Stewart
Hosie: The Economic Secretary
mentions— Mr.
Iain Wright (Hartlepool) (Lab): The hon. Gentleman is an
expert on “The Lord of the
Rings”.
Stewart
Hosie: No, not in the slightest.
The Economic Secretary mentions
Tolkein. What if Tolkein had been commissioned to write a Lord of the
Rings-type, swords and sorcery, elves and demons concept as part of
production? Would that have counted, or would it have been outside the
scope?
Ed
Balls: The hon. Gentleman helpfully allows me to make it
clear where the line is drawn. It is absolutely right that one has to
draw a line to delineate the point at which we believe the making of
the film begins. It is clear that when writing the book, J. R. Tolkein
was not part of the making of the film. It was a much earlier stage
than that. There is a long development stage, which often involves
people trying to commission or write scripts. There could be a book, or
the script could be for a film, a television show or whatever. During
that creative process and in that development stage,the
production of the film has not begun. To obtain the enhanced tax relief
that supports the making of the film, the line has been drawn after
that conceptual development stage.
Stewart
Hosie: Would the storyboarding of “The Lord of the
Rings” be part of production, before the detailed script is
written?
6.45
pm
Ed
Balls: The process in the consultation
has been to separate the stages of the film-making process. The
development stage takes place before the pre-production stage begins. A
lot of thinking goes on in the development stage, including the writing
of a script and consideration of which actors might be part of the
film. All those activities take place before the pre-production stage
begins and would fall under the definitions set out in the legislation.
The initial conception of possible story boards for a film would take
place in that development stage. That is not to say that there are no
costs involved or that they could not be set against income for tax
purposes. However, if we are trying to incentivise the making of a
British film, we must draw a line between developing the conceptual
framework and moving into pre-production. One starts to contract for
the making of the film at the pre-production stage.
On the basis
of the consultation, it is understood in the industry that there is a
distinction between amuch broader conceptual, speculative
phase, which is development, and saying, “This is a film; this
is a script.
We’ve gone beyond the point of creative speculation. We’ve
decided to make the film and we’re now going to commission all
the things that we need for it in the pre-production phase.”
That is understood in the industry and therefore reflected in the
amendment. There is a process called pre-production, which is a clear
phase in the making of a film that comes only when one has gone beyond
the speculative, creative phase and decided to make the
film. Mr.
Newmark: The Economic Secretary is floundering slightly.
The definitions that he is offering are open to interpretation. My
concern is that there will be an incentive for smart tax accountants to
shove what might generally be viewed as pre-pre-production into
pre-production. I am curious as to how he will get over the problem of
who will play Solomon in those
decisions.
Ed
Balls: It is widely understood in the industry that after
the development phase, when the conceptual phase is taking place, there
is a particular point called green light. At the point of green light,
the film gets the go-ahead, the studio is booked, the financiers come
in, the legal documentation is brought together and the special purpose
vehicle is created to bring together all the different elements of the
creative phase—people, rights, obligations and risk—into
one legal entity. At that green light stage, when a film moves from
development into pre-production, the tax incentive starts to kick
in.
Mr.
Newmark: Once again, the Economic Secretary shows that he
perhaps does not understand the creative accounting that tends to go
on. My concern—I still do not understand how he is going to get
us over this hump—is that the definitions that he has come up
with will not be clear and that there will be a tendency to show what
was pre-green light as pre-production. I still do not understand how
the Government propose to oversee that and decide who should play
Solomon in those very
decisions.
Ed
Balls: The hon. Gentleman makes a good
point. In defining the stages, we must ensure that the opportunities
for ambiguities or avoidance are reduced as far as possible. That is
exactly why we are specifying clearly that there must be one film
production company responsible for all the phases from the beginning of
the pre-production phase right through to completion, rather than a
number of overlapping entities. There has been extensive consultation
with industry figures to ensure that the terms pre-production,
principal photography and post-production of a film, as set out in
subsection 3(a)(i), are clearly defined and understood in the
industry. In a way
the difficulty we face was the point I was going to make in response to
the hon. Member for Chipping Barnet: we need flexibility in the way in
which the legislation is enacted. We need flexibility in guidance and
the way in which the tax authorities treat the production company. We
are not saying, as was suggested earlier, that the film company must do
all the pre-production, principal photography and the third stage
itself. We are not saying that it cannot work in
partnership or subcontract part of the work to other companies. The
important point is that, through these phases, an entity must be
actively engaged rather than simply being a financial shell in order to
divert tax revenues. The way that the FPC will
operate will be differentin every case and there has to be
flexibility in the way in which we interpret the amount of its
engagement in each of the three stages. It will not be a
black-and-white situation. The important thing is that we will be able
to track the responsibility of the FPC through all the three stages.
Companies have to be actively engaged in making a film. The tax relief
is for making a film, not for writing a book or for simply saving or
avoiding tax.
Mr.
Newmark: I very much appreciate where the Economic
Secretary is trying to go. On the one hand, he is trying to create
specific definitions of what is pre-pre-production and what is
pre-production, but on the other, he says that there must be some
flexibility. To me, flexibility means ambiguity, so my concern is how
the Revenue will interpret a piece of an advice given by an accountant
as opposed to what the Government want it to
be.
