers the operation of the research and development tax credit, on which the film tax credit is modelled, she will find no such delay or problems. Perhaps she would like to make a direct comparison instead of hitting away into areas that are not connected to the issue.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I appreciate the right hon. Lady’s comments. The reason why I referred to tax credits is that many of my constituents have extreme difficulties with the working families tax credit system, which has had problems. I acknowledge that the example that we are talking about is different from the tax credit systems whose problems have been most serious, but it is reasonable to refer to problems in other areas with a view to ensuring that such problems do not recur.
Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
If we are to have a serious debate, will the hon. Lady draw the parallels between a payable tax credit to families, which is based on integration of the tax and benefit systems, and payable tax credits for research and development in the tax system, on which the film tax credit is modelled? Their names are the only similarity.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I acknowledge that the two systems are different. I am saying only that we do not want the problems that have arisen in one area to arise in another.
Uncertainty about the time scale for the payment of film tax credits will drive up the cost of funding a film because of the increased risk involved in delays. I hope that the Government will consider accepting amendment No. 54 to inject a welcome degree of certainty into the measures. It would also be useful if the Economic Secretary indicated how long the Government expect that it will take, on average, to pay out a tax credit. Are they doing any research on the matter?
Rob Marris (Wolverhampton South West, Labour)
The hon. Lady would like the payments to be made within 90 days of a claim. Would that not be unworkable, as the time would run from when a claim was made and not from when a valid claim was made, fully supported by appropriate documentation and evidence?
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
That is the point of the amendment—to ensure a clear timetable for getting the claim sorted out and paid.
Philip Dunne (Ludlow, Conservative)
To help my hon. Friend, I shall illustrate the point. For an example of a Government agency that seems incapable of providing payments for validated claims, we need look only to the Rural Payments Agency, which was debated today on the Floor of the House. It illustrates the extent of the problem and the reason why so many sectors of the economy are concerned about exceptionally complex Government innovation introducing a new relief, subsidy or tax credit that the relevant Government agency will be incapable of delivering according to its own schedule and statutory procedures. That is why the amendment is seeking to direct confidence back into the system. That is its purpose.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
My hon. Friend makes his point well.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
No, I shall conclude my remarks.
Julia Goldsworthyrose—
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
No, I will now conclude. Government amendment No. 24 seems like a straightforward tidying up exercise, to which the Opposition has no objection in principle.
Julia Goldsworthy (Shadow Chief Secretary To the Treasury, Treasury; Falmouth & Camborne, Liberal Democrat)
I will make a couple of short remarks. The hon. Member for Wolverhampton, South-West makes a valid point. However, it would have been appropriate to have an amendment to paragraph 9(1)(b) to ensure that the claim was valid. As for the amendment introduced by the hon. Member for Chipping Barnet, if the Minister is confident that the payment will be delivered within an appropriate time scale, clearly she will have no problem in accepting the amendment.
Rob Marris (Wolverhampton South West, Labour)
The hon. Member for Falmouth and Camborne (Julia Goldsworthy) has made a good point. However, I think that the hon. Member for Chipping Barnet misunderstood my intervention. I will therefore repeat it, perhaps more fully. The effect of the amendment, were it to be accepted, would be that if a film production company put in a claim showing that it was entitled to a tax credit, it would be entitled to have it paid out within 90 days even if it was not actually entitled to the tax credit because it had not put in the right documentation. The company could argue, statutorily, that it had to be paid because the 90 days was up as per the Act of Parliament. With respect to the hon. Lady, it would be a complete nonsense if a company were to be entitled to receive a payment when it had not produced proper evidence. All members of the Committee would recognise that companies should provide proper evidence to validate claims to receive tax credits.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
It is obviously important that we implement the film tax credit as efficiently and professionally as we can. As my right hon. Friend the Paymaster General said, there is much that we can learn from the tried and tested model of the research and development tax credit, which has been successful in its impact and administration.
It is important to say that we are talking about a tax credit. Therefore, it depends on the company’s tax position and that is why the claim needs to be in the company’s return and why repayment will depend on the broader complexity of those tax arrangements.
