I take this opportunity to welcome you to the Chair for our deliberations, Mr. McWilliam. Clause 114 begins chapter 9 of the Bill. Together with clauses 115 to 118, it seeks to tackle tax avoidance schemes whereby individuals try to convert what is, in essence, a tax deferral into a permanent tax gain. That can occur when someone in the film trade, whether alone or in partnership, calculates their taxable profits or losses in line with the sector's two principal tax relief schemes, known as section 42 and section 48.
The recent Culture, Media and Sport Committee report on the British film industry highlighted the fact that those two tax relief schemes have been vital to the UK film sector. After all, it is a business that in any average year is able to export films worth about £700 million. In the five years up to the end of 2003, the industry generated inward investment of about £1.7 billion. It is a very important industry. It is about not simply the quality of films, but the generation of crucial wealth and employment in this country by a British film sector with tremendous skills and talents that are the envy of the world.
The clause, supported by clauses 115 to 118, seeks to impose an income tax charge on an exiting partner. I would like to express the concerns of the industry and its advisers about whether it will achieve its stated purpose.
Does the hon. Gentleman agree that the tax breaks introduced by the Government in previous years for the film industry—some of them have been abused by the television industry—have resulted in £2 billion of foregone tax revenue, which is a considerable amount?
The hon. Gentleman refers to section 48 of the Finance (No. 2) Act 1997, and he is right to say that there has been significant abuse. Government and Opposition Members support the need for accurate and targeted measures that help. That will form part of the debate as we progress.
I do not deny that there has been persistent tax avoidance in the sector. Rather, I wish to ensure that the clause accurately affects abusive tax avoidance without unduly damaging commercial trade and legitimate business activity. Under clause 119, we will address the issue of film investment and film partnerships, where it seems that the balance is not being achieved.
I wish to raise a couple of concerns about how the changes for exiting partners and exiting individuals will work in practice. The clause seeks to impose a charge on the exiting partner at the point of exit. The Government seek no additional income tax charge in the event that the profits to which the exiting partner would have been entitled continue to be chargeable to UK income tax. Several representations, not least from the Chartered Institute of Taxation, have highlighted various situations in which an exit may be optimal to the individual but does not specifically
aim to remove future profits from a charge to UK income tax.
For example, there is the situation in which one partner dies. We understand that, in film and related industries, the revenue stream from royalties is important. They tend to last for a long period—10 or 15 years. Frequently, a partner involved in that sort of structure dies and, legally speaking, exits the partnership. Arrangements must then be made to handle future incomes from those royalties and the withdrawal of the capital investment. Those arrangements are bona fide and there is no wish or intention to abuse the tax system. Rather, someone is trying to settle an estate. In other circumstances, including those involving withholding tax, it is clear that the reasons for a partner exiting are entirely commercial and legitimate.
The concern with the clause is that there seems to be a genuine risk that the exiting partner could be liable for extra income tax even where their future profits face tax liabilities while in the hands of the remaining partners. Perhaps the Paymaster General can clarify the clause, but there is considerable concern that it could achieve for some people the opposite of its stated purpose.
Referring to the point made by the hon. Member for Wolverhampton, South-West, I have no doubt that unreasonable behaviour and abusive tax avoidance must be tackled. I hope that the Paymaster General recognises that the question is about not the intent of the legislation, but its efficacy.
A number of related issues concern the tax regime for the film industry and film partnerships, but the principal issues in that regard will arise later, particularly under clause 119, and I shall reserve my comments until then, if I catch your eye, Mr. McWilliam.
Good morning, Mr. McWilliam. I have two questions on clause 114, which apply equally to clauses 115 to 118. The first question is straightforward and the second covers a wider issue that touches on the Government's intent.
First, can the Paymaster General clarify the individual revenue yield from clause 114? I am not sure whether that information has already been published. I may have missed it, but when I tried to find it in the Red Book and elsewhere I was unable to do so, so I should be grateful if the Paymaster General indicated what the expected revenue yield is from clause 114 and, if the figures are available, from clauses 115 to 118.
The second issue touches on the Government's intention in clauses 114 and 118, which is to tackle some of the tax avoidance associated with the film industry tax relief over the past five or six years. The hon. Member for Hertford and Stortford raised some concerns about that and the film industry has lobbied on the Government's measures and their impact on jobs and revenue in the industry.
