The
Economic Secretary to the Treasury (Ed Balls):
May I start by echoing the words of the hon. Member
for Chipping Barnet (Mrs. Villiers) and say that it is a great pleasure
and privilege to serve for the first time on the Front Bench in a
Committee under your chairmanship, Sir John? I thank you for your
indulgence in allowing us to debate the amendments and discuss clauses
31 and 32 at the same time. In discussing those two clauses, I shall
deal with several issues that were referred to by the hon. Lady and
that are pertinent to the Bill.
I thank Opposition Members for
their kind, warm words of welcome last week to those on the Front Bench
and particularly the hon. Member for Fareham for his comments a moment
ago. I served for 20 hours last year during the proceedings on the
Committee dealing with the Finance (No. 2) Act 2005 and, until today, I
would not have recognised the concept of becoming over-excited in
Committee. After the fine speeches of the hon. Member for Fareham and
my hon. Friend the Member for Wolverhampton, South-West (Rob Marris), I
would not say that I was over-excited, but there have certainly been
moments of interest. I
shall start by following the lead of the hon. Member for Chipping
Barnet in making some introductory remarks about chapter 3 in general
and clause 31 in particular. I will then turn to the points that she
made about the amendment. I have some comments to add to hers about the
context of the new tax credit for British films. She made many points
about that context with which my hon. Friends and I could agree. At
times, it was almost as if she had seen some of my speaking notes, so I
shall make sure that I do not repeat any of her words.
The importance of British
cinema to our cultural heritage was obvious from the hon. Lady’s
comments in welcoming the importance of the clauses. It plays an
important role in Britain and around the world in building a sense of
national identity and propagating it beyond our borders. Our aim in the
clause is to continue to provide and enhance the support necessary to
encourage a sustainable British film industry in what is an
increasingly competitive environment. That can be done in a range of
ways. For example, the Department for Culture, Media and Sport supports
the film industry in a number of ways directly through grant support.
However, the tax system also plays an important role. The UK is not
alone in this: many countries around the world do the same. All large
countries use their tax system to some extent to provide incentives to
support film production.
As the hon. Lady said, the
previous tax reliefs for British films have been in place since the
beginning of 1992 and, in 1997, they were enhanced and tailored to meet
the needs of small films. In that time, as she explained, expenditure
on British film production has risen from around £98 million in
1992, when the reliefs were first introduced, to £569 million in
2005. Over that period, attendance at cinemas in the UK
hasrisen from 98 million at the beginning of the 1990s to
264.7 million last year. It has clearly been the case that as the
strength of the British film industry has grown—along with its
use of tax relief—cinema audiences have grown as well.
The hon. Lady mentioned
“Harry Potter and the Goblet of Fire”, and many other
British films have been produced in recent years. In the last year and
a half, “Charlie and the Chocolate Factory”,
“Nanny McPhee”, “Pride and Prejudice” and
“Bridget Jones: The Edge of Reason” were released. I have
seen some of these films, but I must admit I have never seen other
British films such as “Layer Cake”, “Kinky
Boots” or “Ladies in Lavender”. I am told,
however, that the production of these films was based in
Britain.
In response to the hon.
Lady’s point about the danger of the number of UK films dropping
off, I point out that, in 2004, the number of British productions was
133. In 2005, during which the debate about these reforms was ongoing,
the number fell, but only marginally—from 133 to 124. Numbers
for this year will show the continuing engagement of the British film
industry in the production of films.
Unfortunately,
as the hon. Lady said, there is another side to this story. Throughout
the lifetime of the old reliefs that the Bill will deal with, there
have been examples of abuse and of people using those reliefs not as an
aid to film production but as a convenient way of avoiding tax. That is
why anti-avoidance legislation aimed at protecting the Exchequer from
abuses of film tax reliefs has been enacted regularly. Such reliefs
have featured in a number of Finance
Bills. The hon. Lady
referred earlier to the consultation document produced last summer,
which contains a full explanation of how the previous reliefs, which
were inherited in 1997 and continued since then, have been subject to
abuse, particularly from sale and leaseback schemes and, more
generally, because people who are not really film makers or producers
used such reliefs for tax purposes. There is a very long list on page
13 of the consultation document of all the different times in Finance
Bills from 2000 onwards that action has had to be taken to try to
tackle that abuse and those problems.
