(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38) - Clause 98 - Films: restriction of relief to films genuinely intended for theatrical release

Finance Bill – in a Public Bill Committee at 10:30 am on 18th June 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 10:30 am, 18th June 2002

I beg to move amendment No. 86, in page 75, line 3, after 'release', insert 'or constitutes long-form drama'.

Photo of Joe Benton Joe Benton Labour, Bootle

With this it will be convenient to take amendment No. 87, in page 75, line 19, at end insert—

'(d) ''long-form drama'' means a production of a duration of 60 minutes or more in total, shot to cinematic standards, of single or short episodic type with a budget in excess of £600,000 per hour.'.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

As the Committee will be aware, clause 98 restricts the reliefs for expenditure on the production or acquisition of British qualifying films solely to those intended for commercial cinema release. The tax relief was originally introduced in 1997. We obviously all want the British film industry to prosper, but we want other industries to prosper as well. There was a general view when the provision was introduced that the tax incentives were potentially over-generous and—dare I say it—intended for interest groups not that far away from the Labour party.

The tightening-up amendments are somewhat flawed. First, there are several outstanding contracts in relation to films being made for television where money and other factors are already committed. It is against principle to change rules in the middle of that. Secondly, in ruling out all television productions, there is the issue of expensive and serial productions. Amendments Nos. 86 and 87 are designed to retain the tax incentives for long-form dramas. Amendment No. 87 defines a long-form drama as

''a production of a duration of 60 minutes or more in total, shot to cinematic standards, of single or short episodic type with a budget in excess of £600,000 per hour.''

I would describe such a drama as a type of production such as ''The Jewel in the Crown'', which, although made for television, was a valuable export and not a minor production. I will deal with the other aspect in clause 88, but amendments Nos. 86 and 87 are designed to question whether the Government want to rule out even serious, major television serials.

Photo of John Pugh John Pugh Shadow Spokesperson (Education)

This is another example of the Treasury trying to make things happen. Not content with bean counting, an objective of the Treasury now is to encourage cultural development. Historically, Governments have had two routes by which they can do that. They can make things happen by negotiating with other Departments, such as the Department for Culture, Media and Sport, and

releasing money to Departments and agencies to stimulate growth, in this case in the creative film industry. They can release immense largesse, but in those circumstances, they are always unsure as to how the money will be spent.

That particular route raises questions such as whether the DCMS is the appropriate organisation to stimulate the film industry, and whether it has the capacity to make the right judgments or is involved in micromanagement of an industry that it may not perfectly understand. None the less, we are aware that much Government thought goes into stimulating the creative film industry, and not just Government thought, but that of Government agencies such as the Welsh Development Agency, the Scottish Parliament and so on.

There is a variety of different initiatives taking place within the different regions of England and the different countries that make up the United Kingdom. I wonder what assessment the Treasury has made of the different levels of support, whether it is assured that economic aid is wisely used in the best way, and whether there is a similarity in the different levels of aid across the United Kingdom. However, I am fully confident that the route that I have just described is not the route that the Treasury prefers to use to produce the desired product. It has always preferred, and seems increasingly to prefer, route two: to create a fiscal environment in which an industry—in this case the film industry—may thrive. The Treasury prefers that, I think, because it enables it to have a level of hands-on control of the process that might be left to other Government Departments.

The argument against that route is that the levers that the Treasury ends up using are not sufficiently sophisticated. That is certainly proved here, where several issues of selection arise. In one sense, the Government have been selective—they have singled out a particular industry, as the hon. Member for Arundel and South Downs (Mr. Flight) has just pointed out. They have given benefits to one particular sector of creative industry as opposed to another. However, there is an argument that they have not been selective enough. The first experience of the fiscal benefit has been that a number of enterprises, such as soaps, have benefited, which was never the Government's intention. We here have a tightening up of the fiscal regime so that the Treasury can achieve whatever it understands its objectives to be.

The Treasury is then assailed by the objection that it is being too selective. Equity and other such organisations have pointed out that long-running and entirely creditable enterprises that do not end up as a fully fledged film are excluded, but should not be.