John Hemming (Birmingham, Yardley, Liberal Democrat)
I am having difficulty in working out the circumstances under which a payment would be made. As far as I can see, a payment would be made only when a film was expected to make a loss over its whole lifetime, and on that basis one would not even make the film. So I find the provision a bit odd.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
The hon. Gentleman may have missed some of the detail of earlier debates—in particular, that this is a payable tax credit. It can either be taken as a credit against tax take, or as a direct cash payment in the event that the film makes a loss. It operates in a similar way to the research and development tax credit, which is why it is called a payable tax credit.
John Hemming (Birmingham, Yardley, Liberal Democrat)
The difference between the film tax credit and the research and development tax credit is that in this instance we are calculating the liability to corporation tax on the basis of the averaged-out income against the expenditure, whereas with research and development the same assumption is not being made.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
It is also the case that we are paying out this tax credit on the basis of making a British film, rather than for research and development. They are clearly not analogous; they are different. One is about making a film, which has a particular tax treatment set out in schedule 4; the other is about research and development. So I would not say that they are identical, but the general model has similarities, and one similarity is the fact that the film tax credit is payable. If over the lifetime of the film the company is making a loss year by year, it can claim the enhanced relief as a credit.
I make the point to the hon. Member for Chipping Barnet that it is helpful and constructive to have amendments that are designed to ensure that the tax system is operated in an effective and efficient way, but if one is going to table such amendments, and do so in a pointed and sharp political way, it is important to get them right. The problem with the amendment is not the wider political shenanigans surrounding its introduction but the fact that it is badly drafted and flawed and does not achieve what the hon. Lady intends.
I got the impression from the hon. Lady’s speech that she expects the clock to start ticking on the 90-day entitlement when the claim is made; from her speech, one would have assumed that the claimant would be forgiven for thinking that the clock started ticking at that point. But in the amendment the clock starts ticking not when the claim is made but when the entitlement is established. I should have thought from my experience of HMRC policy that 90 days is a generous or rather too long a period if the clock starts from the point when the entitlement is established, and the amendment appears to be drafted on that basis. We would hope to get payments out much quicker than 90 days once the entitlement has been established.
The entitlement needs to be established promptly, without impediment, but the time that that process takes depends on the broader issue of the tax return and its complexity, and the time that it would take to establish that it is not some sort of complex trade that is being abused for tax-avoidance purposes. HMRC will take the time that it needs to establish that it is not tax avoidance and its officials will want to do that as expeditiously as possible. That is part of their job; they will also ensure that they do it properly and they will take time to establish the entitlement. From the point that the entitlement is established, 90 days is too long a period, but that is what the amendment refers to. The proposal is flawed; it misunderstands what it is trying to achieve and therefore lets the Revenue off the hook rather than tying it down.
My advice to the hon. Lady is that if she wants to criticise the Government on the matter of administration it is important to get the facts right before tabling an amendment. Being more generous, I would say that one of the great advantages of this debate is that we can discuss these matters in a friendly, co-operative way, knowing that we agree on the general objective, which is to ensure that British films are subsidised in Britain. If only we had the same unanimity on our goals to reduce child poverty through the tax credit system; maybe in that respect there might be a bit more consensus than there has been so far.
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
I shall start by reassuring the hon. Member for Wolverhampton, South-West that the amendment does not seek to entitle a film production company to the film tax credit automatically, regardless of whether a valid claim is made, because it is inserted in the last line of paragraph 9. The preceding two paragraphs make it clear that a valid claim must be established before the last line kicks in.
I welcome the Economic Secretary’s indication that the Revenue is convinced that 90 days would indeed be too long, and that it would anticipate paying out on the film tax credit much more quickly than that. My point is sufficiently made with that indication from the hon. Gentleman, which I welcome, so I beg to ask leave to withdraw the amendment.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
I beg to move amendment No. 24, in page 173, line 33 [Vol I], leave out ‘that Chapter' and insert
‘Chapter 3 of Part 3 of the Finance Act 2006'.
This small amendment addresses a slight drafting defect in the Bill, which we want to set straight. Part 2 of schedule 5, paragraphs 14 to 25, makes changes to schedule 1 of the Films Act 1985. Schedule 1 sets out the rules for certification of films as British. The new tax relief requires a number of changes to those rules and some of those changes require references back to chapter 3 of part 3 of the Finance (No. 2) Bill or, as I trust it will eventually become, the Finance Act 2006. The amendment simply inserts a full reference to chapter 3 of the forthcoming Act, instead of the phrase “that chapter”, which is not otherwise defined.
