Clause 3 - Films, television programmes and video games produced by companies

Finance Bill – in a Public Bill Committee at 9:25 am on 16 January 2024.

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

Photo of Ian Paisley Jnr Ian Paisley Jnr Shadow DUP Spokesperson (Communities and Local Government), Shadow DUP Spokesperson (Culture, Media and Sport)

With this it will be convenient to discuss the following:

Schedule 2.

Clause 4 stand part.

Schedule 3.

Clause 5 stand part.

Schedule 4.

Clause 6 stand part.

Schedule 5.

Clause 7 stand part.

Schedule 6.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

It is a pleasure to serve under your chairmanship, Mr Paisley. I thank all members of the Committee in advance for their attention and participation, and I thank all officials, Clerks and the many stakeholders who have engaged with our discussions to date.

We are first considering the cultural support measures in the Bill. Clause 3 and schedule 2 replace the tax reliefs for film, high-end television, children’s TV, animation and video games with refundable expenditure credits. The audiovisual expenditure credit will replace the four film and TV reliefs. Film and high-end TV productions will receive a credit of 34%. Children’s TV and animated TV and film will receive a credit of 39%. The video games expenditure credit will replace the video games tax relief and will have a rate of 34%. Clauses 4 to 7 and schedules 3 to 6 make changes to ensure that the creative sector tax reliefs remain appropriately targeted and administrated efficiently.

I will turn briefly to the detail, starting with clause 3 and schedule 2, which reform tax reliefs to become expenditure credits. That will ensure that they continue to work as intended following the implementation of the OECD pillar two rules in the UK and elsewhere. A company claiming expenditure credits will not see its effective tax rate lowered as a result. That means that companies will not be at risk of needing to pay a top-up tax after claiming the expenditure credits. The expenditure credits will also go further to support businesses in the creative sector by providing greater benefit than the existing reliefs and greater clarity about the amount of credit that companies can expect to receive.

The expenditure credits will change how tax relief is calculated from a super-deduction to a calculation made directly from qualifying expenditure. The expenditure will increase the amount of relief received by film and high-end TV productions and video games by 0.5%. Children’s TV and animated film and TV production will receive a 5.5% increase in relief.

Under the video games expenditure credit, qualifying expenditure will change from cost incurred in the UK—or the European economic area—to expenditure on goods and services that are used or consumed in the UK. There will be no cap on subcontracting. The Government are making that change to refocus video games tax relief on activity that takes place within the UK. That is appropriate now that the UK has left the EU. Those measures are expected to impact about 3,000 businesses claiming the creative tax reliefs, and we expect to see a positive response and high levels of uptake due to the greater benefit provided by the expenditure credits. Reforming the reliefs to expenditure credits is expected to cost about £60 million a year by 2028-29.

Turning to clauses 4 to 7 and schedules 3 to 6, the theatre, orchestra and museums and galleries tax reliefs have been pivotal in the development of new productions and exhibitions. They have collectively supported almost 25,000 productions since they were introduced. The two-year extension of the 45% and 50% rates of relief, announced at spring Budget 2023, will go even further to boost investment in our world-leading cultural sectors. Clauses 4 to 7 make administrative improvements to these reliefs to provide greater clarity about eligible productions and ensure that the reliefs remain safeguarded from abuse.

Now that we have left the EU, we have the opportunity to refocus our tax reliefs on activity that occurs in the UK and to give organisations more choice over where they source goods and services. That is why clauses 4 to 6 remove EEA costs and instead require expenditure to be used or consumed in the UK. This new approach considers where the goods and services are used, rather than where they are from.

Goods and services from the EEA will qualify, provided that they are used and consumed in the UK, but this will go further, because, for example, payments to a US conductor for rehearsals in the UK would also now qualify for relief, so this goes beyond the EEA. That rule is already in place in the film and TV reliefs, and it is also being implemented for video games tax relief.

The changes made by clauses 4 to 6 change qualifying expenditure for the orchestra, theatre, and museums and galleries exhibition tax reliefs to become costs incurred on goods and services used or consumed in the UK. The clauses require companies to disclose transactions between connected parties when making claims for relief, and to charge connected parties for goods and services at the same price as they would charge unrelated companies. This rule will also apply to the audiovisual expenditure credit and the video games expenditure credit.