My general conclusion, and that of my party, is that the Government are here very unclear about what they want to achieve. I would appreciate some clarification from the Paymaster General about what they intend to achieve, how far they feel that they have yet achieved it and how they will extricate themselves from the position—something of a muddle—that they have got into. I should also like to ask the Paymaster General whether, prior to producing these changes, the Government have assessed the efficiency of the

changes already made and how the changes in the tax regime have married, or complemented, the various supports that the film industry receives from other Government Departments.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

Good morning, Mr. Benton, and welcome back to the Chair.

I support the amendments, and commend my hon. Friend the Member for Arundel and South Downs for them. In tabling them, he has highlighted an extremely important issue. While I fully understand the Government's aspirations to ensure that the reliefs provided to the film industry do indeed support the film industry and cannot be used to support the television industry, which is not noticeably short of money, the practical reality is that the film and cinema industry is very different from what it was, even 10 years ago. We are seeing a continual growth in the number of formats and different outlets for creative works. We are seeing the expansion of DVD and will increasingly see the development of online services. My hon. Friend's use of long-form drama as a vehicle on which to focus the reliefs provides important support to the independent producers who are producing high quality cinematic-standard material but who might ultimately use different forms of distribution to earn money from their work.

The amendments provide a sensible balance between meeting the obvious requirement to ensure that reliefs are limited to providing the proper support to the creative sector in this country for which they were intended, and ensuring that we do not focus exclusively on a format that, if still the most important outlet for major works of that kind, represents only part of the market in today's world. For many productions, that format does not represent the market at all.

I hope that the Paymaster General will support the amendment. It will help to clarify the law and to give support to an important part of our creative sector.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Good morning, Mr. Benton.

In response to the amendments, I start by saying clearly to the Committee that the relief was not put in place to recognise the different ways in which films are distributed, but to recognise risk, particularly different production risks. Before I respond to the amendments, I shall quickly remind the Committee why the relief was introduced, and of the purpose of the clause.

The clause restricts film tax relief for British qualifying films to films made for the cinema. That was the original intention of the relief, which was clearly stated in Committee and in all drafting. It will end the heavy misuse of relief by television programmes of all descriptions, including soap operas, game shows, makeover programmes, reality television and so on; however creative that industry is, and however much we respect it, such programmes are not, by any stretch of the imagination, films intended for cinema release.

The main relief was introduced in 1997 and was aimed specifically at pump priming the production of low-budget British cinema films. We were prompted

by the evidence of the Middleton report, which focused on the structural problems in the film industry that make it difficult for British film makers to find a market for their films and get them screened. I shall return to that problem because it is crucial.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman has already asked a question, which I should like to answer by explaining to the Committee what we are doing. I shall then be happy to give way to him.

I am a little perplexed by the hon. Gentleman's contribution. The hon. Member for Kingston and Surbiton (Mr. Davey) said on the Floor of the House when the measure was announced in the Budget debates that the Government were doing precisely the right thing because an outrageous abuse of relief was going on; the Liberal Democrats supported the Government.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I will have to first give way to the hon. Member for Southport (Dr. Pugh) if I am to give way at all.

Photo of John Pugh John Pugh Shadow Spokesperson (Education)

I concur with my hon. Friend the Member for Kingston and Surbiton that an abuse is going on, and that we want it cleared up. Has the loss to the Exchequer owing to that abuse been quantified?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Yes. If the hon. Gentleman looks in the Red Book at the income generated as a result of closing off the relief, he will see that the projected savings to the Exchequer are in the hundreds of millions. The relief, which was for use in a limited number of circumstances, originally cost £30 million; however, a time lag occurs in the claiming of that relief. Last year, and during the current financial year, there has been a sudden and massive growth in the use of relief as a direct result of television accessing it, which was not the intention.

I could refer the hon. Gentleman to the Red Book or to the savings figures. I assure him that we are not talking about tens but hundreds of millions. The relief was not designed to be a subsidy to television companies.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

I almost regret intervening on the Paymaster General, as I simply rose to be helpful. My recollection of Second Reading—perhaps the hon. Lady remembers too—is that the hon. Member for Kingston and Surbiton was in favour of abolishing the relief in its entirety. As the hon. Lady said, such comments strike a jarring note.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Indeed. I am very grateful for the hon. Gentleman's prompting. I was saving that point in case I needed it later in the debate, but now it is on the record.

On behalf of the Liberal Democrats, the hon. Member for Kingston and Surbiton said that his party did not support the relief in the first place. It beggars belief that we should analyse something that it thinks should not be there.

