‘(3) Whether this condition is met is determined for each accounting period of the film production company during which film-making activities are carried on in relation to the film, in accordance with the following rules.
(4) If at the end of an accounting period the film is intended for theatrical release, the condition is treated as having been met throughout that period (subject to subsection (5)(b)).
(5) If at the end of an accounting period the film is not intended for theatrical release, the condition—
(a) is treated as having been not met throughout that period, and
(b) cannot be met in any subsequent accounting period.
This does not affect any entitlement of the company to relief in an earlier accounting period for which the condition was met.'.
With this it will be convenient to discuss the following amendments: No. 43, in clause 39, page 31, line 28 [Vol I], leave out subsection (3) and insert—
‘(3) Whether this condition is met may be determined at any time after film making activities begin, so long as the film is intended for theatrical release prior to delivery of the completed film'.
No. 44, in clause 41, page 32, line 4 [Vol I], at end insert
‘and expenditure incurred by a person which is reimbursed by a film production company shall be deemed to be expenditure by the film production company for the purposes of this section where it would have fallen within this section had it been incurred directly by the film production company'.
It is a first, but I hope not a last.
It might help the Committee if I set out a little of the thinking behind the clause. It sets out the first condition that a film must meet to be eligible for the new tax relief: subsection (1) makes it clear that it must be intended for theatrical release. That is the same requirement that a film had to meet to qualify for the old relief. Both the old and new reliefs are intended to provide support to films that are made to be shown at the cinema, and exclude other films, which we discussed in our debates on clause 31, such as those made for television. The television industry is healthy and productive and was excluded from the old film tax reliefs in 2002, so this is not a new rule.
Subsection (2) gives more detail on this requirement. Theatrical release means exhibition to the general public at a commercial cinema—again the common-sense, generally understood definition—and a film is considered to be intended for theatrical release only if it is planned that a significant proportion of its income should come from cinema exhibition. This condition was originally imposed because the old reliefs were being abused, and claims were being made for soap operas, news programmes and even for doubtful productions that were clearly not intended to be viewed anywhere, by anyone.
We acted to narrow the scope of the relief to genuine cinema productions, which is what was always intended, and that intention remains. The question is: when should the definition of the film be judged? Under the old system of reliefs, that was done when the film was finished, which was when the old reliefs were claimed. As we discussed earlier, we mean the new reliefs to be claimable from the start to assist film makers with cash flow. That approach is based on a modern understanding of best accounting practice and the way in which TV and film makers work.
As a consequence of the decision to change the model for film tax relief—enhanced tax relief—the film maker now needs to take a view at the outset. But what if something changes? With the original drafting, we would have preserved the original judgment, which was made at an early stage, even when the situation soon changed. However, since the Bill was published, we have held discussions with the industry, and we accept that preserving the original judgment could have unintended consequences. We were particularly concerned that that might lead to film makers taking overly optimistic views in the early stages, so that makers of many productions that are inevitably destined for television or other media would claim film tax relief in the early stages of production. Our amendment will allow greater flexibility when the position changes. It will allow a film that was originally intended for the cinema to drop out of the film tax relief without losing any relief that it has earned to date. I invite the Committee to accept the amendment.
I turn to amendment No. 43. It will not surprise members of the Committee to learn that I think that the Opposition amendment, which I accept seeks to address the same issue, lacks clarity. The amendment would allow a theatrical release to be determined at any time, which means that it could well change back and forth several times, which means that the tax position could also change, possibly leading to payments, repayments and even re-repayments. The whole position could become confusing and lack clarity. Rather than our accepting the Opposition’s amendment, therefore, I hope that the Committee will reflect on my comments and instead support ours.
Amendment No. 44 seeks to make it explicit that expenditure incurred by a third party that is reimbursed by a film production company—[Interruption.] I feel as though I am caught in the crossfire in an exchange of semaphore messages. I hesitate to turn to the explanatory notes for guidance.
I apologise to the Economic Secretary. There was some confusion on my part. We thought, looking at the seating arrangements, that the hon. Member for Wolverhampton, South-West (Rob Marris) had been made a Parliamentary Private Secretary. That was a cause for surprise and delight on our Benches, but we have now clarified that that is not the case.
I am grateful to the hon. Gentleman for clarifying the situation. Even though my hon. Friend the Member for Wolverhampton, South-West is not a PPS, I find his presence behind me reassuring. I am sure that the fact that he will continue to hold the Government properly to account from the Back Benches on the detailed issues is reassuring not just to me but to the taxpayer at large.
