Mr.
Hoban: The Minister spoke of turning capital allowances on
and off as part of a package. We need to remember that the abolition of
the zero rate corporation tax is not just for this year, yet one of the
measures that he offers in compensation is for one year
only.
John
Healey: The hon. Gentleman is right. The matter was
debated in Committee of the whole House. I quoted the responses of
business representative organisations, such as the Institute of
Directors, to the package that was announced, including the moves on
zero rates. The Institute of Directors supported that move, or gave the
response that it did on 5 December, because it will reduce the
differences in taxation for small businesses, depending on how they are
organised. He will remember that that was the principal rationale for
the moves that we have made on the zero rate.
Finally, the response and the
welcome from those organisations is significant not only in policy
terms, but because it may help to deal with the concern of the hon.
Member for Falmouth and Camborne about how small firms will become
aware of the changes. In addition to the sources of
Government-sponsored advice and information, we would expect their tax
agents and advisers to play a large part in ensuring that they are
aware of changes that may benefit them.
However, organisations such as
the Institute of Directors with its large membership and the Federation
of Small Businesses with its federated network also have an important
role to play in helping to ensure that their members and small
businesses in general are fully aware of the tax support and benefits.
On that basis, I hope that the hon. Lady will feel comfortable about
withdrawing the
amendment.
Julia
Goldsworthy: I must apologise, Sir John, for not yet
welcoming you to the Committee. That was perhaps due to my eagerness to
debate the
amendments. I listened
carefully to the Financial Secretary’s response. I am keen to
press upon him that the issue is not simply awareness of the
allowances, but whether there is an incentive to take up the first-year
allowances or whether it is something that small businesses come to
after they have made the decision to invest. The support for the
proposals, which have been welcomed by many parts of the industry, has
not been entirely unqualified. Although it refers to the changes as
beneficial changes, the Chartered Institute of Taxation said
that “this constant
change and uncertainty undermines the effectiveness of any particular
beneficial change and generally increases the complexity of the system
unnecessarily”.
On the basis that the Financial
Secretary has spoken of his commitment to small businesses and has left
the door open to greater stability and consistency in future, I beg to
ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Clause
30 ordered to stand part of the
Bill.
Clause
31Meaning
of “film” and related
expressions 4.45
pm Mrs.
Theresa Villiers (Chipping Barnet) (Con): I beg to move
amendment No. 30, in page 29 [Vol I], leave out lines 3 and
4. I join the rest of
the Committee in warmly welcoming you to the Chair, Sir John. I also
congratulate the Economic Secretary to the Treasury on his recent
appointment. I look forward to a constructive and positive debate on
film tax this afternoon.
Before turning to the substance
of amendmentNo. 30, I should like to start with some general
remarks about part 3 and the Government’s new film tax-break
regime and its history. Strictly speaking, the latter might be more
suited to the debate on clauses 46 and 47, but as it is important that
we learn from our mistakes, it would be useful to take this matter at
this stage in order to set the scene and background for the new
framework proposed and the Opposition’s amendments to it. I am
conscious of the need to make progress, so as I have indicated
informally, I should be happy for the debate on the amendment to cover
the clause stand part debate without the need for any separate
discussion of the clause.
I start by declaring that my
sister-in-law is a film producer. I do not think that it counts as a
declarable interest, but I thought I would mention it just in case.
Like the Government, the Opposition believe that it is important to
work to ensure that the UK provides a competitive and attractive
environment for the film industry for commercial and cultural reasons.
However, although we understand the Government’s motivation in
their film tax-break regime and we, too, want a successful and
sustainable film industry in the UK, we have serious concerns about
their effectiveness in that area to date.
The Chancellor’s film
tax regime has a chequered history. The costs of film tax relief
spiralled from£10 million when it was initially
introduced in 1997-98 to £520 million in 2004-05 and to a
staggering£560 million in 2005-06. They are huge sums
when one takes into account the fact that the UK’s entire cinema
sales were only £770 million last year. It seems clear that many
used the tax breaks in a way that the Treasury did not intend, and that
a significant proportion of the revenue lost to the Exchequer did not
directly benefit film producers and production.