Clause 7 requires companies to share additional information when claiming relief, and gives His Majesty’s Revenue and Customs additional powers to recover overpayments of relief.

Clauses 4 to 6 are expected to impact approximately 1,200 companies, including orchestras, theatres, museums and galleries, and clause 7 is expected to impact about 3,000 businesses claiming the creative tax reliefs.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

It is a pleasure to serve on this Committee with you as Chair, Mr Paisley, and I am pleased to be able to respond on behalf of the Opposition on these clauses and schedules.

As we have heard from the Minister, clause 3 introduces a new tax relief regime for the British film, TV and video games sectors. Existing film, TV and video games reliefs will be reformed into a new expenditure credit modelled on research and development tax credits, and specifically the research and development expenditure credit regime. As the sector will have noted from the Government’s policy paper on the measure, under the current schemes, relief is given by way of an additional deduction from profits, or surrendering a loss for a tax credit. Under the new audiovisual expenditure credit and video games expenditure credit regimes, companies will instead receive an above-the-line tax credit based on qualifying expenditure, which will, in turn, be taxable.

We in the Opposition strongly support the UK’s creative sector—one of the areas of the global economy in which Britain is world leading. As such, we will not oppose any measures that provides certainty and greater opportunities for growth in those critical sectors. However, I will seek a few clarifications from the Minister on the details of the legislation.

First, I would be grateful to the Minister if he could provide an explanation for why the Department opted for a 34% credit rate for TV, films and video games—a 0.5% increase from the previous relief, as he set out—while animation and children’s TV production has a greater increase, up to 39%.

Secondly, while the creative sectors have broadly expressed support for a simplified regime based on the research and development expenditure credit, we know that R&D tax credit schemes have been subject to a lot of chopping and changing, year after year, by this Government, as we discussed at earlier stages of the Bill. I would be grateful if the Minister could give assurances to the creative sector that they can expect stability and certainty when it comes to these new expenditure credits, to encourage long-term investment and competitiveness.

Thirdly, I would like to ask about the role of HMRC. We know that the new schemes, although they apply the same qualifying criteria rules as predecessor schemes, will need to be properly explained though new guidance. Could the Minister explain what HMRC is doing to ensure that guidance remains timely and up to date for those wanting to claim, and what HMRC will do to support those wanting to apply for the credits to understand how they operate?

In clause 4, the Government have sought to clarify rules around cultural reliefs following a two-year extension to the higher rates granted for theatre tax relief, orchestra tax relief, and museums and galleries exhibition tax relief in October 2021 to help the sector recover from the pandemic. The clause relates specifically to theatrical productions. It seeks first to clarify the exclusion of capital expenditure for the relief; secondly, to clarify the exclusion of costs incidental to production from the relief; thirdly, to exclude productions from the relief where the main focus is not observing the performance; and fourthly to clarify the “playing of roles” condition.

The Opposition wholeheartedly support the UK’s world-class theatres and actors, and the creative sector more broadly, and we welcome any measures to support their work. However, I would like to raise concerns noted by the Society of London Theatre and UK Theatre in relation to guidance and consistency of claims for theatre tax relief. They have expressed concerns that the wording in proposed new section 1179AB of the Corporation Tax Act 2009, as introduced by schedule 2, that

“‘UK expenditure’ means expenditure on goods or services that are used or consumed in the United Kingdom”

could curb UK productions that originate in the UK but are exported abroad.

We know that the Government do not always have the best record when it comes to supporting members of the creative community to tour and export their productions overseas, and so I would like to ask the Minister what guidance will be issued to make sure UK creative exports are protected and not inadvertently hit by technicalities in the wording of the tax relief rules.

Secondly, SOLT and UK Theatre have expressed their unease at the Government’s definitions of a theatrical production, and the narrow view taken of an audience. Schedule 3 states that

“it is reasonable to expect that the main purpose of the audience members will be to observe the performance (rather than, for example, to undertake tasks facilitated or accompanied by the performance)”.

Could the Minister confirm whether pantomimes are excluded from making claims under this definition? I am sure that members of the public would not miss the irony of a Government clamping down on pantomimes for families across the country while indulging in their own pantomime in Downing Street and Parliament in recent years.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

You just couldn’t resist, could you?

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

I look forward not only to moving on from the current drama in our wider politics, but also to the Minister’s response on the specific point about pantomime productions and claims for tax reliefs.