Amendment No. 44 seeks to make it explicit that the expenditure incurred by a third party, which is reimbursed by a film production company, should be treated as if it had been incurred by the film production company for the purpose of determining whether the film production company meets the 25 per cent. minimum UK expenditure test. It is common in the film industry for legitimate production costs to be recharged to a third party rather than charged directly to the film maker. That is almost universal in the United States, where the Screen Actors Guild—the Hollywood actors’ trade union—has rules to limit the number of companies to which an actor can charge fees for his or her services. That is likely to be the film production company’s parent company, rather than the film production company itself. I imagine that that is the sort of situation that the amendment seeks to address.
It is accepted accounting practice for costs that are recharged in that way to be treated as though they were incurred directly by the company, and there is nothing in the legislation to indicate that that practice will not continue for the purposes of the new film tax relief. Where costs are recharged to a film production company through a third party, they can be treated as qualifying production expenditure of the film production company as if they were incurred directly by the film production company, provided that they are recharged on a commercial basis and are not designed to inflate the amount of film tax relief that can be claimed. That has already been made clear by Her Majesty’s Revenue and Customs in guidance, which I fear might not yet have been read by members of the Committee, with the possible exception of my hon. Friend the Member for Wolverhampton, South-West. It has been published since 11 April on the website—www.hmrc.gov.uk\films\faqs\htm—which says:
“Q: Can costs charged through third parties be included in production costs? A: The recharging of costs to a subsidiary by its parent company is standard practice in the film industry and elsewhere. Where such costs relate to qualifying production expenditure, they can be included for the purposes of film tax relief, provided they are recharged on a commercial basis and are not designed to inflate the amount of film tax relief that can be claimed.”
Obviously, such costs will be taken into account when determining whether the clause 41 expenditure test is met. Given that that guidance is already on the website, the amendment raises a moot point, so I suggest that it be withdrawn.
I very much agree with the policy objective of the Government to ensure that television production is not subsidised by the film tax break. That has led in the past to problems with the tax break being used in an inappropriate way, and I would not seek to reverse it. What concerns me, which is why I tabled the amendment, is the problem adverted to by the Economic Secretary in relation to the point at which the decision that a film is to be made for theatrical release is made. The original text of the Bill would have provided that that had to happen at a preliminary stage, as soon as film-making activities began. Clause 33 states that those film activities include development and so, to use the example given by the Economic Secretary on Tuesday, the writing of a book that is to become a blockbuster trilogy of films 40 years later could conceivably be considered to be development.
It would make no sense whatsoever to determine the tax status of a film at the start of the development stage. I welcome the Government’s amendment and I am happy not to press mine because theirs does an adequate job in meeting the problem outlined by me and the Economic Secretary.
On amendment No. 44, I welcome the clear indication given by the Economic Secretary that costs incurred by a third party and recharged to the production company will count as expenditure under clause 41. There is therefore no need for me to press the amendment.
There is no need to dwell any further on the amendments tabled by the hon. Member for Chipping Barnet, since she has made it clear that she will not press them. We will not call for them to be pressed either.
I also welcome the Government amendment to clause 39(3). It seems that the subsection as it stood would have created a series of perverse incentives and would have been an incentive for people to misrepresent the intentions of their film-making activities.
I will not keep the Committee too long, but I wanted to draw its attention to the word “significant” in subsection (2)(b), because the subsection states that
“a film is not regarded as intended for theatrical release unless it is intended that a significant proportion of the earnings from the film should be obtained by such exhibition.”
I would appreciate some clarification of how that can be demonstrated. It is obviously not always easy to predict the proportion of earnings that a film will generate from theatrical release compared with DVD or video release. If the Minister could clarify what the word “significant” represents, I would be grateful.
It is a pleasure to be able to give an answer to the hon. Lady. Films do not just happen by accident but are carefully planned, so we would hope that the intended outlet for the film would be clear from an early stage. That will be reflected by who commissions the film, its intended outlet, how it is made and the distribution agents that are put in place.
The Revenue will look carefully at the plans in each individual case, to see not only the intended degree of revenue but how the film will be introduced to the distributional channels. Different indicators can be brought together to allow the judgment to be made, so to set a number on the word “significant” and to make that the only test would be too narrow a view. It is much better to say, as the legislation does, that the proportion needs to be significant and that it needs to be clearly and demonstrably the case that the film is intended for the cinema. That should be a judgment made in the round based on a number of factors.