Ed
Balls: The hon. Gentleman is absolutely right. We are
putting in place a way of accounting for films, television and DVD
productions for tax purposes, under which enhanced relief is available
only for films intended for showing in a cinema. The point that I was
just concluding, in response to my hon. Friend the Member for Bishop
Auckland (Helen Goodman), is that when one commences the production
process, it is not always clear whether the film will be for cinematic
or TV purposes. It would not make sense to do as someone proposed and
have one method of accounting for tax for films that will qualify for
enhanced relief, and a completely separate and different basis for TV
and DVD films that will not qualify for enhanced relief.
We do not think that
the proposal will be a problem for the industry; in fact, in the main,
it is in line with industry accounts, and in line with the direction in
which international accounting standards are moving, in terms of their
reform. It is much more sensible to move to the single system proposed
in the Bill for tax accounting purposes for all films, including TV and
DVD films. Included in those are films intended for cinematic showing,
which will also qualify, beyond the normal setting of cost against
income for tax purposes, for the enhanced relief that is set out in the
schedules to
come. Some
have suggested that we run two completely parallel systems—a new
one for cinema films, and the old one for TV films. Our view is that
that is out of line with best international practice and current TV
practice, and would be complex, burdensome and over-regulatory. It is
much better to move over to a single system for all TV, film and DVD
production, within which the enhanced relief is available only for
British films produced in Britain that are for cinematic release.
Having said all that and having made a reasoned case, I urge the
Committee to reject the amendment in the name of Opposition Members,
and to support clause 31, allowing us to commence debate on the rest of
the Bill.
Mrs.
Villiers: I was slightly unnerved by the spooky similarity
between the first part of the Economic Secretary’s speech and
mine. That outbreak of consensus is welcome, although I suspect that he
and I will not always find ourselves of such like mind.
The Economic Secretary also
emphasised the importance of not delaying this afternoon’s
debate so that we did not add unnecessary uncertainty to Bill business.
I suspect that the film industry will not mind whether we take an hour
or two hours to deal with the issue, particularly as most of its
members are yacht-hopping at Cannes this week. I do not think that they
are looking at what we are up to with great closeness.
[Interruption.] My sister-in-law is not there; her film was not
selected. It is important that we take time to get this issue right. We
do not want to rewrite the film tax regime for the seventh
time—or whatever time it would be—next year.
In a sense, it is a little
difficult to respond to a number of the Economic Secretary’s
points, because they tend to bleed into the debates that we will have
on the coming amendments. I shall confine myself to picking up on one
or two things that he said. He emphasised that the issues relating to
the amendment of paragraphs (a) and (b) were administrative and did not
affect the amount of tax payable. My response is to ask why we are
imposing that complicated and difficult framework if it is not going to
yield revenue benefits for the Government. It seems to me that we are
imposing a burden unnecessarily.
For reasons that I shall go
into when we explore the next set of amendments, it is impractical and
not sensible to have separate regimes for TV and film companies. It is
entirely possible to retain a framework for TV companies that runs
along ordinary company law accounting lines, and I have tabled
amendments to that effect to which I shall speak in a moment.
I remain concerned about the
issue of treating each particular episode as a separate trade and have
tabled amendments on schedule 4 in respect of that. I shall not press
my amendment to a Division and I beg to ask leave to withdraw it, but I
retain concerns about the issue and hope that the Government will take
them on
board. Amendment,
by leave, withdrawn.
Clause 31 ordered to stand
part of the Bill.
Clause
32Meaning
of “film production
company”
Mrs.
Villiers: I beg to move amendment No. 47, in page 29, line
14 [Vol I], at end insert ‘; but
notwithstanding the provisions of this section, a company is only a
“film production company” if it meets the conditions for
film tax relief as set out in section 38 of this
Act.'.
The
Chairman: With this it will be convenient to discuss the
following: Amendment No. 64, in page 29, line 17 [Vol I], leave out
lines 17 to 20 and
insert— ‘(a) undertakes
(whether on its own account or whether it is responsible to a third
party)— (i) principal
photography and post production of the film,
and (ii) delivery of the
completed film,'.
Amendment No. 31, in page 29,
line 18 [Vol I], leave out
‘pre-production'. Amendment
No. 65, in page 29, line 22 [Vol I], leave out
‘pre-production,'. Amendment
No. 32, in page 29 [Vol I], leave outlines 24 and
25. Amendment No. 33,
in page 29, line 26 [Vol I], at end
insert— ‘(3A) The Treasury
may, by regulations— (a)
amend subsection (3); and (b)
provide that specified activities are or are not to be regarded for the
purposes of this Chapter as film making
activities; and
in this subsection “specified” means specified in the
regulations.'. Amendment
No. 46, in page 29, line 27 [Vol I], after ‘company',
insert ‘resident
in the United Kingdom (and not resident in another place in accordance
with the law of that place relating to
taxation)'. Amendment
No. 34, in clause 34, page 30, line 19 [Vol I], after ‘on',
insert
‘development,'. Government
amendment No. 26. No.
35, in clause 35, page 30, line 37 [Vol I], at end
insert— ‘But for the
purposes of this
subsection— (a) services
provided in relation to rented equipment shall be considered to have
been performed in the United Kingdom where the equipment is used in the
United Kingdom; and (b) where
goods are initially supplied in the United Kingdom, their subsequent
transport and use outside the United Kingdom shall not prevent the
relevant expenditure from being treated as UK
expenditure.'.