The most important point concerns structural problems, risk and films being made for the cinema. As far as we can see from the substantial evidence that has been presented to us since we announced our intentions in the Budget, TV productions do not encounter the same problems as cinema films. A typical TV drama series is made by commission from a broadcaster and its producer has a guaranteed customer and income. The Government believe that in such cases the relief has been used not at all as originally intended. Producers have accessed tax relief in order to reduce the price paid by the broadcaster, which is not acceptable to the Government. There is no justification for TV's use of special incentives that are designed to support the British film industry, and the clause is designed to stop that happening.

The amendment moved by the hon. Member for Arundel and South Downs addresses the question of what he describes as high-value TV drama. Since the Budget announcement, we have received a number of representations from the industry to retain relief for high-value TV drama. If high-value TV drama is defined by a clear principle, it is interesting that suggestions from the industry as to what it is have ranged from dramas costing £600,000 an hour to those costing £1.5 million an hour, which shows that the industry has not formed a consensus on what it is and what sets it apart from other TV dramas. If the argument that high-value TV dramas face risks and structural problems similar to those of films is going to be advanced, we would expect the industry to have a clearer definition of what constitutes high-value TV drama.

I should say very clearly to the Committee that the Government accept that high-value TV drama is often made at the same facilities by the same technicians as cinema films. We also recognise that that type of production attracts inward investment of about £150 million a year and operates in a very competitive environment—as do many other industries. The question is, of course, why we should make an exception here, and those factors by themselves are not enough to justify special tax incentives.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health) 10:45 am, 18th June 2002

Has the Paymaster General given full consideration to the fact that although TV producers normally have, as she mentioned, guaranteed revenue, many TV groups that are independent from the broadcasters invest in their own right in productions to sell around the world without guaranteed contracts? Does she accept that such TV groups are facing challenges in some marketplaces from producers that have tax reliefs? Did she assess the competitive position of such organisations in the international markets before drawing her conclusions?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

We have considered the question of films and productions, the rights for which are sold elsewhere, and if we were to receive clear information on that we would be prepared to consider it further. However, the problem is that one would end up with a huge range of reliefs, because the distinction cannot necessarily be made on the basis of cost per hour in production. For instance, there could be a debate

about whether television drama that is made in a particular way or sold in a particular market should also be considered for assistance. The case for such relief would have to be made separately. On behalf of the taxpayer, the Government would have to make a judgment on whether using a relief on a scale that was not intended was a sensible expenditure.

The problem with approaching the matter in the way that the hon. Gentleman suggested—he is right about the diversity of production—is that we could end up with a totally unworkable relief and an open door for any claim. For instance, my understanding is that relief was not claimed only for productions of high quality television drama; it was claimed per episode. That is just not on. It is not as though the industry was not warned that that was not the Government's intention. Therefore, if the relief has been spoiled, if there are those who cannot now get access to the relief although their claims might have been justified previously, they must look to their own industry. If the assistance is not sensibly administered, the Government cannot be expected to sit by while huge amounts of revenue are used. Frankly, we have other, higher priorities for the money.

We are discussing high-value drama, particularly the big-budget television series made by multinational producers, not the smaller producers that the hon. Gentleman mentioned. From all the evidence, it is clear that they are not subject to the same structural and commercial constraints. Therefore, relief is not justified, as the risk is not the same. We continue to consider the question of high-value dramas, but the industry must demonstrate clearly that the risk, structural problems and use of the infrastructure are the same, before we would reconsider our decision that access to the relief is for cinema production only. That has not been demonstrated yet. Therefore, the Government are not minded to consider any exception on that basis. If the case were made, I would certainly reconsider the decision.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

May I give the Paymaster General an example of a case in which the legislation might actually cause problems? Increasingly, authors are publishing their first works on the internet. With the arrival and substantial spread of broadband, it is perfectly conceivable that smaller companies might produce low-budget movies and try to provide access to them through online means rather than through the cinema. They would be excluded from benefiting from any of the reliefs, were they to do so. My fear is that the change that the Government propose would actually close avenues of creativity for the smaller producers in a way that perhaps would not be desirable.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I understand the hon. Gentleman's point and acknowledge that he is experienced in such matters. However, he will understand, not only because members of his party constantly point it out to us, that the complexity in trying to deliver a relief in specific circumstances as proposed by the amendment would lead to pages and pages, we fear, of legislation and we are not sure how much added value, in terms of assistance, we would be able to provide. Because of our experience with the

relief, our particular fear is that if the Government try to be of assistance, we will find that, in the words of the old adage, we will give an inch and they will take a mile. Here, people have taken a million miles from the intention. There are times when Governments of all political persuasions must say, ''No, that was not the intention.'' Our patience and interpretation of the relief are being stretched to breaking point, and we shall return to the original intention by closing off the places where we see abuses taking place.

