UK Film Investment (Tax Relief)

– in Westminster Hall at 11:00 am on 16 December 2014.

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Photo of Nick Harvey Nick Harvey Liberal Democrat, North Devon 11:00, 16 December 2014

I am delighted to take the opportunity today to draw the House’s attention to the serious and widespread misapprehension about the current status of the tax affairs of those who, between 1997 and 2007, invested in the increasingly successful UK film industry, at the encouragement and incentivisation of the British Government. There is a general perception, perpetuated by the media and encouraged by Her Majesty’s Revenue and Customs, that all those who invested in UK film between those years did so for the purposes of tax avoidance, rather than as genuine investments.

On 22 October this year, I raised the matter at Prime Minister’s Question Time, and the Prime Minister gave a telling response. He said that

“the things…being investigated are abuses and were known to be abuses at the time when people entered into them.”—[Hansard, 22 October 2014; Vol. 586, c. 899.]

I find that rather a worrying statement. It rather suggests that the Government have made up their mind on these partnerships, on the basis of very little evidence and next to no attempts to engage with those involved. If it is ultimately ruled that the schemes are not in order, many investors could find themselves liable for tax bills of up to 10 times their original investment. The financial stress caused by sudden and unexpected demands from HMRC is proving ruinous in some cases. I have heard accounts of marriages breaking down and people becoming sick with worry, and the consequences should be clearly understood by all those involved.

There has been no engagement with the partnerships to discuss the situation nor any attempts to engage in meaningful settlement talks, despite a settlement opportunity letter being issued to partners at the beginning of last year. Today, I would like to ask the Minister to look again at the situation and urge HMRC to bring this business to a conclusion. The lack of information and engagement has been woeful, and I would hope that in many cases, investigations can be concluded or dropped outright, or at least, that a settlement can be reached.

Photo of Barry Sheerman Barry Sheerman Labour, Huddersfield

I congratulate the hon. Gentleman on securing this debate. We desperately need investment in entertainment, culture and the arts. The one bright light of the recent autumn statement was the expansion of the enterprise investment scheme up to the full level of private investment. The opportunities for investment in film, theatre and all sorts of productions in a time of austerity is wonderful, and it would be a pity if what he is pinpointing ruined all that.

Photo of Nick Harvey Nick Harvey Liberal Democrat, North Devon

I entirely agree with the hon. Gentleman. This takes us back to 1997, in the midst of the “Cool Britannia” era, in which stars of film and pop attended parties at Nos. 10 and 11 Downing street and the then Chancellor, Mr Brown, introduced a full tax relief on investment in small-scale British films in order to encourage investment and promote growth in the British film industry.

Encouraged by a report called “A Bigger Picture” from the UK film policy review group, the Government established a 100% write-off for tax purposes on the completion of films with budgets of £15 million or less. In real terms, that meant that sale and leaseback deals for smaller films would become financially viable, vastly stimulating the market. Those reliefs were known as section 42 relief, in place from 1992, and section 48 relief, in place from 1997. They lasted for 10 years until 2007 and were arguably a large success: the size of the industry increased from £1.7 billion in 1997 to £3.2 billion in 2008; the number of films made in Britain doubled over the period and 46,000 new jobs were created.

In the Budget in March 2004, the then Chancellor was able to report on the successes of the reliefs. He said that “a minority of” third parties had abused them, but he did not see the need for an “anti-avoidance rule”, saying simply that he thought that “loopholes” needed to be closed. However, other partnerships, including the 74 Movision film partnerships, applied the terms of the Films Act 1985 and the Financial Services and Markets Act 2000 scrupulously.

The Movision film partnerships were established between 2002 and 2004, entirely in accordance with the law and with significantly different arrangements from the “minority” that was commented upon by the then Chancellor. Furthermore, the Movision film partnerships, which were established with approximately £50 million of subscription capital raised from approximately 500 partners, with an average investment of £50,000 a head, produced 13 British films and acquired another 14 British films. Those films would not have been made without the involvement of the Movision film partnerships. In the end, the partners did exactly what the Government had asked them to do; they invested in British films and claimed their tax reliefs.

Photo of Barry Sheerman Barry Sheerman Labour, Huddersfield

The hon. Gentleman is making the point brilliantly clearly. I was born in Shepperton and when I was a youngster, my family worked in Shepperton studios, and I am passionate, as he is, about the film industry. The people who misused the tax relief were a tiny minority. Most of them have done really good stuff. “The Scottsboro Boys” is a big success at the moment—one of my constituent’s sons is a star of it. This is how that production was done. Small films and big films are being produced in this way. I beg the Minister: please do not spoil that, because this is the future of the film industry in Britain.

