Clause 57

Finance Bill – in a Public Bill Committee at 7:15 pm on 22nd May 2007.

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Election out of special film rules for film production companies

Question proposed, That the clause stand part of the Bill.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The clause allows television companies that do not qualify for film tax credit to opt out of the new tax regime for film companies. I am delighted to see that provision in the Bill, because I asked the Government to include it during the debate on the Finance Bill last year. In scrutinising last year’s Bill, it seemed unfair to inflict a controversial new tax framework and a significant compliance burden on companies producing TV and films that were not destined for general release, and which therefore could not qualify for the film tax credit.

I therefore tabled an amendment to remove from the new accounting regime those companies that could not qualify for the tax credit, such as TV companies. The response of the Economic Secretary on that occasion, as recorded at column 234 of the Hansard report of Standing Committee A for 18 May 2006, was to dismiss my amendment as going “completely against the intention” of the Bill. Although I am pleased that he has seen the light and responded to my concerns, I have to ask why the Government could not get the issue right the first time around. The explanatory notes refer to discussions with the industry, which no doubt were useful, but the problem was flagged up with the Government in Committee last year, while they still had time to solve it in that Bill.

That is a recurring theme in the history of the Chancellor’s film tax legislation. Since he first introduced his film tax break in 1997, the rules have been revised by Finance Acts in 2000, 2002, 2004, 2005 and 2006, and now they being revised again in 2007. When I highlighted that unfortunate history in the debate on last year’s Finance Bill, the Paymaster General and the Economic Secretary dismissed my concerns. They were entirely confident that they had got film tax completely right, even though they had got it wrong so many times in the past. Their confidence has proven to be sadly misplaced, because here we are again, although this is not the first time that the House has been asked to consider film tax since the previous Finance Bill. It is regrettable that after five major changes to the film tax regime in seven years, the Government have had to come before the House twice in the past 12 months to ask for approval of its cultural test for its film tax regime.

I asked the Economic Secretary last year whether he anticipated any problems obtaining European Commission approval for the new film tax credit. In his confident response, he said:

“The hon. Lady suggested that the approach to defining UK expenditure in clause 35 was in some way determined by the European Commission. There was absolutely no truth in her statement. On the contrary, the definition of UK expenditure reflects our policy aim of encouraging producers to make full use of film-making skills, facilities and infrastructure in the UK.

It is true that, as is required, we have been discussing with the Commission the securing of state aids approval for the new relief, but the Commission has not indicated any concerns about how we define UK expenditure nor requested that we change the definition in any way. We have, for example, reduced the qualifying limit from 40 per cent. to 25 per cent., and we made that decision on the basis of the points put to us during the consultation. In our view, the definition is well within the ambit and requirements of the state aids rules. We are confident that those discussions will proceed apace.”

The Economic Secretary goes on to say a little later that

“productions for which filming has taken place predominantly or wholly overseas will be entitled to a level of benefit lower than that of productions filmed in the UK. That is entirely in line with the Government’s policy aim, set out clearly in the legislation, of encouraging filmmakers to make full use of facilities and infrastructure in the UK. This is an enhanced tax relief for making British films in Britain, so it is not our intention to spoil overseas film industries.” —[Official Report, Standing Committee A, 18 May 2006; c. 232.]

However, that was exactly what the Commission later told the British Government that it could not do. It required the deletion of that element of the Economic Secretary’s cultural test that gave favoured status to films made in Britain. The only permissible criterion was whether or not a film was culturally British.

Therefore, despite the brave words of the Economic Secretary, the Commission would indeed determine the approach taken to “UK expenditure” in relation to the film tax credit. Hence, the Paymaster General was forced to return to the House to ask for its approval of a second revised cultural test instead of the one debated in Committee last year. That had a highly destabilising impact on a number of UK films which thought that they were going to qualify for the new tax credit, but then found that they could not. It also delayed the implementation of the new film tax rules and forced the Government into a temporary extension of the reliefs outlined in sections 42 and 48 to plug the gap. Those were the reliefs that the Economic Secretary had repeatedly told the Committee last year were flawed.

To compound that chapter of accidents, no sooner had the Treasury announced the temporary extension of the sections 42 and 48 reliefs, then it announced out of the blue that it was going to scrap sideways loss relief in relation to those reliefs, thereby undermining their value. It was reported that more than 100 films would be negatively affected, including “Casino Royale”. The film industry lobby swung into action.  Three days later, it forced one of the swiftest U-turns in Government history. It was frankly astounding that the Government announced a significant crackdown on sections 42 and 48 reliefs, which they had just agreed to extend and which HMRC was actively encouraging filmmakers affected by the debacle over the cultural test to use.

Frankly this is a shambles. The Government’s incompetent handling of film taxes has cost the taxpayer billions and caused significant instability for film financing. I very much hope that the Economic Secretary does not have to return yet again to this Committee next year to ask for further changes to the film tax regime.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

Clause 57 allows companies to opt out of the special rules for film production companies, for which we legislated in the Finance Act 2006. The clause is designed to respond to representations from the TV industry in particular and has been welcomed by it. The laws introduced last year were discussed with a number of TV production companies and tax professionals. We believed then, and still believe, that they make sense for many companies. Therefore, we want to leave them in place. As the hon. Lady said, the point was made in Committee last year that concerns had been raised. Rather than rushing to make sudden changes then without consultation at a later stage in last year’s Finance Bill, we had further discussion with those who saw problems and proposed a simple proportionate solution, which is the clause before us today.

As for the European matter that she raises, the EC treaty prohibits subsidies that distort competition and trade. Aid is allowed on cultural grounds for films. The Commission has set out criteria for that. The UK’s cultural test was notified in December 2005. The Commission considered the test last September and raised concerns that it was too focused on economic rather than cultural factors. The Treasury, with the Revenue and the Department for Culture, Media and Sport, then worked to produce a revised test that met those concerns, while still supporting the development of a sustainable film industry. We made those changes to ensure that, consistent with our European obligations, we would transit to the new regime, which is operational.

In recent years, we have had to make changes to the film regime to ensure that tax avoidance was addressed. Last year’s regime, which we debated at length, is a simplified, sensible and effective regime. The fact that we have such a small change before us today is a tribute to the success of that new regime, and I commend the clause to the Committee.

Clause 57 ordered to stand part of the Bill.

Further consideration adjourned.—[Kevin Brennan.]

Adjourned accordingly at twenty-nine minutes to Eight o’clock till Thursday 24 May at Nine o’clock.