The £600,000-an-hour limit that the hon. Member for Arundel and South Downs suggested in the amendment would exclude soap operas from the relief, but would include a lot of what we consider to be the more ''ordinary'' television dramas—if anyone is a fan of them, as I am, I hope that they will excuse me for calling them that. I enjoy watching such dramas, but they should not necessarily be within the scope of the relief. They are far removed from the films that were originally intended to fall within its scope, however much viewers enjoy them.

That type of product should not, in principle, be able to obtain the film tax relief, so I am not prepared to accept the hon. Gentleman's amendment. In particular, I must say to him that given current behaviour, what appears to be, and what I am sure he thought was, a modest suggestion runs at an Exchequer cost of £150 million in 2003–04. That is just not acceptable. On that basis, I hope that he will agree not to press the amendments and will tell those whom he knows in the industry of the seriousness of what has gone on and the Government's resolve to stop it, and implore them to focus specifically on the question of risk and whether the risks of such television productions are really the same as those involved in making a film. If that case can be made, the Government still have time to consider it and I would be prepared to do that. However, we are not prepared to consider providing a relief to those whom we never intended to include in the remit of the relief and who are not so included.

Photo of John Pugh John Pugh Shadow Spokesperson (Education)

It is always a pleasure to be patronised by the Paymaster General, so perhaps I can give her another opportunity. In saying that the Government will make savings of at least £100 million, has she not acknowledged that the Government have already lost hundreds of millions by poor drafting? Is it not appropriate at this point to blame not only those who have abused the legislation but those who possibly framed it inadequately? Part of the burden of blame must lie there.

Dawn Primarolo: I find that patronising a Minister is never a good way to bring them round to an hon. Member's way of thinking. Of course, there is a risk for any Government when they draft legislation. The previous Government had the same problems, for example with profit-related pay. Governments draft legislation on the basis of good will, understanding and agreement that they wish to encourage a specific activity. Unfortunately, there are those who then take it beyond its intention, in tax planning. That is also the nature of complex anti-avoidance legislation. If every

time that the Government introduced legislation, it had to be accompanied by massive anti-avoidance clauses, the Committee would find its job even more difficult.

I would also say to the hon. Gentleman—this may be a little old fashioned—that the Government acted in good faith, and we believe that that faith has been breached. We know that in the industry, those who were using the relief knew that they were on borrowed time. We have had extensive discussions with the representative bodies. There is an important issue concerning British film makers and risk, particularly for low-budget British films, and what we can do to assist them. We have left that assistance in place. However, we cannot allow the current situation to continue.

I would say finally to the hon. Gentleman that if Governments are not prepared to act to encourage what they believe is of use and a good contribution, and if the Treasury only ever operates on a dead cert, when it knows that it totally controls the situation, an awful lot of current legislation would not be on the statute books. We do not see similar scales of abuse elsewhere, and we will not tolerate it in this instance. I hope that the hon. Gentleman can see that I do accept that if the matter can be settled, there may be an issue concerning the high-value dramas. We have not been able to settle it thus far, but if the point of risk can be satisfied and the structural issues resolved, I would certainly be prepared to consider it.

The wider points raised by the hon. Member for Epsom and Ewell (Chris Grayling) may be the subject of a future debate about the changing nature of the creative industries and whether the Government should be involved in that area. That would be a detailed and long debate, which I look forward to his pressing on the Government in future. It is not the right place or time to do it now, however.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster 11:00 am, 18th June 2002

I wish to make a brief contribution to the debate. I confess that I have considerable sympathy with the Government's position on tightening up on the eligibility for tax relief in relation to United Kingdom film production. It is perhaps the case that the Minister has put forward the armageddon scenario that £150 million of taxpayers' money would be swallowed up by a vast array of television and other industry bodies, if that tightening up did not take place. None the less, the point has been relatively well made.