Photo of Nick Harvey Nick Harvey Liberal Democrat, North Devon

I entirely agree with what the hon. Gentleman says. I think that this policy was a success and that one can visibly judge the tangible uplift in small film producing in Britain during the period that the tax relief existed. I think that the then Chancellor was right in March 2004 when he observed—this is widely recognised—that a minority of partnerships were abusing the tax relief, but they were a minority. This is the point: it is completely inexplicable and totally unacceptable that 10 years later, HMRC is treating the whole lot of them as though they were crooks, and when the Prime Minister gets up to respond at Prime Minister’s questions, he has in his folder a brief that says that all those involved were involved in abuse, and that they knew at the time that they were engaged in it. That is completely different from the experience of the

Movision partners to whom I have talked and of my own constituent on whose behalf I have taken an interest in the subject.

Photo of Tim Farron Tim Farron Party Chair, Liberal Democrats

Does my hon. Friend agree that the important thing is to consider the future of the film industry and particularly the young people who are involved in it? Whatever is the case, it is certainly not the fault of young people looking for a future in the film industry. I spoke to a young man—a Kendal college film student—called Emilio Methven on Friday. He did a survey of his fellow students over the weekend, and they want investment in the film industry going forward and more apprenticeships. They want the UK Government to demonstrate that in backing the UK film industry, they are going to back UK film students. They do not want a sense of there being a retrospective potential attack on the film industry that makes their future much harder to establish.

Photo of Nick Harvey Nick Harvey Liberal Democrat, North Devon

My hon. Friend makes a series of very good points. These small films are something that Britain is good at. We have an international reputation in it and the developing creative industries in this country are something that we should celebrate, and yet investment in film is an inherently precarious thing to do. If it had not been, it would not have been necessary to contemplate these sorts of tax reliefs in the first place. The reality is that this scheme was almost too much of a success. It ended up costing more in tax reliefs than had been anticipated at the outset. However, as my hon. Friend says, young people up and down the country are engaged as students and as workers in the early stages of careers in the creative industries, and it would be a very backward step if the UK Government, the Treasury and HMRC were seen to be having a crusade against this industry at the very time when we should be encouraging it further and trying to ensure that more jobs are created in this area in years to come.

Anyone who has looked at this matter will understand that a minority of those involved had, arguably, been seeking to avoid tax rather than to invest in film. There are companies—for example, Icebreaker and Eclipse 35—that have been ruled to have abused the reliefs. Rulings have been made and money has been clawed back. However, I believe that the majority, including Movision, acted in good faith, and they are now being tarred with the same brush in the eyes of HMRC, which is refusing to give them the reliefs and challenging the availability of them to those that claimed them.

HMRC’s current position is that all compliant Movision partners who entered into investment in terms of their tax returns are under inquiry for all years ending from 5 April 2003 onwards. Hon. Members will be aware of how rarely retrospective legislation is passed, yet in effect that is what HMRC is doing by applying regulations in such a way that they are having a retrospective impact on these genuine film partnerships, as they were formed and invested in before 2007, and the abolition of section 42 and 48 relief. However, the sticking point is that HMRC will not engage with the partnerships either to discuss the rationale behind its position or to engage in any meaningful settlement talks. Many of its actions could even be viewed as obstructive. HMRC’s inquiries into Movision have been going on for 10 years—since 2004. When HMRC asked Movision how it incurred

100% production expenditure on films, Movision responded in detail on 11 December 2006. HMRC did not respond to that until June 2013—more than six years later. That is completely unacceptable.

It subsequently transpired that HMRC had had a resolution discussion embargo in place from 2010 to 2013, but had chosen not to inform anyone about that; none of the partnerships was aware of it. Why was that? What was the purpose of the embargo? What benefit did it afford to HMRC or the taxpayer?

In 2013, HMRC trialled an alternative dispute resolution and found it to be successful. Following that, it offered a 55% settlement to all partners. Many phoned back and at first were told that HMRC would get back to them after 10 days. Those who phoned later were told six weeks and then two months, and those who rang after that were told that the settlement team had been disbanded—with no explanation.

Movision has made two settlement offers to HMRC: one for £2.4 million and another for £3.95 million. It was told by HMRC that its offers were unsatisfactory, but not why, which obviously makes it very difficult for it to negotiate. The latest development, in the last fortnight, is that HMRC has issued a new embargo on discussions with film partnerships if the partnership has investment in films via anything similar to sale and leaseback. Sale and leaseback is a perfectly conventional method of generating financing whereby the owner of an asset sells the asset but then leases the asset back from the inquirer, thus freeing up some capital. It is commonly used in financing films, and HMRC recognises it in its own business manuals. It is unclear why the embargo has been issued, but it will certainly delay even further any meaningful discussions.