I want to make a slightly different point. We are always lobbied effectively by the groups that are
directly affected by the measures in the Finance Bill each year and perhaps we do not always think of the general taxpayer and their interests in our debates. My concern is not so much about whether the Government's action in trying to deal with tax avoidance is going too far, but about whether it does not go far enough and whether it would not be better to replace clauses 114 to 118 with measures to abolish the reliefs. The hon. Gentleman touched on some of the tax-avoidance problems relating to film industry tax relief during the past few years. It may be helpful to remind ourselves of what has happened in relation to film industry reliefs and the avoidance issues that we are discussing and debating today.
After the Government introduced the latest film industry reliefs in the July 1997 Budget soon after the Labour party came to power, the estimated cost of the film industry reliefs was modest: £5 million in 1998–99 and £15 million in 1999–2000. There was a further upward revision of the figures in the 2001 Budget when film industry reliefs were extended and the cost estimate was increased by £50 million for 2003–04. That was pretty small beer—tens of millions of pounds—for the cost of those reliefs.
The figures now for the cost of film industry tax relief since 2001 are not £10 million, £20 million, £25 million or £50 million, as we were led to believe, but £440 million in 2001–02, £300 million in 2002–03 and £300 million in 2003–04 to 2005–06. If the Government have got their figures right—it remains to be seen whether they have got them right for the whole Parliament, because that has not been the experience so far—they will spend £1 billion on that tax relief during the current Parliament if it runs its full term, however unlikely that may be. That compares with around £1.25 billion for the whole of the child trust fund during a similar period. In other words, the Government have provided a £1 billion subsidy for the film industry compared with £1.25 billion for all the trust fund accounts for children during one Parliament.
We are entitled to ask the Paymaster General what returns we have had from that £1 billion, what estimates the Treasury have made of the increase in the activity and profitability of the British film industry over that period, and how many new jobs have been provided as a consequence of the expenditure of £1 billion of tax relief. We also ask whether clause 114 and—if you will allow me to mention them, Mr. McWilliam—clauses 115 to 118 go far enough, or whether we should consider a more draconian change. Instead of making the tax system even more complicated by bringing in anti-avoidance measures to deal with earlier problems, should we get rid of that tax relief altogether?
I have no doubt that the Paymaster General will say that, although I am making some legitimate points about the explosion in the cost of the tax relief in 2001–02 and 2002–03, that explosion was a consequence of avoidance issues that have been dealt with, not least, as the hon. Member for Hertford and Stortford mentioned, the classification of many well known television programmes as films, which allowed an explosion of tax relief in 2001–02 and 2002–03. The
Paymaster General will no doubt say that she dealt with those problems and that that abuse is not open.
The question remains, however, whether there has been any economic analysis of the benefits of the tax relief that is provided at great cost to the taxpayer and how many jobs are created as a consequence of that relief. The Treasury has been unable, to date, to answer that question. The question that I ask the Paymaster General to answer is: what would be the effect of not introducing clauses 114 to 118 but abolishing the film industry tax reliefs altogether and, as a consequence, saving the money for the general taxpayer? What is the Government's estimate of the effect that such a change would have on the film industry? What would be the reduction in jobs?
We are here to represent the interests and concerns of the people on whom the Finance Bill has a direct impact. Perhaps, as a consequence, we do not always take into account the interests of taxpayers in the wider public. I think that most taxpayers would be horrified to know that they spent £1 billion over the period of this Parliament in subsidising one industry in a way that may not have brought many additional jobs.
I turn first to the general points about section 48 relief, as we are dealing with those issues. Section 48 was intended to pump prime the production of low-budget British films, leading to more success, to more recycled profits and, eventually, to structural change. It has produced about 50 films a year that otherwise would not have been made. I am sure that we are all great fans of the commercial successes, which include ''Billy Elliot'' and ''Bend It Like Beckham''.
In its investigation, the Select Committee on Culture, Media and Sport found that the tax reliefs have been vital in securing inward investment to the United Kingdom and maintaining a critical mass of indigenous film making. I will return to the period from 1997 but, in 2003 alone, the reliefs secured a record year for productions in the United Kingdom, with £1.17 billion of production expenditure and secure British involvement in 177 films. Section 48 relief has ensured the production of a number of low-budget British films. That is to be applauded and is precisely the issue that the Government wanted to tackle.