One of the great concerns that we have expressed, which is one of the reasons that we have tried to tailor a sensible compromise in relation to the amendments, is that it is difficult five, seven, eight or nine years after these provisions were put in place in the Finance Acts to ensure that the British film industry had some sort of encouragement to entirely qualify what we were trying to achieve. I know that it might be said that the provision was supposed to be entirely narrowed to encourage the British film industry, but several of my hon. Friends have made the valid point that the

entertainment industry is now much more interdependent and interlinked.

I fully appreciate the Minister's point that the direct intention was not to allow—dare I say it—second and third grade television programmes to benefit from such reliefs, but it is probably the case that the reliefs put in place initially were envisaged to encourage the film industry in the broader sense. Therefore, there is a risk that without amendments of the sort that we have proposed for high quality long-form drama, some of the product that was envisaged to benefit from the provisions when they were introduced in the mid–1990s will now fall outside their remit.

Much of the British film industry is based in my constituency, in Soho and the west end of London. It is fair to say from the indications that I have had from the industry, which has clearly lobbied the Treasury not just in the last few months but, I suspect, fairly continuously during recent years, that most of the feedback about the proposed changes has been pretty positive. It would be a disaster for the film industry if the Chancellor, or a future Chancellor, felt that the whole system was being abused and decided to draw a line through the whole thing and say that the film industry should have no benefit whatever given the abuses that are open to it, which would obviously not be the right way forward. The film industry reaffirms the support that Governments have given to it by reducing its costs under the Finance (No. 2) Act 1997 and the Finance (No. 2) Act 1992.

Restoring the credibility of the entire scheme is at the forefront of the Government's proposals, and there has been ongoing lobbying from the Film Council and various film bodies. Outside the confines of the amendment, there are other narrow concerns that the Paymaster General will wish to address at some point during the debates on this clause and clause 99. It is important to re-focus the tax relief, but we need collectively—I accept that this is ultimately a Treasury decision—to consider what we are trying to achieve. In relation to both these amendments and similar ones that we may propose in future, the fast-changing world of the entertainment industry may make it too difficult to tailor relief.

I appreciate that the real risk is that the amendments are not watertight, and if they are not we run the risk of the abuse to which the Paymaster General earlier referred.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

First, I agree with the hon. Gentleman that the Government are maintaining the commitment to support the film industry in the original relief.

Secondly, I want to remind him that the Red Book's scoring shows that the measure will save the Government £225 million in 2003–04 and £295 million in 2004–05. Those are not insubstantial figures. Although I am prepared to look at the issues that the hon. Gentlemen have raised, I must say that that is a lot of money. To give that money back inadvertently by providing other reliefs would not be acceptable, and we need to concentrate on that point.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I accept the Paymaster General's remarks. However, it strikes me that the intention,

which goes back some years, is to produce high quality product that is predominantly, if not exclusively, British. If we take too narrow an interpretation we shall run the risk of high quality drama going overseas, which would be bad news for not only the film industry but the whole entertainment industry in the UK.

It sounds as though the Paymaster General is unlikely to support the amendments, but I hope that we can keep an eye on the situation in the years ahead. If there is a real risk over and above the day-to-day special pleading that any industry puts forward and there is real evidence that we are losing a significant amount of business overseas, and in particular to the nascent and fast-growing eastern European film production market, we would want to look at the matter again to ensure that the intention to promote high quality film product in this country is maintained.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

First, I am sorry to tell the Paymaster General that I do not have lots of friends in the film industry, which is not territory that I know very well. I suggest, perhaps cheekily, that her colleagues will have more friends in the film industry than me.

No one wants tax incentives to be used unnecessarily when production risks are not there. In 1997, we suggested that the incentives were more generously drafted than was necessary. Although it is fine to blame the industry, it is fair to say that if one uses such incentives, there is little sense in not crafting them to achieve specifically what one wants; otherwise they will be abused, as the Paymaster General said.

