Clause 75
Finance (No. 2) Bill
4:45 pm

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

Clause 75 deals with film tax partnerships, and the Opposition broadly support it. Film tax issues have already been discussed by the Committee at length, but the avoidance scheme on which the clause focuses is one of the latest of many that have sought to exploit loopholes in film tax laws. As I stated in the debate on chapter 3, we have reservations about certain aspects of the proposed film tax structure, but we believe that the Government are right to close the loopholes, and we agree that the complex system of sale and leaseback contracts should not continue, because it is not yielding sufficient value for money for the taxpayer.

It seems strange to remark on specific legislation concerning this particular scheme, given that the regime that makes such schemes possible is about to be  abolished. I have some sympathy with the position of the Law Society, which has questioned whether

“it is worth introducing a provision of such complexity and narrowness on the statute book, particularly when film tax reliefs are being refocused”.

However, I acknowledge that the particular scheme that we are debating has long been a target for the Revenue—even from before the decision to opt for wholesale film tax revision, although I have never understood why the Government want to focus on it so much. For some years, the plain vanilla sale of leasebacks had been tolerated by the Revenue if it resulted only in a deferral of tax. However, the structure we are discussing goes further—it seeks to achieve tax reduction by converting taxable income into permanently tax-free income. The scheme has an opaque and complex structure that involves both a film partnership and an investment partnership.

The clause restricts the amount of tax relief on interest borne by loans whose purpose is the funding of investment in a film partnership. Instead of 100 per cent. deduction being permitted, a film partner will be able to deduct only 40 per cent. of paid interest, which will ensure that at least some film income ends up being taxable. The Revenue believes that the 40 per cent. figure will leave the investor in a similar tax position to that for a plain vanilla sale and leaseback structure, in which benefits are only deferred. However, the Law Society pointed out that the 40 per cent. figure seems fairly arbitrary, so will the Paymaster General indicate how the Treasury made that calculation? Other than on that point, the Opposition have no objection to the stand part motion.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I agree with the hon. Lady that the need for the provision is regrettable. That is particularly so given that the Bill also contains tax credit provisions that she has acknowledged are better suited in directing money to those engaged in production, rather than to high-value individuals who are not connected to production and who are simply looking for a tax-saving scheme.

The change was needed because the schemes were particularly aggressive: sale and leaseback occurred over a 15-year period and it was necessary to ensure that tax was paid over the rest of the period. Her Majesty’s Revenue and Customs became aware that the schemes were being marketed aggressively and the likely exposure, had we not taken steps, would have been substantial. I am sure that the hon. Member for Chipping Barnet (Mrs. Villiers) can imagine my delight in finding that I had to have yet another arrangement under the Finance Bill in respect of films. It has been challenging for all hon. Members who want to assist particular technological abilities and the developments in the film industry for such matters to be based in the United Kingdom where we have great skills. There also comes a point when we must question for what the tax relief is providing.

As for the question posed by the Law Society, 40 per cent. is not an arbitrary figure. HMRC approached the matter by undertaking a detailed study of standard sale and leaseback structures. It gave it a reasonable approximation of the position that investors would be  in had they invested in such structures in a straightforward way. The figure of 40 per cent. was therefore chosen as a proportionate response to that particular type of aggressive tax plan. It was simply trying to squeeze out aggressive tax planning. Such matters will never be an exact science, but it was an attempt to deal with the avoidance while not hitting other forms of sale and leaseback. I hope that hon. Members are satisfied by my clarification of matters.