John Hemming (Birmingham, Yardley, Liberal Democrat)
This comes back to the previous point. I am trying to assess how this relief gets paid. I accept the point about the research and development tax credit which is funded right at the start of the project, but there are two issues here. First, there is a massive nuisance in that to qualify for this relief one has to take the tail end income and count that at the start of the project. One does not have the cash, but one must account for a profit that will be made on income that will be received in perhaps a couple of years’ time and one must account for it as soon as one starts spending money on the project. That is a real burden.
The question is, what is the benefit? The benefit is the availability of a tax credit where there is a surrenderable loss. With various complications, which are not as complicated as those surrounding capital gains tax and so on but are still quite complicated, one will possibly get between 16 and 20 per cent. of the surrenderable loss at the best of times. The real question is how in the real world we will have a situation where someone will be paid a tax credit. If the calculation is on the basis of a loss, it must be a loss over the whole of the project on the basis of the initial calculation as to the estimated income, unless there is something else within the entity that is losing money. That is the issue that interests me.
Jeremy Wright (Rugby & Kenilworth, Conservative)
I simply wanted to ask a question in the absence of the hon. Member for Dundee, East (Stewart Hosie). I am sure that he would have asked it if he were here. It relates to paragraph 25, particularly subparagraphs (5) and (6), which deal with the agencies that are entitled to conduct a prosecution for the wrongful disclosure of information related to Revenue and Customs. It is clear which agencies prosecute in England and Wales and in Northern Ireland, but which agency would do so in Scotland?
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
I will reflect on that and try to find an answer in due course. First I shall make some remarks about the schedule and the loss rules which I hope will help to clarify matters. The schedule is in four parts. The first sets out how the relief is calculated. The second part amends schedule 1 to the Films Act 1985, which deals with the certification of films in Britain. The third part provides claims machinery for the relief. The fourth part deals with claims for relief made before a film is completed. Finally, to answer the hon. Member for Rugby and Kenilworth (Jeremy Wright), in Scotland prosecutions under the schedule would be taken forward by the procurator fiscal.
Jeremy Wright (Rugby & Kenilworth, Conservative)
I am impressed by the speed at which the Minister can get these answers. But why is it not in the schedule?
John Butterfill (Bournemouth West, Conservative)
Order. The hon. Gentleman cannot intervene while the Minister is still attempting to answer the question. When the Minister has finished answering it, the hon. Gentleman may be at liberty to intervene again.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
I apologise, Sir John. It is helpful to be set straight on that point of procedure. I was about to say that if that issue had occurred earlier to the hon. Member for Rugby and Kenilworth, I presume that he would have tabled an amendment to clarify this schedule to the Bill. Obviously, that thought did not occur to him until a much later stage.
Rob Marris (Wolverhampton South West, Labour)
Will my hon. Friend the Economic Secretary give way on that point?
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
No. I am told that, in Scotland, the Procurator Fiscal Service is not only an authority that may deal with these matters but the only one that may do so. Therefore, it might be thought to be overburdening the schedule to state the obvious within it. However, we will reflect on the drafting advice of the hon. Member for Rugby and Kenilworth for future occasions.
Rob Marris (Wolverhampton South West, Labour)
My hon. Friend has partially answered this, but just to clarify: I did not put in an amendment because the words on line 42 are, “England and Wales only”. Paragraph 25(5) narrows down the possibilities as to who might bring a prosecution and so on; no such narrowing down was required in Scotland for the very reason that my hon. Friend has given.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
I am grateful to my hon. Friend and, referring back to earlier comments in response to the intervention by the hon. Member for Rayleigh (Mr. Francois), the Committee should be reassured to know that my hon. Friend the Member for Wolverhampton, South-West is scrutinising our proceedings with such care. In an analogy with the Bank of England, where a decision not to raise interest rates is as important as the decision to do so, knowing that my hon. Friend considered whether an amendment was necessary and decided not to table it provides me with a similar degree of reassurance as if he had. Therefore we can move on, comfortable in the knowledge that he is keeping a close eye on proceedings, from whichever Bench.
I turn to the other matters of substance in hand.