I am glad that the hon. Lady has recognised the issue to which the two amendments refer. My understanding is that the original purpose of the relief was to generate new economic activity in the UK film industry. The amendments refer to long-form drama, which is very much a part of the industry, and there is a danger that much of it will leave the UK if it is cut out completely. Therefore, I bowl it back to the Government to try to craft with the industry what, if anything, they feel is appropriate to address the issue that the amendments raise. That was their intention.

It is accurate and fair to say that the incentives are designed to encourage those parts of the industry that have production risks, not just films for cinemas. I may be completely out of date, but I repeat my earlier point that ''The Jewel in the Crown'' was the best thing made by the British film industry at the time and for a long time afterwards. I recollect that that enterprise was actually very high risk. I hope that productions such as that, some of which may be more deserving than some stuff made just for the cinema or theatre, will be considered.

I believe that the Government understand the point and seek to address it. I do not know whether the amendment is too wide fiscally, but I shall take the Paymaster General's word on that and hope that she can solve the problem.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am grateful for what the hon. Gentleman has said. I hope that he understands that I shall continue to consider the matter until the Bill returns to the House. I have tried to explain clearly the major issues that must be settled.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I understand and accept what the Paymaster General has said. Let us hope that she and the Revenue can craft something that meets the point without costing too much. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I beg to move amendment No. 88, in page 75, leave out lines 30 and 31 and insert—

'unless before 17th April 2002 expenditure has been incurred on a film or a binding commitment to incur expenditure on a film has been entered into, in either case or in aggregate representing more than 20 per cent. of the budgeted cost of the film.'.

The amendment is about an issue that has been raised by those in the industry and in the accounting profession. The Bill could produce retroactive effects of cutting off incentives in midstream for productions for which contractual commitments have been made, because they become non-qualifying. Clause 98(4) provides that the restrictions apply to all films

''(a) completed on or after 17th April 2002, or

(b) completed before 1st January 2002 but not certified by the Secretary of State before 17th April 2002,

unless an application for certification was received by the Secretary of State before 17th April 2002.''

Section 42 of the Finance (No. 2) Act 1992 permits two or three years after the time that the expenditure arises to make a claim, so the exception should not have wide application. However, some film makers—the Government will be aware of them, as some high-profile figures have been banging on their door—have incurred expenditure, entered into binding commitments to incur expenditure or concluded financing arrangements on the basis of the wider relief that had effectively been in place, even though the Government may not have intended it, until 2 July 2005.

Therefore, there will be some contractual messes resulting from the retrospective nature of the changes to tax relief. Projects were appraised and commitments made but, clearly, some projects might have been rejected in the absence of wider tax relief. In moral terms, the Paymaster General could say, ''Naughty boys! You were not doing what we wanted you to do''. They were, however, doing what the law permitted them to do. Unfortunately, a principle of our tax system is that the moral argument does not matter if the shutters come down after commitments have been entered into.

As I commented earlier, perhaps the Government have done their homework and found out the number of people who will be affected—perhaps it will be few. However, if there is no major financial exposure, when and where the shutters come down should be reconsidered.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health) 11:15 am, 18th June 2002

I support the amendments moved by my hon. Friend because production companies sometimes live on a wing and a prayer in cash-flow terms. Financing major productions, paying the bills on time, getting revenues in, selling products and getting them into the marketplace and generating

income give regular nightmares to accountants in the business.

The amendment addresses the unwelcome shock in the clause. The Paymaster General is right to point out that the industry has had indications for some time that the Government were minded to make changes, but productions have nevertheless begun and work is under way that have factored in the relief; if they lose it, the knock-on effect on the cash flow of businesses producing films could be significant. The very survival of a production company could be undermined by the shock generated by the sudden loss of relief mid-production. I hope that the hon. Lady will take on board a sensible amendment that would ensure that damage is not done to current commitments while achieving the objectives that she set out.

Photo of John Pugh John Pugh Shadow Spokesperson (Education)

I support the amendment. We could have a debate on whether the fault lies with the drafting or with those that have abused the relief. Regardless of whether people have kept in line with the spirit of the law, or have second-guessed its intentions, people will have embarked on enterprises and, in some cases, engaged in contracts with others who depend on their services. As a matter of moral principle, people who have made an honest error about future legislation, but who have acted thoroughly and according to the letter of the law, should not be penalised. The amendment should therefore be supported.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

I want to speak in support of the amendment moved by my hon. Friend the Member for Arundel and South Downs.