Ed
Balls: It goes to the very essence of making tax policy to
ensure that there are rules that are understood by people who are going
about a piece of businessor undertaking a project and that
have common application, while ensuring that there is flexibility to
deal with the circumstances of each individual trade. No two films will
look the same, or be financed or produced in the same way. The question
is whether we have a model that allows us to be confident that, when
attempting to subsidise through the tax system the making of a film,
the FPC is actively engaged in each of the three stages.
On the basis of our
consultation with the industry, we have come up with a definition that
is much better than the previous one because it makes clear that, to
some extent, there should be active engagement by the company in each
of the three stages involved in the making of the film. The FPC could
be making a film, but not rolling the cameras; it could be making a
film, but not actually booking a studio or getting actors in; or it
could be making a film without being involved in distribution. However,
if it is not involved in any of those three activities, it is not
making a film. The guidance and the tax case law, as it develops, will
make clear exactly how that will be applied in
practice.
Mr.
Dunne: It is now clear where the Economic Secretary is
seeking to draw the line. I happen to think that he is making a mistake
in that development cost expenditure ought to be included as a
legitimate expense of a film production company, but I would like to
draw his attention to a couple of clauses.
The Economic Secretary is
creating confusion through the drafting. In clause 33, there is a
definition of film-making activity that includes the word
“development”. That is picked up in paragraph 5(1)(a) of
schedule 4 which refers to
“film-making activities in
connection with the film”
thereby picking up development costs from
clause 33. The first line of paragraph 4(1) of the schedule refers to
the development costs of a film, so the Economic Secretary seems to be
clearly expressing an intent to the Committee that is not reflected in
the drafting of the
Bill.
Ed
Balls: I do not think that that is right. The hon.
Gentleman should find that clause 32(3)(a) is very clear. A film
production company is defined as a company that is
responsible: “(i)
for pre-production, principal photography and post production of the
film, and (ii) for
delivery of the completed
film”. To qualify for the
tax relief it needs to be involved in all three stages and the
definitions are commonly understood in the industry. In the earlier
phases, the costs that can be set against tax in the normal way are not
part of the making of a British film for these purposes so they are not
included. We had to draw the line somewhere and we consulted widely
with the industry before coming to that
view.
Jeremy
Wright: I want to take the Economic Secretary back to what
he said about subsection (3) when he indicated that it would be
remarkable if a British film or, indeed, a film of any other
nationality, did not involve one of the activities in subsection
(3)(a), (b) or (c). I agree, but the difficulty is that because of the
way in which the clause is drafted, the provisions in those paragraphs
are conjunctive and not disjunctive. All three must be done to qualify.
The difficulty that Opposition Members have highlighted is that there
are situations when companies may not be involved in all those
activities, but may still qualify in ordinary language as a film that
deserves tax
relief.
Ed
Balls: We are trying to put into statute definitions that
ensure that that the tax relief is properly applied and goes only to
genuine British film makers. We do not want to introduce loopholes that
allow the tax resource to be diverted elsewhere to shell companies and
so
on. If
“responsible for” meant that a company had to finance the
relevant activities in their entirety, if “actively engaged
in” meant that it had to do everything, or if
“directly negotiates, contracts
and pays for”
meant that it could not
involve or buy in expertise to advise it or to do some of those things,
the hon. Gentleman would be making a good point. However, that is not
the absolutist way in which this is being set up. We are requiring
active engagement, which does not mean absolute engagement. We are not
being prescriptive
and we are not saying that, to qualify, a company must be responsible
for every aspect of every activity. Clearly, the degree of activity
will vary film by film, case by case and with some films there will be
much more active engagement by the film production company in the
pre-production phase or the completion phase than in others. The
important point is that to qualify the film production company must
have some engagement in the pre-production and completion phases. It
cannot opt out of one phase or the
other. I
hope that that provides some clarity for the hon. Member for Chipping
Barnet because she made the same point earlier. We are not saying that
a special purpose vehicle cannot be used or that the company must
either work in isolation or do everything itself. We are saying that it
must be engaged in, have responsibility for and negotiate each aspect
of those three phases, but it may do so in partnership with others or
by bringing in other services from Britain or overseas. The important
point is that we will not allow the tax relief to go to a partnership.
There may be a partnership, but the tax relief will go to the British
film maker and the British film maker must be a film production
company—a vehicle that meets each of the three tests in the
clause. I hope that that provides
clarity. I
come now to the details of the amendments. First, amendment No. 31, as
the hon. Lady said, would remove the obligation on a film production
company to have responsibility for pre-production activity. As I
explained, we believe that a film maker must be actively engaged in,
and be responsible, for the pre-production phase. We are not saying
that that is an absolute or inflexible definition and it is possible to
have a greater or lesser engagement in the pre-production phase but, on
the basis of our consultations, we believe that it would be a mistake
for the provision to apply if there is no engagement as that would
suggest that we did not properly understand the delineation between
speculative development and the beginning of the production
process. Likewise,
amendment No. 32 would weaken the definition of a film production
company by removing the requirement that it must be involved in
negotiating, contracting and paying for the various rights, goods and
services that together make up the expenditure on making a film. Again,
and for reasons that I hope I have made clear, any company that is not
involved in negotiating contracting and paying for the fundamental
elements of making a film cannot be the controlling entity or the
essence of the making of that British film, which is what we want to
achieve in the provision. I stress that that does not mean all of the
film. Debate
adjourned.—[John
Heppell.] Adjourned
accordingly at Seven o’clock till Thursday 18 May at five
minutes past Nine
o’clock.
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