Clause 14

Finance (No. 2) Bill – in a Public Bill Committee at 12:00 pm on 26th October 2010.

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Photo of David Gauke David Gauke The Exchequer Secretary 12:00 pm, 26th October 2010

I beg to move amendment 7, in clause 14, page 11, leave out line 21 and insert ‘L + RUL’.

This simple amendment regards what is essentially a typographical error in the Bill, which has resulted in the available loss formula being stated incorrectly. The draft legislation previously published contained the correct formula, which should be “L + RUL,” not “L – RUL”, as in the current print of the Bill. Should the amendment not be passed, the legislation would further restrict a film production company’s claims to the available tax credit; it would deduct the loss brought forward rather than add it, as is intended. The point might be made that the Government, given the current state of the public finances, want to turn a minus into a plus, but I am sorry that the error was in the Bill.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

As the Minister has explained, there was clearly a typographical error. In the circumstances, there is not a lot that I can say to debate whether the change should be made, so I am happy to accept the amendment.

Amendment 7 agreed to.

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

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

We broadly welcome the provision. In the 13 years of Labour Governments we took great strides in supporting the British film industry, attested to by the success of a lot of British films, both at the box office and at an artistic level, in winning awards. I am a Bristol MP, and the film industry in Bristol is a thriving creative sector. I think that three films are being filmed in Bristol in the near future, funded with support from some of these measures. We have Aardman Animations, which manages to scoop awards at the Oscars most years. It is important, therefore, that we continue to support the production of British films.

Measures to support the production of culturally British films were introduced in the Finance Bill 2006 and came into effect on 1 January 2007. The relief allows an additional deduction based on UK expenditure by companies on the production of films qualifying as culturally British, which is determined by a culture test. That raises various interesting issues that are not the subject for debate today, but the idea that we can define “culturally British” is an interesting concept.

The rules also provide that losses sustained in production can be surrendered for a payable tax credit. The key features of the support are that it is provided directly to the film production company, not only to those whose only involvement is that of providing finance.

Photo of Richard Harrington Richard Harrington Conservative, Watford

It is an honour to speak in Committee under your chairmanship, Mr Chope. Although I very much support the clause, it is not true that more money is being invested in the British film industry. The credit for producers is well used and is an excellent tool, but it is necessary to say that the actual amount of British investment in British films, where the profits remain in this country, has gone down. The film industry is doing well, but it is mostly overseas capital that funds films made here because we  are so good at making them. I hope that in future the Government will come up with some ideas to increase the amount of British investment in British films.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I thank the hon. Gentleman for his intervention. The film industry is quite a thriving creative sector in the area surrounding his constituency. For example, Elstree Studios is only just down the road from his constituency—or is it actually in it?

Photo of Richard Harrington Richard Harrington Conservative, Watford

Leavesden Studios is in my constituency; it is where the “Harry Potter” films are made. It is rumoured that “The Hobbit” might be made there. If it is looking for extras, I could put in a good word for some hon. Members.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I thank the hon. Gentleman for his intervention, but seeing that he has just described me as a creature from “The Hobbit”, I might take it back. However, he was obviously talking about some of the Labour Members on the Benches behind me and not insulting me personally. I thank him for his clarification about the “Harry Potter” films. If he has his way, perhaps a film will be made in his constituency in which we all have starring roles.

There is indeed more to be done. An interesting House of Lords report into the communications industry made recommendations about what more could be done to support the film sector, despite the pressures on budgets. We have a situation in which the British Film Council is being axed and there are question marks over what will happen to support for the British film industry because of that. It is important that we recognise the incredibly valuable contribution that it makes economically as well as to the cultural life of this country and to how Britain is perceived overseas. It also has an effect on tourism in this country. It is important that we look at the wider picture.

I come now to the existing relief provided to companies that make culturally British films to be shown in cinemas, when at least 25% of qualifying expenditure will take place within the UK. Qualifying British expenditure is defined as services performed or goods supplied in the UK. I have referred to when the House of Lords Committee took evidence on that a few years ago. Most witnesses who gave evidence saw the relief as absolutely essential to the future and health of the British film industry. Tim Bevan, who was co-chairman of Working Title and went on to become chairman of the UK Film Council, said that the film tax credit was

“working brilliantly for inward investment in terms of bringing the studios into this country to make big films here”.