Even the industry accepts that the other aim, which was for the creation of the critical mass to lead to structural changes in the industry, particularly on the distribution side, has not been achieved. Some of the discussion about the new tax credit focuses on that principle. The industry accepts that section 48 has run its course and it is working with the Department for Culture, Media and Sport and with the Treasury to consider the replacement tax credit and the issues that need to be addressed. Since 1997, the British film industry has benefited from record investment. The latest estimates from the industry are that more than £6 billion has been invested under sections 42 and 48 reliefs. That level of investment continues. If the hon. Member for Yeovil (Mr. Laws) examines the detailed
study that the Select Committee has carried out on the industry as a whole, he will see that the reliefs are crucial in helping that pump-priming and ensuring that such investment continues to come into the UK.
Clauses 114 to 118—I have left out clause 119 because the hon. Member for Hertford and Stortford wants to discuss that specifically—counter an abuse of the reliefs. I want to explain why that is important. I know of the hon. Member for Yeovil's long-held opposition to the film reliefs, but the Government are committed to the success of the film industry. We are of the view that we should continue to invest in the prize of huge inward investment in the British film industry, assistance to indigenous film making and the creation of that critical mass.
I am somewhat disturbed that, as evidence of the value of the tax relief, the Paymaster General seems to be relying on a Select Committee rather than work by the Treasury, with the accompanying scepticism that one would expect of the Treasury when it approaches such issues. Given that the taxpayer has spent £1 billion on the relief, will she undertake to have the Treasury conduct a proper study of the costs and benefits of the relief and publish the results of that study?
It is not the habit of the Treasury to duplicate work undertaken by Select Committees, or to undermine or to question the excellent work that they undertake. If the hon. Gentleman has not read the Select Committee report, I commend it to him and its answers to the questions. I am sure that he is not suggesting that we should waste resources by conducting another investigation, only to reach the same conclusion. I have told him of the Government's conclusion. I know that he will disagree with that, but that is the view of the Government on investment in the British film industry.
Regrettably—I said this when we discussed the matter before—those who seek to tax plan and to gain advantage from the tax system go across the whole of the tax system. It is not just a matter of whether that occurs in the film industry. The hon. Gentleman will know from previous discussions on Finance Bills that I have sent the clear message, as I continue to do, to those who use the tax system in ways that are not intended that the Government will deal with that, should it be necessary.
The current relief works by giving individuals an upfront tax repayment in respect of trading losses claimed against their general income. As income arises from the films in later years, the individuals pay tax on the profits. The overall result is a form of tax deferral that gives an incentive to invest. We do that at different points in the tax system. That arrangement has been the traditional, accepted way of assessing the film tax relief.
The avoidance schemes, as is often the case, involve complex arrangements that enable individuals who have benefited from upfront relief to dispose of the income stream on which they would have had to pay tax. Such arrangements allow them to get back the capital that they invested. That leaves them with an
outright tax gain, which is not the purpose of the provisions and is not acceptable. The clause raises a tax charge where there has been such a disposal on the amount they got back, so as to ensure that the deferred tax liability is paid, and that a fair balance is struck and maintained between industry, investor and Exchequer.
The film industry agrees that the schemes concerned are unacceptable, and many representative bodies have welcomed the action we are taking. This clause, along with clauses 115 to 118, will ensure that the deferred tax, which is in excess of £2 billion, is recovered over the next 15 years.
I have heard arguments, so it is as well to put them on the record, that some of the schemes-, mainly the film schemes, are acceptable because the partnership might earn taxable income in year two onwards. That is highly questionable and the operators admit as much because, as an intrinsic part of the scheme, they value the future income as next to nothing at the end of year one. In any event, future taxable income does nothing to reverse the unfairness of the way the scheme is funded. The fact that a wealthy individual can make a significant return if a project is successful makes it even more objectionable that they should have the entire upfront gain.