Many of the funding
arrangements developed under the section 42 and section 48 reliefs that
we are proposing to abolish had much more to do with reducing the tax
bill of a limited number of high net worth individuals than any desire
to make films. The outgoing regime depended on investors to provide
funds through complicated sale and leaseback arrangements, which gave
rise to a veritable industry of tax avoidance schemes. As Revenue and
Customs set out in its recent consultation paper, that led to
considerable problems. It
said: “Whilst
the current film tax relief has ensured the production of many valuable
British films, the financing structures that have been used to access
them have affected their value for money for
the taxpaying public, calling into question their fairness and
effectiveness. The repeated use of tax avoidance schemes around the
current film tax relief has also involved significant Exchequer cost
and there remains a clear Exchequer risk in the current reliefs. This
has resulted in fluctuating and, at times, untenable levels of
Exchequer costs over the years the reliefs have been in
operation.” Some of the
aggressive structures allowed investors to make high rates of return
that were almost risk-free, and some schemes apparently allowed
investors to claim more in tax relief than they invested. Loopholes
included so-called double dipping, which enabled film producers to
claim tax relief twice on the same production—on production
costs and the sale and leaseback of the final film.
In September 2003, the Culture,
Media and Sport Committee stated:
“The historical cycle of
change in the tax regime was presented to us by the majority of
witnesses as a huge disadvantage to the
industry.” Although
acknowledging the problems flowing from aggressive avoidance schemes,
the Chartered Institute of Taxation said recently:
“We think there has been
too much tinkering with the tax system. As with other relieving
provisions, the government introduces a relief and then expresses
surprise when taxpayers obtain the benefit of it.
Then the relief was withdrawn
or redrafted. More
careful thought and consultation would have resulted in better
legislation.” Since the
Chancellor first introduced his tax break, the rules have been amended
in the Finance Acts in 2000, 2002, 2004, 2005 and now again in 2006.
The continual change has caused uncertainty, damagingthe
competitive position of the UK as a destination for the film
industry. The
announcement of a further review last year unsettled the industry yet
again. Harry Hicks, a film tax consultant with Grant Thornton,
commented: “The
quicker we see the new legislation in full, together with HMRC’s
proposed interpretation of its practical application, the better. In
the meantime, I fear that many projects will be prevented from going
ahead whilst financiers and bankers simply sit on the fence and wait
and see how the new tax breaks will operate in
practice”. His firm
predicted a downturn in the film business in 2006. It would be useful
if the Minister gave us an insight into recent levels of investment in
the film industry. Pinewood’s profits fell from £6.5
million to £571,000, which it attributed in part to the
uncertainty caused by the pending new
regime. Problems
were also reported with several other films: “Lassie” was
due to be filmed at the book’s original British locations but
was moved to Ireland, “The Libertine”, starring Johnny
Depp, moved to the Isle of Man, and, most controversially, James
Bond’s 21st film outing in the remake of “Casino
Royale” will be the first of that long-running series to be shot
predominantly overseas. Pinewood, Bond’s traditional home since
“Dr. No”, lost out to Barrandov studios in the Czech
Republic. Tim Adler of Screen Finance commented:
“For the Government to
allow its most high profile civil servant to go abroad is
extraordinary”.
Certainty is of key importance,
and it will be the theme of a number of the amendments that I table. If
there is significant uncertainty about how our rules
operate and will operate in future, that will deter the large US studios
from investing in the UK and making films here. Uncertainty probably
has an even bigger impact on indigenous, independent film producers,
because it impacts so significantly on their ability to raise finance
for their film projects. They are unlikelyto have the ready
cash available, so they must borrow to finance their projects. If this
regime is to be successful, we must ensure that film producers can
borrow against the tax credit. If the rules are uncertain, the risks
will be higher and the banks will be reluctant to lend; where they do
lend, it will be at significantly higher rates. Currently, few if any
banks are willing to lend pending resolution of the new
structure. While we
regret that it has proved necessary to introduce yet another revision
of the rules, we agree with the Government that changes are necessary
to deal with the problems I have outlined and the significant loopholes
in the existing framework. There is no doubt that the proposed new
framework is an improvement on the current rules and that it has
received some positive comment from many of those who are affected by
it. In particular, the Opposition agree that it makes sense to amend
the framework to try to ensure that the benefits can be claimed only by
the companies who are making the films.