We announced in last
year’s Budget that there would be a formal consultation on a new
approach to reliefs for the film industry to remedy the defects of the
predecessor regime. As that consultation document exemplifies, there
has been an intensive, constructive consultation over last summer,
leading up to the details of the new relief being announced in the
pre-Budget report in 2005 and a complete change in the conceptual basis
on which film taxation support will be
provided. The change
will mean that the targeting of the relief will now shift directly to
the film production companies, rather than indirectly through the
financiers, investors or other intermediaries. That means that not only
will film makers no longer have to share the benefit of the reliefs
with others, but it will also bring an end to the tax-driven sale and
leaseback structures used extensively by film financiers to access
relief, which has been the source of so much tax avoidance in the
past. A further
significant way in which the new relief differs from its predecessors
is that, for the first time, its value to film makers is directly
related to the amount of work actually done in the UK. Previously,
eligibility for tax relief was determined by the certification of the
film as British under schedule 1 of the Films Act 1985, and the way in
which the certification rules worked meant that it was possible to
claim the relief on the total production budget, even where little, if
any, filming took place within the UK. Instead, the new relief provides
a direct incentive to make full use of film making skills, facilities
and infrastructure in the
UK. Another important
feature, which we will debate later when we get to the loss provisions
and the details of schedules 4 and 5, is the way in which this relief
is now designed to encourage genuine sustainability in the British film
industry. The value of the reliefs will be greatest where film is
profitable and where its income is
retained within the UK, rather than sent offshore, and there are also
incentives for film makers to reinvest profits from films in the UK,
particularly in the production of further British
films. Together,
the various elements of the new relief constitute a package designed to
give genuine reassurance of the Government’s continuing support
to the film industry. We have already announced the rates at which the
relief is set, which will mean that small budget films will be able to
claim a guaranteed minimum benefit worth 20 per cent. of
qualifying production costs, while large budget films will be able to
claim a benefit typically worth 16 per cent. of qualifying production
costs. By targeting the new relief at film producers, the provision
will be much better focused and more effective in fulfilling the
Government’s objectives for the film industry. As John Woodward,
chief executive officer of the UK Film Council, has said, the new
relief marks a new era for the future growth of our industry, which
operates in a highly competitive global
marketplace. We take
seriously the comments of the hon. Member for Chipping Barnet about the
importance of moving forward expeditiously to ensure that we have no
unnecessary uncertainty. It is important that we move expeditiously
through the debate on the clauses and amendments, because there is a
danger that, if we take too long over the details, we will add to the
uncertainty rather than resolve it. Margaret Matheson, a
producer, from Bard Entertainments, has
said: “Yes,
there will inevitably be delays involved in the changeover. That is
unfortunate, but this time next year we will have forgotten about
it.” I am not so sanguine
as to believe that people will have forgotten, but once the film
industry sees the scale and benefits available under this new support,
we will be able, as John Woodward said, to move into a new era with
substantial benefits to the British film industry for making films in
Britain, with British employees and British
ideas. Amendment
No. 30 would relax the test under which a series of films is treated as
a single film by removing the requirement that it must not have more
than26 separate parts or a playing time of more
than26 hours. A series that has fewer than 26 parts can be
considered to be one film, whereas a long-running series such as
“EastEnders” or “Friends”, if produced in
Britain, would have to be accounted for under tax purposes on a
case-by-case and episode-by-episode basis. The 26-part, 26-hours test
is a purely administration decision. It does not make any difference to
the favourability of the tax treatment; it is only to do with the way
in which the tax is accounted
for. A 10-hour episode
TV drama would be treated as a single film, but a long-running series
such as “Friends” or “Blue Peter”, if they
were being made as a TV series, would not be treated as single films.