As I said at the outset, there remains a misapprehension about film tax relief. I fully understand the importance and, indeed, the necessity of putting a stop to tax avoidance. That is more pressing than ever in the current financial climate. It is clear that a light needs to be shone on these partnerships. HMRC needs to take immediate steps to identify those who were genuine investors as opposed to those who cynically abused the tax system. The Treasury must be clear that film partnerships that applied the correct legal procedures before 2007 are and remain eligible for the tax reliefs that they were promised by Her Majesty’s Government. With 65,000 cases of tax avoidance identified and a record 27,000 tax disputes waiting to be heard at tribunal, it seems clear that HMRC should be either prosecuting or moving towards a settlement with partnerships.

As I said, for the 500 partners involved in the Movision scheme, the average individual subscription was just £50,000. We are not talking about the super-rich; we are not talking about pop stars and footballers, who are advised on how to seek opportunities for aggressive tax avoidance. With every year that passes, the impact on some of the partners, with the HMRC sword of Damocles hanging over them, will worsen. Many have already become ill, suffering nervous breakdowns and stress-induced illnesses, and have seen marriages and businesses fail. That is a very high price to pay for responding to the call of “Cool Britannia”. Furthermore, it will no doubt make investors less likely to make use of current tax reliefs to invest in industries that the Government want to grow, of the sort that Mr Sheerman suggested, and let us not forget that that is how this whole business started.

HMRC should stop prevaricating and engage with the film partnerships to resolve the inquiries. That should include the aim of either settling or prosecuting within two years, because this has already gone on long enough. I hope that the Minister will consider the steps needed to bring clarity out of the current chaos and rectify unfairness caused to genuine partnerships and investors.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury 11:16, 16 December 2014

It is a great pleasure to serve under your chairmanship, Mr Crausby. I thank my hon. Friend Sir Nick Harvey for securing the debate. It had two key and linked themes: investment in the film industry and concerns about tax avoidance. On both those issues, the Government have a strong, clear message. We of course strongly support the UK film industry and want to encourage genuine investment in film, but equally—and unapologetically—we condemn the use of tax avoidance schemes. We want low taxes and a competitive regime, but we expect those taxes to be paid.

We have in the United Kingdom a vibrant and successful film industry, of which we should be proud. In the past three years, employment in the creative industries has grown at five times the rate of the wider economy. The past year has seen film and television production in the UK boom, with, to pick names at random, “24” being filmed in London, “Outlander” in Scotland, “Da Vinci’s Demons” in Wales and “Game of Thrones” in Northern Ireland.

It is right that as a Government we lend our support to those who want to invest in the industry. We now have a robust corporate film tax relief, which was expressly designed to minimise the risk of tax avoidance and which has been in place since 1 January 2007. The new relief goes straight to those making films—in other words, it is the production company that gets the direct benefit of the regime.

The new regime has proved very successful in attracting inward investment. It is highly popular with film-makers and has helped to make the UK one of the top film-making destinations in the world. Since the film tax relief was introduced in 2007, 1,680 film productions have become eligible to claim the new relief, and total production expenditure by films claiming the relief was £7.8 billion, of which 72% was incurred in the UK.

As a Government, we have made the relief even more effective. From 1 April 2014, we increased the rate of relief for larger budget films, reduced the level of minimum UK expenditure and modernised the system of film tax relief qualification. To ensure that our creative industry flourishes across sectors, we announced in the autumn statement that we would introduce tax relief for children’s television and for orchestras.

With regard to the concerns raised by Mr Sheerman and by my hon. Friend Tim Farron, I should say that we have a successful record in this country. The existing film tax relief is working well and continuing to attract investment to the UK. I am pleased to confirm that there has been no reported avoidance activity with the new film tax relief.

Photo of Barry Sheerman Barry Sheerman Labour, Huddersfield

I hope the Minister takes the point that those of us who have spoken in the debate do not agree with tax avoidance, which is carried out by a minority. We are at a critical stage, having had such good news in the autumn statement—Opposition Members do not often congratulate the Minister on such things—about raising the social investment tax relief scheme to a much higher level, and about the seed investment scheme. The Minister knows that I am very keen on crowdfunding and crowdsourcing, and we are seeing a new beginning when it comes to vibrant theatre and social investment across our country. The Minister must not send a message in his response to the debate that some of that might be seen as tax avoidance. We are talking about social investment and investment in our arts, and it is to be welcomed.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

The hon. Gentleman is nothing if not consistent; I have never known him to fail to take the opportunity to extol the virtues of crowdfunding and some of the other measures that we are taking. The point that I am making is that we have a film tax relief system that is working well and attracting investment. Nothing in what I am about to say should undermine that.

Our system is working, but I cannot, unfortunately, say the same about all investment under the film relief that was in place before 2007. The old relief was heavily exploited by partnerships of wealthy individuals. Typically, they sought to obtain tax relief out of all proportion to their economic investment. Many schemes used artificial and contrived arrangements to create excessive tax claims. In short, investors abused the relief to try to dodge paying their fair share of tax.