Mrs.
Villiers: I do not propose to press amendment No. 46.
Having reflected on it, I do not believe that it would be a positive
change to the
Bill. Clause
32 is one of the most important and controversial parts of the new film
tax structure. It defines the meaning of “film production
company” for the purposes of the Bill. The clause represents one
of the most significant changes to the old rules, focusing the tax
advantages solely on film production companies to ensure that what the
Chancellor called grey middlemen cannot get the tax advantage. As we
have heard, the clause focuses the scheme on the people making the
films, not on the groups of high net worth investors.
The new framework proposes that
only companies falling within the definitions set out in clause 32 can
be capable of qualifying for the new film tax breaks. A number of film
industry sources have expressed anxieties about the definitions; many
are worried that legitimate productions will miss out because of how
clause 32 is drafted. In its helpful briefing, the British Screen
Council stated that “the
provisions of clause 32 are very proscriptive and make it extremely
difficult for genuine film production companies to
qualify”. It felt that a
simpler and clearer definition should be
considered. In
amendment No. 33, I proposed to allow the Treasury to refine and update
the definition through regulations. The use of secondary legislation in
the tax context is
always problematic, and I am also conscious that it would give rise to a
degree of further unpredictability and instability. However, it could
be useful for the Committee to consider the idea, given the
definition’s drawbacks, which I shall
outline. First, I turn
to the issue that we have already started to address: that of TV
companies. As we have heard, any company falling within the scope of
the Bill’s definition of a film production company is covered
even when it cannot qualify for the tax break. Hence, a number of
companies will not be able to benefit from the advantages of the film
tax regime, but will be subject to the disadvantages. As we have heard,
that will concern a lot of TV companies, although not only TV companies
could be involved.
Those making training videos or
safety or promotional films, or airlines that produce films with
guidance on safety measures could also be affected. My amendment No. 47
would remove companies from the scope of the legislation unless they
were making a film that would qualify for the tax relief set out in
clause 38—that is, the enhanced deduction or film tax
credit. That would
leave TV producers governed by the ordinary rules on company taxation
and the existing rules set out in the Finance (No. 2) Act 1992. I have
tabled consequential amendments on clauses 46 and 47 to make that
possible. They would deal with the problem that we have discussed
because TV companies would no longer be at risk of having to draw up
separate accounts for every episode of a single series.
However, there is another
pressing reason to take such companies out of the framework. In general
terms, the framework set up by the Bill requires that a relevant
proportion of income from the making or exploiting of films is brought
into account for tax purposes on an estimated basis, before it is
earned. That includes income from merchandising and the use of
characters and music, as well as directly attributable
income. The effect is
that tax liability will be accelerated and tax will be due on income
that has not yet been earned. I do not wish to anticipate our debate on
schedule 4, but although applying the provisions to film companies that
can qualify for the tax break is controversial, it seems even more
harsh to apply what I think is a problematic regime to companies not
eligible for the tax break at all. That would mean subjecting such
companies for no reason to a regime harsher than that applicable to
companies in other industries.
It would be useful if the
Economic Secretary explained the motivation behind that new regime in
schedule 4. If it is to do with a tax break and seeks to deal with some
kind of tax loophole, there is no justification for applying it to
companies that are not capable of qualifying for the tax break in the
first
place.
Rob
Marris: Just to be clear, is the hon. Lady saying that,
for example, each episode of “Coronation Street”, which
would not meet the 26-parts rule that we discussed, would have to be
treated as a separate film? Is that how she understands the
legislation?
Mrs.
Villiers: Yes, my understanding is that that is how it
works. I urge the Committee and the Economic Secretary to consider the
problems in respect of TV companies.
The Committee should consider a
second point about clause
32. 5.30
pm Sitting
suspended for a Division in the
House.
5.45
pm On
resuming—
Mrs.
Villiers: Another key problem with the definition of film
production company in clause 32 is that subsection (3) requires a
company to be involved in and responsible for multiple activities
before it can qualify as a film production company and potentially
obtain the tax break.
Paragraph (a) seems to require
that a film production company should be responsible for all activities
that are listed. They include,
“pre-production,
principal photography and post production...and...delivery of
the completed film”.
Paragraph (b) requires the film
production company also to be involved in the planning and decision
making in relation to those activities, and paragraph (c) introduces a
further requirement that the company
“directly negotiates, contracts
and pays for” those
rights, goods and services.
An initial problem arises
because there is no statutory definition of terms such as
“pre-production”, “principal photography”
and post production. It could be cured by regulation if amendment No.
33 were agreed to. Alternatively, the early publication of guidance
notes would I am sure be welcome. However, even if that problem were
dealt with, the definition would still be at odds with the way in which
the industry works. It seems unrealistic to expect a single company to
be directly responsible for all the listed activities in subsection
(3). The Committee
knows that all industries break down their activities into specialist
areas, and the division and specialisation in the film business is more
marked than in any. Some of the specialist production companies in
Britain are world leaders in their field, and if a single company must
undertake all those activities to qualify as a film production company,
many in the industry are concerned that it would mean depriving many
genuine film production companies of the support of a tax break. For
example, when a company films overseas, it is standard practice to hire
a local production company to organise much of the work and carry out
many tasks in relation to the film. In some countries, there may even
be a legal obligation to hire a local firm for such
activities.
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