Michael Kuhn of Qwerty Films described it as “fantastic” and said that it had been designed “very cleverly, very effectively”. Lord Puttnam—a world-renowned producer—was slightly less effusive, saying that

“after three or four false starts…we have a system which seems to be fairly admired, which has been road-tested sufficiently”.

Gaynor Davenport, the chief executive officer of the UK Screen Association, thought that, compared with previous film support schemes, the film tax credit was

“a much simpler system which is more easily explained and more accessible for people who actually should be legitimately benefiting from the film tax incentive”.

Several witnesses noted the importance of the tax credit’s remaining competitive internationally if the UK were to continue to attract inward investment in film. It  was also noted that the rates were more generous in places such as Australia, Canada and Ireland. The Lords recommended that the rate of the tax credit be kept under review by the Government, in consultation with the industry, to ensure that the UK does not become uncompetitive as a venue for international film making. Can the Minister say a few words on whether the Government intend to revisit that issue in future?

The specific provision in the Bill is a small, but still important, measure that will help to support the continuing success of the British film industry. Currently, film production companies that make films in which production spans two or more accounting periods, including some overseas expenditure, may suffer from an unintended restriction on their ability to surrender a loss for a tax credit if there is increased spending in the UK in the second or subsequent accounting periods. The clause introduces a revision to how the amount of the loss that is surrenderable for the tax credit is calculated, and thus removes the anomaly in the amount of tax credit claimable. As intended, the amount of film tax credit available is the same, regardless of the profile of the UK expenditure.

As such, we welcome the provision, but can the Minister say more about what he thinks the likely consequences of it will be? Are there any plans to do more to support the UK film industry and to keep the situation under review in years to come?

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 14 corrects an unintended anomaly in how payable film tax credit is calculated. It ensures that the amount of credit given will depend only on the total UK and foreign expenditure, regardless of the order in which the expenditure is incurred.

The new film tax relief was introduced in 2007 and, as we have heard, it has been widely welcomed. Undoubtedly, the 2007 version was an improvement on earlier versions, which were too widely used for purposes of tax avoidance and were not, perhaps, focused on providing support to film makers. To date, about £300 million has been given to companies making British films, mainly in the form of payable tax credits, so more than 400 films have been supported.

It became clear that the rules give a slightly different outcome depending on the order in which UK and foreign expenditure is incurred. The effect has been to restrict relief when UK expenditure increased in later periods. That was never the intention, and the clause corrects the problem. It brings the rules into line with the scheme as it was originally announced, which will benefit the hundreds of companies that claim the relief and will help to maintain the creative industries in the UK as a success story.

Photo of Jim Shannon Jim Shannon Shadow DUP Spokesperson (Health), Shadow DUP Spokesperson (Transport)

Does the Minister agree that the only driver for legislative change on the film tax credit has to be to help the industry—to incentivise it and make it better? In his opinion, the proposed changes are for the betterment of the industry. How will they ensure that the industry will grow and that opportunities will continue to exist? In my constituency of Strangford, and in Northern Ireland as a whole, the film industry brings a large proportion of revenue and provides jobs off that as well. Obviously, we want to ensure that that will not be lost because of such changes. Can the Minister assure me that that will not happen?

Photo of David Gauke David Gauke The Exchequer Secretary

Like my hon. Friend the hon. Member for Watford and Middle Earth, the hon. Gentleman has highlighted the importance of the film industry to the UK economy as a whole and to individual areas. I confess that I am not as familiar with the constituency of Strangford as I am with my neighbouring constituency of Watford, but in both cases the film industry is important, as hon. Members have highlighted.

We want to encourage film production in the UK. The relief that is in place helped to secure investment into the UK of about £900 million in 2009-10, which is significant. There will be fluctuations from year to year—film is an international business and some films can involve substantial investment, which may create such fluctuations. The film relief state aid approval runs out in 2012, and that will be an appropriate time to review the effectiveness of the existing film tax relief. We will look at that. Hon. Members’ points on the significance of the film industry to the UK have been well made. As a Government, we will look at what we can do to support that industry in the most effective way possible.

Question put and agreed to.

Clause 14, as amended, accordingly ordered to stand part of the Bill.