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Clause 32 - Film tax relief

Finance (No. 2) Bill – in a Public Bill Committee at 5:00 pm on 6th May 2014.

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

It is a pleasure to serve under your chairmanship, Mr Streeter. I congratulate the Minister on her appointment. It is wonderful to be debating with two Front Benches that are all female, except for our Whip.

Clause 32 introduces additional changes to the highly successful film tax relief, introduced in 2007 under the last Labour Government, to promote the sustainable production of British films. It is clear that the tax relief has been an enormous success in attracting and supporting the production of films here, not just by British but by worldwide companies. An HMRC note from last July summarised the headline benefits of the relief to date: 1,390 film productions have become eligible to claim the new tax relief; the total production expenditure by films claiming the relief was £9.8 billion, of which 72% was incurred in the UK; production expenditure averaged £86.6 million per film for large-budget films, or £2.3 million for limited-budget films.

The British Film Institute told the House of Commons Select Committee on Culture, Media and Sport:

“The film tax relief has been an undisputed success story, supporting the UK film industry and the UK economy.”

In its report, “Supporting the creative economy”, the Select Committee highlighted the benefits of the film tax relief in attracting big-budget promotions, principally from the US. The Committee concluded:

“We strongly support the film tax credit. The benefits it has brought in terms of film production have spread across the country, from Glasgow to Chatham, from London to Liverpool.”

The Opposition wholeheartedly support those sentiments, and we therefore welcome any measures that build on the success of the film tax relief introduced under the last Government.

I have one or two questions to put to the Minister for clarification. The second key provision in the clause provides for the UK expenditure requirement in section 1198(1) of the Corporation Tax Act 2009, the minimum UK core expenditure, to be reduced from 25% to 10%. For the purposes of clarity, “expenditure” includes that spent on filming activities such as pre-production, principal photography and post-production, 10% of which must take place in the UK for the film tax relief to apply. Can she say how many more film productions might benefit from the relaxation of the minimum spending requirement within the UK, and what assessment has been made of that? HMRC has published a detailed note on who, what films and what companies have benefited to date from the relief, so I presume that the Government have also assessed the potential future impacts of extending the relief. It would be useful if she could comment on that.

That said, the policy costings document published alongside the Green Book and autumn statement 2013 suggests that the cost of modernising film tax relief will rise to £25 million a year by 2016-17, yet concedes that there are many areas of uncertainty:

“The main areas of uncertainty in the costing relate to the number of films that will claim FTR in future years and the level of inward investment following the policy change.”

Can the Minister give any Treasury estimates of how much additional inward investment the UK can expect as a result of the additional film tax reliefs?

I appreciate that we have discussed tax avoidance at great length in many Finance Bill Committees, including this one, but it is worth briefly mentioning some reported instances in which investment schemes have been set up apparently to exploit the UK’s film tax reliefs. The list of such schemes runs potentially into the hundreds, some of which, such as Eclipse 35, have already been shut down. They often involve “sale and leaseback”, whereby clients are encouraged to invest money—supposedly to support the UK film industry—and then loaned that money back to exploit the film tax reliefs that we are discussing.

HMRC is rightly concerned about that and has taken action to close down some of those schemes. The Public Accounts Committee has returned to this issue in the last few weeks as part of its inquiry into tax reliefs and their administration. In the light of the risks associated with those schemes, has the Minister made any provision to ensure that such a successful, valuable and well-intentioned tax relief is not further exploited for alternative ends? What action have the Government taken to ensure that the welcome provisions to extend availability will not be exploited? The tax information and impact note does not appear to make any reference to anti-avoidance measures; indeed, the permanent secretary to the Treasury has suggested that HMRC has seen no evidence of such schemes. None the less, given the growing public awareness of such schemes in the past couple of years, it would be helpful if the Minister clarified those points.

Photo of Nicky Morgan Nicky Morgan Minister for Women, The Financial Secretary to the Treasury 5:15 pm, 6th May 2014

I thank the hon. Lady for her remarks. The clause sets out two changes, which modernise the existing film tax relief and encourage the production of culturally relevant British and EEA films. Indeed, the Palace of Westminster has been host to a film production recently: I returned here on a Friday afternoon to find New Palace Yard overrun by suffragettes—and very welcome it was, too, to see all those additional ladies in the bounds of the Palace of Westminster. I do not know whether that film will benefit from the tax relief, but I am sure it will be good when it comes out.