I shall explain what is supposed to happen from the Exchequer's perspective. The Exchequer has given up tax relief upfront, which is the equivalent of 40 per cent. of the film's budget. If the film generates no income at all, that remains the position. Under the official reliefs under sale and leaseback structures, the tax on the rental income, which is what is cut out of the equation, ensures that four fifths of the initial relief is clawed back over the terms of the lease. That is what is cut out to protect the upfront gain, and the rest does not arise. To counter that, where individuals leave the scheme, we have put in place a charge that ensures the gain comes into the tax charge.
The hon. member for Hertford and Stortford raised the question of what happens if a person who has invested unfortunately dies. The charge will not arise after a person has died, unless that person has exited with a tax advantage before their death. The exit charge only applies to individuals who have claimed loss relief. If an individual dies, any capital withdrawn or contribution received after their death will be made or received by someone else, either their personal representatives or their beneficiaries, and they cannot therefore be subject to the exit charge.
The hon. Gentleman raised the question of an individual transferring future rights to profit to another individual. It is perfectly normal for some people to move to a different country and become a non-resident of the UK, and any person who does will be taxed as a non-resident on UK-sourced income, subject of course to the extensive network tax treaties. That can affect anyone who still carries on any business in the UK, and there is no reason to make a special exemption for people with a business interest in the film industry, because that would clearly be unfair and against the spirit of the obligations under the treaties. In circumstances where future rights to
profit are transferred to another partner or moved abroad, that is the current position.
The hon. Member for Yeovil asked what the yield was. He did not find it in the Red Book because it is protection of revenue of £85 million, we estimate, over the next three years—protection measures cannot be scored in the same way as the generation of income. It is part of the scheme that we are running to stop gains moving outside the tax net.
The hon. Gentleman asked whether film relief was just an invitation to avoid tax. That is a crude summary—he put it rather more tactfully in saying that he was not convinced by the reliefs. As I said to him, the Government's view is that the reliefs provide an incentive for people to invest in the film industry and there is a huge gain from that in terms of production of British films and the growth of an indigenous film industry to create the critical mass. It was always envisaged that film makers would access the main tax reliefs through sale and leaseback or similar tax deferral schemes.
In practice, those schemes allow investors to spread payment of part of their normal tax liability over a period of their exploitation of a film—the income coming in—in return for making an investment in that film, which goes to the film maker. The benefit to the investor is akin to an interest-free loan; it is an incentive to invest in British industry. Individuals who seek to exit tax free are effectively not playing the game, of which the rules are clear. It is reneging on the balance that has been struck. I am trying to put it delicately, having been chastised earlier today by the hon. Member for Arundel and South Downs.
The rules are there to operate in a particular way. If people seek to frustrate them, the Government will attempt to return to the legislation so that it is used in the way it should be used. Some people seek to use the investment incentive to create gain. The Government are interested in ensuring that people who are committed to the film industry and are prepared to invest in it over time are provided for within the tax system in the same way as in other parts of the tax system.
The hon. Gentleman referred to the new relief. The Inland Revenue and Treasury are discussing the details with the industry. We hope to publish full details in the summer. In brief, we are trying to ensure that the film maker will be able to claim a deduction for production expenditure that can either be offset against taxable income or surrendered to the Treasury, so it will be a tax credit. We are still looking in detail at the way in which the relief will work and its distribution through the film industry to try to direct it specifically at the area that the current relief is directed to and to take the opportunity to recheck, as the hon. Gentleman suggests we should, that the relief works as we intended. We will do everything that we can to ensure that it does.
However, it is impossible in these circumstances to ensure that all the policy points are met. The structure of the industry and distribution in particular are still of concern to the industry, DCMS and ourselves. We still
have not come to a conclusion over whether tax is appropriate there.
The Government remain committed to investment in the British film industry and to providing these reliefs. However, as with any other relief in the tax system, if they are used in ways that were not intended and people are making tax-free gains that were not intended, we will make arrangements to prevent that from happening. Clauses 114 to 119 and other clauses that we will discuss later deal with precisely that.
The film industry has welcomed the move. It recognises that, to have a sustainable and long-term future, it has to have reliefs that operate in the way that was intended and that do not make the industry a target of planning schemes that bring no extra money into films but result in a loss to the Exchequer, which is unacceptable to everyone.
Question put and agreed to.
Clause 114 ordered to stand part of the Bill.