They would instead be treated for the purposes of the tax regime as
separate trades. That is not new; it simply reproduces a requirement
under the Films Act 1985 that has been in force since 1999 and is based
on our consultation with not only the film industry, but the TV
industry. In
our view, the requirement will not involve any significant concerns. It
is quite in line with practice in the industry. A series such as
“Parkinson”, the “Jonathan Dimbleby
Programme” or “Davina” does not begin with the
assumption that it will be made in perpetuity.
People will want to be sure that they are making a return case by case,
that the audience figures match it, and that the costs are being
covered episode by episode. On the basis of the consultations, our
understanding is that that is in line with how the industry chooses to
organise itself and therefore should not cause a problem. On that
basis, we urge the Committee to reject the
amendment. The hon.
Lady referred to the broader issue of whether we are right to try to
have a single regime for the treatment of films, and TV and DVD
production, whether or not they qualify for the enhanced tax relief
that comes from their being made in Britain as a British film for
cinema showing. For the benefit of members of the Committee, I must say
that a key requirement is that at least 25 per cent. of the film has to
be made in Britain, an important matter that we shall be discussing
later. The existing
treatment of film production is based on the principle that film makers
exploit the films to generate income from their use rather than by
selling them. It is also tied to the completion of the film at which
point a trade of exploitation can start. At that point, the cost of
creating a film is deemed to be a normal trading expense. However, on
the evidence of our consultations so far, that fits pretty badly with
the way in which the industry works, how it accounts for itself and how
the accounting model was put to us during those
consultations. The
industry regularly makes films for immediate sale or in a way that
pre-sells almost all the exploitation rights to generate income to fund
the film. Rather than the tax treatment occurring at the end of the
process when the film is completed, it makes more sense to calculate
taxable income on a cost basis through the lifetime of the production
of the film. That is why we are structuring the tax reliefs under
schedules 4 and 5 to follow the principles that are used to account for
income and expenditure on long-term contracts. Although the treatment
is essential for the new film tax relief, it also provides a firm
foundation for other film production companies, such as those making
films for TV or for transfer to DVD. Nothing that we have been told by
the industry suggests that the working of those industries will find
difficulty with
that. 5.15
pm
Helen
Goodman (Bishop Auckland) (Lab): Before my hon. Friend sits down, I
have a question following on from the points made by the hon. Member
for Chipping Barnet. Subsection (2)(b) says:
“the combined playing time is not
more than 26 hours”. In
the consultations, did officials or Ministers consider more avant garde
installation events shown in museums and art galleries that may last
for more than 26 hours, with a film playing on a continuous basis, or
where a film is on a
loop?
Ed
Balls: I am grateful to my hon. Friend for that
intervention. We consulted widely with the film and TV industry. I am
sure that many people whom we consulted have had their avant garde
moments, but I am not sure whether we consulted any specialist avant
garde producers. My feeling is that if one is making an avant garde
film of more than 26 hours, it would still
be one episode—one film—and would therefore count as one
film for tax purposes. There may be examples of avant garde film
companies that have attempted to make films of more than 26 hours in
length running to a series of more than 26 episodes, but it strikes me
that the idea of 26 or more episodes of a 26-hour-plus film would not
necessarily be a profitable enterprise. I do not think that that
particular example was put to us during the
consultation. Mr.
Philip Dunne (Ludlow) (Con): I add my congratulations to
the Economic Secretary on his promotion to the Front Bench. May I also
say that is a pleasure to serve under you, Sir John?
While we are
on the holistic nature of the Government’s proposals, and the
fact that they are trying to bring television and film production under
the same regime, I am a little confused by what the Economic Secretary
is saying; it seems to fly in the face of the proposals in clause 39,
under which, in order to be eligible for film tax relief, productions
have to be intended for theatrical release. Several examples that he
cited were clearly made for television, rather than theatrical,
release.
| 