Finally, having led for the Opposition on five Finance Bills, I know all too well that there can be complexity and indeed unintended consequences when new changes are made to tax relief regimes. Will the Minister therefore again explain what he and HMRC are doing to make sure the appropriate guidance is issued, and support offered, alongside the changes to the rules, to support claimants in navigating them?

On clause 5 on orchestras, the Government have sought to clarify rules around cultural reliefs, again following a two-year extension to the higher rate for orchestra tax relief that we mentioned earlier, which was issued in October 2021 to help the sector recover from the pandemic. Clause 5 seeks to clarify the exclusion of capital expenditure; clarify the exclusion of costs incidental to production; and amend the time limit for concert series elections to either the date of the first concert in the series or the date of the claim.

Although seeking to provide clarity in the operation of creative reliefs is welcome, I am concerned that there is still a lack of clarity on how the rules should be interpreted, and I again ask the Minister to use this opportunity to put some clarification on record. The lack of clarity was brought to my attention by my hon. Friend Barbara Keeley, who is a great champion for the UK’s world-class orchestras. On Second Reading, she made the point that:

“International touring is vital to the survival of many orchestras and makes up a fifth of earned income” and that

“it boosts cultural exports and enhances the UK’s place on the world stage.”—[Official Report, 13 December 2023; Vol. 742, c. 931.]

She also referred to changes in eligibility for orchestra tax relief that required 10% of expenditure to be on goods or services that are used or consumed in the UK.

I understand the reasoning behind that, as the Minister set it out, but I also understand from my hon. Friend the Member for Worsley and Eccles South that the Association of British Orchestras believes that that means there is a lack of clarity about what orchestras will be able to claim. I am sure the Minister will agree that clarity is crucial for a successful tax system and I would therefore be grateful if the Minister could provide clarity today about how changing eligibility criteria will affect the claims that touring orchestras make.

In clause 6, the Government have again sought to clarify rules, following the higher rate that was granted for museums and galleries exhibition tax relief in October 2021. Galleries and museums are a critical part of our creative sector and of the enjoyment and fulfilment of so many people across the country. The clause seeks to provide clarity on two areas in relation to the relief: namely, the exclusion of costs incidental to production and the requirement for there to be physical admission to exhibitions for the relief to apply. The Opposition will not oppose either of those changes, but I ask the Minister what he is doing to work with key industry bodies, including the Museums Association, to ensure that the appropriate guidance is in place for museums and galleries, large and small, to be able to navigate these changes without confusion.

Clause 7 introduces new administrative measures for companies claiming creative tax reliefs. Claimants will now be required to complete and submit a new online information form. This will include the various new expenditure credits that we discussed in the previous clauses. We understand that these changes seek to streamline the process of making a claim, reduce the administrative burden on HMRC and make it easier to tackle abuse.

Of course, the Opposition support the principle of all those aims. However, as the clause involves the mandatory use of a new online information form from 1 April 2024, I ask the Minister to confirm whether he is confident that the digital systems at HMRC are ready for that to operate from that date. I believe that that is a pertinent question, given the shocking record of the Government in overseeing the implementation of the Making Tax Digital strategy since it was adopted almost a decade ago. Last summer, HMRC admitted that its ageing legacy IT systems meant that HMRC had

“underestimated the scale and complexity” of delivering Making Tax Digital.

According to the National Audit Office, Ministers set unrealistic ambitions and timescales for implementing MTD. From the very start, HMRC rated MTD as a high-risk programme, and dates were rushed without realistic appraisal. The Financial Secretary to the Treasury is the fifth incumbent of the role since September 2021, and there is no doubt that the churn of Ministers has contributed to the lack of direction in policymaking for digital strategy on tax affairs. I would therefore be grateful if the Minister could outline what steps he has taken to give him confidence in HMRC’s ability to make sure the new online forms for the creative reliefs are operational on time and on budget. That is important for the effective administration of creative reliefs. More widely, it is important that HMRC is equipped with the tools it needs to provide a high-quality online service that individual taxpayers and businesses should expect the Government to deliver.

Photo of Dan Carden Dan Carden Labour, Liverpool, Walton

It is a pleasure to speak with you in the Chair, Mr Paisley; I am delighted to serve on the Committee.