To cut relief off in midstream, as the clause appears to do, will cause damage to the film industry. The Paymaster General referred to sending out messages about the abuse of relief, but we should bear in mind the section 48 relief, which is the one that some production companies have abused. My hon. Friend the Member for Cities of London and Westminster (Mr. Field) referred to the creative sector being based in Soho; I also suspect from the way in which the relief has been abused that the creative sector also rests in the City.

The original relief was set up for three years, but was extended in last year's Finance Act before the election until 2 July 2005, so it was legitimate for companies to plan—notwithstanding the messages that the Paymaster General may have given out—that productions in progress would benefit from the tax relief. It is therefore unfair for such a relief to be removed in midstream. We should recognise that companies were perhaps led to believe that tax relief under section 48 would continue for some time, and that any productions in progress would receive it. Suddenly to withdraw that tax relief at this stage will, I think, damage the film production industry as well as the companies that produce such a diverse range of outputs as quiz shows and the reality television shows to which the Paymaster General referred. Removal of the relief in midstream is the wrong measure to take. I hope that the Government recognise that and accept the amendment.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Before discussing the amendment specifically, perhaps I can answer the hon.

Gentleman's point about the extension of the relief in 2001. At that point, the relief had been running for less than four years and as the film industry was labouring very hard, the relief has been very helpful to it. It takes years to make a film, for the financing to be finalised and for the profits to come through and I know that the hon. Gentleman will understand, from his experience outside the House, that there was a time lag before we saw that the relief was moving into areas where we had not intended it to apply. That is precisely why we felt that we had to move now and why the figures in the Red Book for the relief that will not be paid if the relevant clauses are passed seem suddenly so high.

The question of transitional relief is worthy of consideration. I want to explain the Government's attitude to the amendment and to transitional relief proposals. We have received much representation since Budget day that revolves around programmes already in production. We have some sympathy with producers who have contracted to make a drama for firms who have factored the tax relief into their budgets. However, there are considerable difficulties in constructing a transitional relief that can be limited to circumstances in which it would not be abused.

I shall explain what the problem was in the way in which the relief was being misused. As I said earlier, television production companies make programmes on commission from a broadcaster for an agreed amount. When the series is completed, the producer certifies it with the Department for Culture, Media and Sport as a British qualifying film. The producer then does a sale and leaseback deal with a third party, normally a film partnership. The third party takes the tax relief on the purchase of the film, and a proportion of the tax relief is then passed back to the producer through the leasing structure. That is the crux, relating to the point that the hon. Member for Fareham (Mr. Hoban) kept making about contractual relationships. Normally, there is no contractual agreement with the third party until the film is completed. That is the mechanism that caused all the difficulty.

The new rules apply to films completed on or after 17 April. That means that a producer with a series in commission on 17 April will not be able to use a tax-based sale and leaseback deal when the series is completed. If I may try to describe the situation, that part of the deal is not yet in place. There is no contract. It is not as simple as saying that there was a complete contract and that the producer had made commitments and already taken a substantial risk in agreeing to sell a programme, while not knowing whether their costs were covered until the end of the production when the programme had been sold and worked its way through the system. By any stretch of the imagination, that is not what we intended to happen.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

Will the Paymaster General consider a situation in which, for example, a production company has entered into a contract with a broadcaster to provide 40 per cent. of the cost of a production relating to its sale in one country, perhaps with overseas sale providing additional revenue? In such cases, a chunk of the budget is often speculative

because the producer hopes to sell the programme on the international market. That producer will have factored into the equation the likelihood of receiving the relief in some shape or form at the end of budget and will have contracted artists, camera crews and so on for half the cost of the production. Then 17 April arises and that company is up a gum tree.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The problem is how to provide transitional relief. The hon. Gentleman referred to a contract to produce with everything in place and that would be a hook on which to hang it. However, if the producer has sold the programme, apparently for less than it will cost to make, the final contract that brings the relief is not determined and that creates a problem in providing transitional relief. I shall go a little further in explaining the difficulty. It is the way in which the relief is used that makes it so difficult to work out whether transitional relief would be appropriate.