We still have several
reservations about the proposals. I have tabled a series of amendments
that seek to elicit clarity from the Government about a number of
points that have been raised with me by the film industry and by those
who are affected by the new framework. As I said, the amendments were
tabled in a constructive spirit to try to ensure that we end up with a
framework that achieves the goals that the Government have
set. Turning to clause
31 and amendment No. 30, the clause defines the meaning of the word
“film” forthe purposes of the tax regime.
Anyone who produces a film as defined by the clause will automatically
fall within the new framework, although they will qualify for the tax
break—the enhanced deduction or tax credit—only if they
also comply with the conditions set out in clauses 32 to
41. I want the
Committee to consider clause 31(2), on films produced as a series.
Amendment No. 30, which I moved, seeks to delete paragraphs (a) and (b)
from the clause and deal with the fact that the Bill currently provides
that unless a series complies with all of the criteria set out in
subsection (2) each film will be treated as a separate film for the
purposes of taxation. Paragraphs (a) to (c) require that the series has
no more than 26 episodes, that the total length is no more than 26
hours and that
it “constitutes a
self-contained work or is a series of documentaries with a common
theme”. The
cumulative conditions of subsection (2), particularly paragraphs (a)
and (b), could cause considerable practical problems if the legislation
goes ahead as it is. For example, a TV series that has a significant
number of short episodes would fall outside the cumulative conditions
of those paragraphs. There seems no sensible reason to treat such a
series as separate films for the purposes of taxation, nor is there any
obvious reason why a series of more than 26 hours should not be treated
as a single unit for film tax purposes.
As the
Chartered Institute of Taxation pointed out in its briefing on the
Bill, the cumulative conditions would give rise to a considerably
increased compliance burden because of the requirement to treat each
episode of a series as a separate trade. Schedule 4 treats each film as
a separate schedule D case 1 trade. For example, TV companies producing
long-running soaps will be required to keep separate tax records,
monitor costs and estimate the total future income for each individual
programme. They will have to track the loss position for each separate
episode, and that will involve considerable extra
cost.
Rob
Marris: Does the hon. Lady think that the British taxpayer
should subsidise through tax breaks the production of soap
operas?
Mrs.
Villiers: No. I was just coming to that. TV companies
cannot qualify for the tax break as their programmes are not intended
for theatrical release, but, because of the way the legislation is
structured, they come within the taxation framework that is being
introduced. They are concerned about getting an additional compliance
burden without any chance of getting a tax credit. That is why I am
discussing the clause with particular reference to TV companies. I am
not suggesting that we should extend the tax credit to cover
them—that would be inappropriate—but we must mitigate the
compliance burden that clause 31 would
impose. I have also
tabled an amendment that we shall discuss later which would take TV
companies that do not qualify for the tax break out of the overall
taxation framework in the Bill. That would also deal with the
problem. I hope that
the Economic Secretary will explain why he thinks it inappropriate to
consider a series of short episodes to be a single film and a single
trade for the purposes of taxation.
To conclude, clause 31(2)(c)
deals with the connection that there needs to be between films in a
series. Perhaps the Minister would like to expand on that. It seems
that it could involve subjective judgments as to whether a series of
films is sufficiently connected to qualify under paragraph (c). One
example that springs to mind is the series of Harry Potter films. Would
they be considered sufficiently connected to come within the paragraph?
If we leave uncertainty and subjective judgments in the framework, they
could lead to disputes about the level of the tax credit, which of
course will drive up the cost of borrowing against it. That was one of
the general points in my introduction. I look forward to the comments
of members of the Committee and the
Minister. 5
pm
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