I just wanted to raise an issue that has come to my attention in relation to the Liverpool Philharmonic Hall. The Liverpool Philharmonic Hall is the home of our orchestra in Liverpool. It has a unique model whereby the orchestra owns the hall, and the hall is also rented out for external events. That is unique compared with any other set-up in the country. I understand that, in clause 5, the Government are proposing changes to the detail of how creative tax reliefs are claimed. They are proposing that external events with connected companies —as might happen in the case of the Liverpool Philharmonic—will not be eligible for those tax reliefs. That is the model that the Liverpool Philharmonic has relied on and that has made it such a great success. I wish to use this opportunity to ask the Minister to look again and to seek assurances that the minor changes proposed in clause 5 will not affect the Liverpool Philharmonic Orchestra negatively.

Photo of Debbie Abrahams Debbie Abrahams Labour, Oldham East and Saddleworth

It is a pleasure to serve under your chairmanship, Mr Paisley. I have a couple of quick questions for the Minister. First, on clause 3 and the assessment that the Government have undertaken of its economic impact on the sector, particularly in relation to the current TV ads slump, how much will it offset that and what timescales are the Government considering? On clause 4 and theatre production companies, is there a size limit for the companies that the measures will relate to?

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

Thank you. I do not think anybody in this room or any Members doubt the importance of the creative industries sector. It is an absolute success story for the UK, a huge export earner and something that we can all be proud of. During the pandemic, the sector was among the hardest hit, so we provided more than £1 billion in culture recovery fund money to make sure it was able to survive and do what it does best post pandemic, which it has done incredibly well. I will endeavour to answer the points raised by colleagues in that context.

One area of relative weakness when recovering from the pandemic while other sectors boomed was British children’s content, which declined. That is the rationale for the special difference and the incremental rates specifically for the children’s sector—they need a little more help to recover and boom. We have a great record of children’s TV content, and we want that to be the case again. I can assure the hon. Member for Ealing North that pantomimes will continue to qualify for theatre tax relief—[Hon. Members: “Hear, hear!]—as the main purpose of a pantomime audience is to observe the performance. He raised the point about observance versus participation, where there is some difference in eligibility. Of course, some level of audience participation is normally the case in pantomimes, but it is still predominantly observing, so they will be eligible and not disqualified for production.

On the further points raised by the hon. Gentleman and others about the guidance that will be provided, HMRC is currently working on that and further information will be provided in due course. I have also written to several entities, many of whom participated in the consultation. I should thank all those who participated in the 12-week consultation, which was extensive. We listened carefully and have made many changes. I think we have addressed the vast majority of the issues that were raised during the consultation. Further guidance is needed and will be provided. We are aware of the points that the hon. Gentleman raised.

On his comments about chopping and changing, tax legislation should never remain static because the nature of the economy and the world changes all the time. It is therefore always appropriate to change relevant tax legislation. Signalling and giving stability and assurance to the industry is important. I think that in these measures the support for the creative industries cannot be in any doubt. The creative industries have expressed extreme gratitude for the Government’s support, which has enabled the industries to be incredibly successful over many years. The reason that many film and TV productions are now located in the UK is precisely because of the tax breaks and incentives that have been provided over the last few years.

Several points were raised about orchestras. I explained on Second Reading the rationale behind why we are making changes in relation to EEA expenditure and the UK. There are World Trade Organisation requirements, but I do not think we should underestimate the importance of what is there. In many cases some expenditures that were not previously included will now be able to be included precisely because some of the remit was limited to EEA.

At present, all orchestral productions and touring theatre productions and museums and galleries exhibitions are eligible for a credit rate of 50%. The 50% rate of relief was introduced to support our cultural sectors through the aftermath of the pandemic. At the spring Budget, it was extended for two years in recognition of the temporary but ongoing difficult circumstances that those sectors in particular face. The rate will taper to 35% on 1 April 2025 and return to 25% on 1 April 2026, so support for the sectors is still considerable. As I said, further guidance will be provided, and I will take all the comments that have been made today on board.

Question put and agreed to.

Clause 3 accordingly ordered to stand part of the Bill.

Schedule 2 agreed to.

Clause 4 ordered to stand part of the Bill.

Schedule 3 agreed to.

Clause 5 ordered to stand part of the Bill.

Schedule 4 agreed to.

Clause 6 ordered to stand part of the Bill.

Schedule 5 agreed to.

Clause 7 ordered to stand part of the Bill.

Schedule 6 agreed to.