Clause 64

Finance Bill – in a Public Bill Committee at 4:45 pm on 16th June 2009.

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Long funding leases of films

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

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

With this it will be convenient to discuss the following: that schedule 33 be the Thirty-third schedule to the Bill.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

The clause and schedule are the last in the series of anti-avoidance measures. The provisions relate to long funding leases of films and are designed to target a specific avoidance scheme. The scheme is apparently being used by film-makers who have already claimed capital allowances for the cost of making a film under  section 42 of the Finance Act 1992, or section 48 of the Finance (No. 2) Act 1997, or sections 138 to 140 of the Income Tax (Trading and Other Income) Act 2005.

In essence, the scheme, the success of which is disputed by HMRC, appears to have been used in the case of films on existing leases for long periods of, it is generally said, 15 years, at rents which are subject to tax. By terminating the existing lease and replacing it with a long funding finance lease, the tax treatment of the rents is greatly mitigated. Not only that, but there is no recapture by the Revenue of the capital allowances already given. In effect, a film-maker could recover the cost of a film through capital allowances and still enjoy a low tax income.

The provisions of schedule 33 remove that treatment in respect of all long funding finance leases granted after 13 November 2008. There is a degree of retrospection, inasmuch as in the case of a long funding lease granted before that date, the rentals accruing due will receive the new tax treatment, but only for rents falling due after the 13 November cut-off.

Paragraphs 1 to 3 of the schedule exclude the income tax and corporation tax provisions normally applicable to long funding leases, when the subject of the lease is a film and the lease is granted after 13 November 2008. Paragraphs 4 and following exclude those treatments in the case of pre-existing leases that continue to subsist, but only in respect of rents falling due in periods of account commencing on or after 13 November 2008. They include transitional provisions based on time apportionment, where a rental period straddles two periods of account.

We have studied the schedule and find nothing to oppose, but I look forward to hearing whether the Minister agrees with my explanation.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

The hon. Gentleman is right that the clause introduces schedule 33, which counters avoidance involving the leasing of films. It was introduced in response to information received by HMRC and was announced on 13 November 2008, with draft legislation published at the pre-Budget report. The schedule prevents avoidance that, if unchecked, would have led to a substantial loss of tax—perhaps as much as £1.5 billion over 10 or so years.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

This intervention is similar to the one I made this morning. HMRC is rightly trying to recover money that should have been paid. However, the Minister gave some annual figures for two different schemes, then he cited, I think, prospective moneys to be recouped over two or three years, and he has just now given us a figure for a 10-year period—the significant sum of £1.5 billion. How much of that is likely to be recouped in year 1 of those 10 years?

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

Governments have supported the film industry for a long time. One way in which they have done so is through special reliefs, which have allowed the acquisition costs of a qualifying British film to be written off more quickly by the acquirers for tax purposes. The cost of the film was often recouped by investors through leasing out the film, so that over time the initial tax relief should have been recovered by taxing the rental received under the leases. In practice, most such  investment took place via partnerships of wealthy individuals who were able to reduce their taxable income by using the losses generated by the write-off of the cost of the film. The investors received a timing advantage which they would share with the film producers, giving a benefit to the industry.

Those rules were abolished, and in 2007 they were replaced by a relief focused more directly at film producers but—this is the point that the hon. Gentleman has asked about—many film partnerships remain. They can last for up to 15 years, so the clause tackles the long-term impact of the avoidance. We estimate the tax at risk to be £90 million for 2009-10, £110 million for next year, £120 million for the following year and £140 million for the year after that. It all adds up, as I have said, to about £1.5 billion over 10 years.

Last November, HMRC became aware of a scheme that was intended to turn the taxable lease rental income into largely untaxed rental income. That would have been achieved by converting the leases into long funding leases—the hon. Gentleman mentioned that—the income from which, as a general rule, is largely not brought into account for tax purposes.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

The film industry is extremely important in my constituency: Hammersmith is one of the bases of the UK film industry. The film industry has told me that probably the most important thing is certainty in the tax system. That £1.5 billion seems an awful lot of money to be recouped from anti-avoidance action on film schemes. Has the Minister assessed the likely impact on the UK film industry? How prevalent is the practice with which schedule 33 deals?

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I think that I can reassure the hon. Gentleman. The special reliefs that gave the initial losses were abolished in 2006. They were replaced by a new relief, which has been in place since January 2007. The measure that we are debating now will therefore have no impact on the new relief, as it relates only to arrangements made before 2006. I reassure the hon. Gentleman on the important point about investment in the British film industry this year and in future years. The measure will have no effect either on previous investments, other than to ensure that the tax that should become payable over time does indeed remain payable. I do not think that there is a problem for the industry, although I take the hon. Gentleman’s point about the benefit of certainty.

I am glad that the hon. Gentleman sees nothing to object to, although it may be of interest to the Committee that HMRC has been advised informally that the announcement of the measure last November killed the scheme “stone dead” before it could be promoted.

Question put and agreed to.

Clause 64 accordingly ordered to stand part of the Bill.

Schedule 33 agreed to.