The clause makes film tax relief available at 25% on the first £20 million of qualifying production expenditure and 20% thereafter for all productions. The minimum UK expenditure requirement will be reduced from 25% to 10%. There was previously a cliff edge in the film tax relief scheme between small and large productions. A 25% rate was available for films with qualifying core expenditure of £20 million or less and 20% for all other films. That meant that a film spending £21 million received less relief than one spending £20 million. In addition, one of the qualifying criteria for film tax relief was that at least 25% of the qualifying core expenditure must be UK expenditure. That requirement had become outdated, as the way in which films are made has developed and cross-border productions are much more commonplace.

The global film market has seen large changes in its production methods and many mobile elements of film production, such as visual effects and digital film making, have started to migrate to jurisdictions outside the  EEA. As we have seen from recent award-winning British films, those techniques and the skills they require are where the UK can excel, which adds significant cultural contributions to those films.

The changes made by the clause will ensure that film tax relief is available at 25% on the first £20 million of qualifying production expenditure and 20% thereafter for all productions. That removes the distinction and the cliff edge between limited-budget films and other films. The clause also reduces the minimum UK expenditure requirement to 10%, which will encourage further investment in the UK and benefit visual effects and the wider industry. It will also help UK independent production companies to work internationally and encourage minority co-production where the UK spend is less than 25%. Elsewhere, we have complemented these changes by modernising the film tax relief cultural test. That test has been expanded to allow for European as well as British culture. We have also increased the points available for principal photography, which I think the hon. Lady mentioned, special effects, visual effects and the use of a European language.

Let me turn to the hon. Lady’s questions. She mentioned that US productions might benefit from these tax breaks. It is worth putting it on record—I was not previously aware of this—that approximately 90% of the films made in the UK are small-budget films, for which this tax relief is very important.

The hon. Lady also asked about anti-avoidance measures. Recent coverage of high-profile tax avoidance schemes using the film industry related to a series of cases involving film investment tax relief, which was repealed in 2006, since when anti-avoidance legislation has been introduced. Film investment tax relief was replaced by film tax relief—that is what we are discussing today—which provides targeted support for film production in the UK. That targeting is important. Film tax relief is no longer given on investment. The new rules apply only to expenditure on film production by a film production company. The Government support and encourage genuine business investment through the tax system—that is why we have tax reliefs. However, we have made it clear that we will not stand for abuse of those reliefs and HMRC will come down hard on anyone who tries to use them for tax avoidance.

The move from 25% to 10% is intended to allow more productions to benefit from film tax relief. Tax relief is available only on UK expenditure, including goods and services used or consumed in the United Kingdom. The change will have a positive impact on activity in the UK.

The hon. Lady asked how much more inward investment the changes will generate. I cannot give her an exact number—I am not in the film business—but gathering together the finance for a film, pulling it together and making it all happen is incredibly complicated and, from everything I have read, takes an awfully long time. It is difficult to predict the impact, but given the positive reaction she outlined in her speech—there is plenty of support for the changes—we expect there to be a positive impact on film production. It is difficult, because there are a number of other factors that will affect the numbers, including rate change, but the change in the Bill is important and has been widely welcomed. The film tax relief makes a valuable cultural contribution to the UK.

Photo of Ian Swales Ian Swales Liberal Democrat, Redcar

Will the Minister join me in welcoming the fact that, following work by the Public Accounts Committee on the previous scheme, HMRC now has to give prior approval before the tax reliefs are given, rather than post approval, which in some cases was heavily abused?

Photo of Nicky Morgan Nicky Morgan Minister for Women, The Financial Secretary to the Treasury

My hon. Friend is right. That change is important and was valuably highlighted by the Public Accounts Committee, of which he is a member.

Since the introduction of film tax relief in 2007, direct employment in the sector has almost doubled and 1,050 film productions have made 1,900 claims for a total of £1.1 billion. The changes in the clause modernise existing film tax relief to encourage the production of culturally relevant British and EEA films.

Question put and agreed to.

Clause 32 accordingly ordered to stand part of the Bill.

[Martin Catonin the Chair]