My hon. Friend the Member for North Devon argued that the old legislation was working well. The previous Government took significant legislative action over a number of years to try to prevent the various forms of abuse that were occurring, but they concluded in 2007 that they had to scrap the old regime and replaced it with a much better scheme that now works. HMRC is actively investigating and countering schemes under the old regime about which it has concerns.

Photo of Nick Harvey Nick Harvey Liberal Democrat, North Devon

I am not dissenting from the Minister’s proposition that the post-2007 arrangement has been better than the arrangement that ran for the previous 10 years. Nor would I take issue with his assertion that there was some abuse of the previous system. However, when he says that investors used those schemes for the purposes of tax avoidance, is he seriously contending that every single investor who availed themselves of a tax relief that the Government had created was doing so for tax avoidance purposes, or does he accept that there were good and bad among those investors? Will HMRC please do more to distinguish between the two?

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

HMRC is not taking a blanket approach to all such schemes, and I will return to that point in a moment.

It might be helpful if I set out some of the problems with the old regime. At the extreme, the situation was so bad that some films were produced solely for the purpose of avoidance schemes, and they were never destined for release beyond the minimal qualifying requirements. Other schemes involved genuine commercial films, but the structure of the financing was designed to generate tax relief in excess of the scheme user’s genuine economic investment. Alongside the schemes that used the relief, other avoidance schemes were created that happened to use films as the avoidance vehicle of choice, even though they did not rely on the specific film relief.

Everyone should be clear that the use of films for tax avoidance is bad for the reputation of the UK film industry. I suspect that there is no dispute among us on that point. Such avoidance is unfair on the vast majority of the public who pay their fair share of tax, and it is correct for HMRC to tackle avoidance in whatever form it takes. HMRC has a strong track record in the courts, winning about 80% of tax avoidance schemes that go to litigation. In 2013-14, HMRC’s 30 wins protected some £2.7 billion of tax. HMRC has a strong track record of defeating film schemes in court. It is right for HMRC to challenge avoidance schemes, because that is its job, but it has not taken a blanket approach of opposing all schemes that involve the old film tax relief. If someone believes that HMRC’s view on a scheme is wrong, they can take the matter to the courts for a decision.

My hon. Friend the Member for North Devon has raised the concern that HMRC has not always worked the case properly. I cannot comment on specific cases or schemes, but let me reassure him that the resolution of existing tax avoidance schemes is a top priority for HMRC. During the past year, HMRC has created a dedicated counter-avoidance directorate, bringing together technical, policy and operational expertise from across the Department in one place to concentrate focus on tackling marketed tax avoidance. The Government have consistently supported HMRC’s work to counter marketed tax avoidance by introducing new legislation and investing in its resources.

That brings me to this year’s Budget, in which the Chancellor announced that from 17 July 2014, individuals and businesses involved in tax avoidance schemes must pay HMRC the disputed amount of tax up front while the dispute is being resolved. That new power, which is called accelerated payments, came into force as part of the Finance Act 2014, and it removes the cash flow advantage that those who deliberately try to bend the tax rules by avoiding tax previously had over the majority of taxpayers who pay their tax up front.

I am pleased to say that the collection of tax from avoiders has accelerated enormously since the introduction this year of accelerated payments, and avoiders have already agreed to pay more than £30 million since Parliament introduced that measure. It is quite right that the users of avoidance schemes involving films or film relief should also pay up front.

Photo of Barry Sheerman Barry Sheerman Labour, Huddersfield

Can we send the message to HMRC that although it must catch the rascals and make them pay, it needs to be more discriminating? If it is not, we on the Back Benches will put a lot of attention and focus on to making sure that it becomes so, to ensure that people who have innocently invested are not picked on. We have many powers, through Select Committees and from the Back Benches in Question Time, to keep our eye on HMRC and ensure that it does the job properly.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

I am sure that that point has been noted, and I do not disagree that HMRC must pursue those who have engaged in tax avoidance and not pursue those who have not. However, an important part of HMRC’s role is to pursue tax avoidance thoroughly. It would be inappropriate for me to comment on any ongoing litigation, but I stress that neither accelerated payments nor any other HMRC action to tackle avoidance will stop genuine investment in UK films.

The UK film industry goes from strength to strength, supported by a successful, avoidance-free film tax relief that goes directly to film producers. We want to continue to support investment in the UK film industry so that it can grow. Tax relief, properly due, has an important place in helping to provide that support. As the hon. Member for Huddersfield has made clear, further announcements of such support were made in the autumn statement. Tax avoidance has no place in a modern film-making environment. The UK has a hard-won reputation for world-class creativity, but we want that to be expressed in the creation of films, not in the creation of tax avoidance schemes.

Sitting suspended.