We could have delayed the date of commencement long enough for all those series in commission on Budget day to be completed. We could have delayed until the end of the year, but that would have allowed every TV programme or series completed in 2001 to qualify for the relief and that is not our intention. If we just changed the date, the extension would include the soaps, game shows, makeover programmes and so on and the Government would lose virtually all the estimated savings of £225 million in 2003–04, and that is assuming that the relief was used only by those who would normally expect to use it and not by those who might decide to move everything forward because they had been given notice of what would happen. Announcing in advance that the relief will change would have an effect on behaviour in terms of bringing forward commissioning to include it within the definition. That could cost us more, which would be bizarre. Producers might certify even more programmes with the Department for Culture, Media and Sport in 2002 to acquire a stock certificate product that they could use for sale and leaseback then or later.

We considered those issues and decided that the risks were too great. Those risks are replicated in the amendment and we could not see a way of dealing with the commencement date. I am sure that the hon. Member for Epsom and Ewell would have argued the other way if we had done away with the relief because it was being misused and then provided for it to continue.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

May I finish my point before giving way?

Having said that, I recognise that the commencement date causes particular difficulty for producers who, on Budget day, were locked into an arm's length contract with broadcasters to make dramas for sums that anticipated a proportion of the budget coming from sale and leaseback when the series was completed. I am not unsympathetic to that problem and am struggling to respond to it without losing revenue to the Government.

The Revenue have had extensive and constructive discussions with the industry exploring whether a targeted transitional relief is feasible in those circumstances. The main stumbling block is the absence of any contract between the producer and the eventual buyer on Budget day that would allow relevant programmes to be identified in law and practice.

The only evidence of an anticipated sale and leaseback is the arithmetic of the fee agreed with the broadcaster, and we cannot construct a transitional relief upon something so intangible. I repeat that I recognise the feeling in Committee that that is a serious and urgent issue for the producers concerned. I promise to give the matter further consideration and shall continue to have discussions to see whether there is an alternative way to achieve the same result.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health) 1:30 am, 18th June 2002

I thank the Paymaster General for giving way again. I became slightly anxious when she expressed surprise at a producer selling a programme for less than its overall cost. Does she recognise that major productions are increasingly not sold in one block to one broadcaster? A production company takes a decision on the basis of sales across a number of rights areas and will often have secured contracts only for part of a programme, in which case it is carrying a considerable amount of risk. The loss of the reliefs could have a fundamental affect on the finances of a business carrying that block of risk.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I do recognise that point, which takes us back to the previous amendments about the nature of the risk, whether it is comparable with that of cinema films and the value of the production. I recognised that point when I tried to find a way in which to respond on the question of high-value dramas, which would typically fall into that category, and I remind the hon. Gentleman that I am still looking at that closely.

I am saying clearly and strongly to the Committee that the scale of the loss is so great that I need to be particularly cautious and the industry needs exactly to establish with us the points that the hon. Gentleman has rightly raised. I regret this deeply, but the Revenue is aware that there are problems with some early schemes that have been marketed but not yet used, and I regret to say that I shall have to return on Report with proposals to deal with that issue. We are making the move to close that further loophole with the considerable assistance of the vast majority in the film industry, which is determined, along with the Government, that the integrity of the relief should not be undermined. That relates to the point that the hon. Member for Cities of London and Westminster made about the importance of the film industry.

With that in mind, I again ask the hon. Member for Arundel and South Downs not to press the amendment to a vote. The amendment would not achieve what Conservative Members want, although the points that it has raised are very valuable. I am not promising that I will definitely find a way, but I am

making a commitment to the Committee: I recognise that those two issues are sufficiently important for us actively to consider them beyond today's discussion. We shall try to settle them on Report, if we can. That is a big if, but I give that undertaking.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I thank the Paymaster General for her comments and for recognising the problem. I think she feels that amendment No. 88 would not work because it would be too generous.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

That is a good argument to deploy, although the amendment seems to reflect a point of principle, which the Paymaster General acknowledged. If the process has started, and costs have been incurred on the basis of the tax arrangements in place, I am not sure that the principle changes just because the eventual sale on a sale-and-leaseback arrangement is put in place only at the end. I am glad to hear that the Government are looking for a way of addressing the problem that minimises the costs, and I am grateful for the Paymaster General's comment that she will consider on Report those issues and others that emerge. In anticipation of the Government solving those nitty-gritty problems, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 98 ordered to stand part of the Bill.

Clause 99 ordered to stand part of the Bill.