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
Returning for a moment to film, I turn to part 1 to set out some more detail which I hope will help all hon. Members, particularly the hon. Member for Birmingham, Yardley (John Hemming). He is asking the same series of questions and I fear that I am giving the same answer, so if I put the answer in a broader context that may help the Committee to understand both my answers and his interventions.
Part 1 implements our announcement in the pre-Budget report that a British film starting principal photography on or after 1 April 2006 and meeting the conditions that we set out, is entitled to film tax relief, which is given as an additional deduction in computing its profits—the amount of which deduction, as debated earlier, is defined in paragraph 4—and possibly as a payable tax credit as set out in paragraphs 6 and 7. The amount of the deduction is based on the actual UK spending subject to a cap of 80 per cent. of the production company’s spending. That cap, as we have discussed, is needed to meet European Commission state aid rules requiring that it must be possible to spend at least 20 per cent. of the film’s budget elsewhere in the EU without loss of relief. As also discussed, we reduced that requirement from 40 per cent. at an early stage.
Paragraph 4(3) would allow the Treasury to amend the 80 per cent. limit so that any future changes in state aid rules could be accommodated, but at this stage we do not envisage complications in state aid clearance. The additional deduction is defined in paragraph 4 as the result of that threshold multiplied by the appropriate rate—100 per cent. for a limited-budget film and 80 per cent. for a large-budget film. That additional deduction will alter the overall profit or loss previously calculated according to schedule 4, which we debated earlier. If the results of the calculation place a company in loss, paragraph 6 will allow some of the loss to be surrendered for a payable tax credit. The amount that can be surrendered is capped at the same threshold amount as I mentioned a few moments ago—the actual UK spend up to 80 per cent. of the total spend. It is not limited to the amount of the additional deduction. That is the position in the first period of account, which in the case of most films will be the only period.
It is unusual for a film to take several years to make, although it does happen. In later periods, if there are any, the rules are slightly more complicated and examine cumulative spending, but the principle is the same. In calculating the additional deduction for and the amount of loss that can be surrendered in such later periods, paragraphs 4(2) and 6(4) take account of the amounts in previous periods so that the Commission’s 20 per cent. rule is met over the film’s overall production period. That measure is necessary because the new film tax relief may be claimed by companies period-by-period as a film is made, whereas the previous reliefs under section 42 of the Finance (No. 2) Act 1992 and section 48 of the Finance (No. 2) Act 1997 could be claimed only on completion of the film, which was much simpler because all the facts were known and final positions could be determined.
Once the amount of loss to be surrendered has been determined—a company need not surrender the maximum amount but can instead retain losses to set against future income from the film, which might be more advantageous—it is multiplied by the appropriate credit rate as set out in paragraph 8 to determine the actual payable credit. Again the credit is higher for a limited-budget film than for a large-budget film. Were the losses instead to be retained and set against film incomes, taxed at 30 per cent., the losses would of course be worth slightly more. Whether to do that is of course a company’s choice. Once the amount of payable credit has been determined and a claim made, paragraph 9 requires Her Majesty’s Revenue and Customs to pay it to the company, although there are protective provisions in that paragraph to deal with circumstances where the company owes money to HMRC or its tax return is being inquired into.
Paragraph 10 makes it clear that the payment of tax credit is not itself taxable. Paragraphs 12 and 13 are aimed at preventing the inflation of film tax relief. Paragraph 12 addresses circumstances where a payment is deferred. While we accept that deferred payments are a legitimate practice in the film industry, we do not accept that the film tax relief should be based on payments that have not yet been made. When they are made they can be included. Paragraph 13 is a more general measure aimed at attempts to inflate the amount of film tax relief. It is along the same lines as other rules, such as those on the R and D tax credit in paragraph 21 of schedule 20 to the Finance Act 2000, and targets arrangements the sole or main purpose of which is to obtain or inflate the amount of film tax credit. That does not include ordinary transactions that would in any case be undertaken in making a film, such as establishing a film production company in the first place. We do not want to get in the way of such transactions, but as we have said, we will not accept amendments that abuse the new system.
I hope that that detail makes things clearer to the hon. Member for Birmingham, Yardley. As I said, a film is typically made by a film production company under a contract. If that contract results in the film production company making a loss, the tax credit may be payable, but the film may be profitable to whoever commissioned it.