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Division
No.
1]
Question
accordingly negatived.
Clause 32 ordered to stand
part of the
Bill.
Clause
33Meaning
of “film-making activities”
etc. Question
proposed, That the clause stand part ofthe
Bill.
Mrs.
Villiers: I want to speak briefly to the clause, which
covers the meaning of film-making activities, and to emphasise a point
that arose during discussions. The clause refers to
“development, pre-production,
principal photography and post
production” but there is
no statutory definition of those terms. The Treasury’s
frequently asked questions document says only that they
are “familiar terms
which are well understood within the film industry and take their
normal meaning for the purposes of the
legislation.” As we have
heard, however, the Minister himself had some difficulty in defining
those terms on Tuesday, and it would be exceptionally useful if
guidance on the new rules were issued as soon as possible. The
indication is that the guidance will not be available until October,
which leaves a considerable period of uncertainty. In that respect, I
quote Liz Brion of Grant Thorton, who has considerable expertise. She
says that if the legislation is
“not entirely clear, then many
film productions may well be postponed until publication of the
guidance notes, which will obviously have a knock-on effect on levels
of film production activity in the UK for much of the rest of the
year.” I hope that the
Government will consider bringing forward the publication of
guidance.
Ed
Balls: I can give the hon. Lady the assurance that she
asks for. We will be able to produce detailed guidance on the matter by
the end of the summer. On the basis of our consultations with the
industry, we do not believe that that will cause undue
difficulty.
Question put and agreed
to. Clause 33
ordered to stand part of the Bill.
Clause 34 ordered to stand
part of the Bill.
Clause
35Meaning
of “uk
expenditure” Amendment
made: No. 26, in clause 35, page 30, line 36 [Vol I], leave out
from beginning to end of line 37
and insert— ‘goods or
services that are used or consumed in the United
Kingdom’. Clause
35, as amended, ordered to stand part ofthe
Bill.
Clause
36Meaning
of “qualifying co-production” and
“co-producer” Question
proposed, That the clause stand part ofthe
Bill.
Mrs.
Villiers: I should like to emphasise that the clause
concerns qualifying co-production companies. As we have heard,
providing an attractive framework for co-production is vital if we are
going to encourage an indigenous British film industry. There is a dual
purpose to the film tax break: to encourage the big US producers to
make films here, and to ensure that home-grown talent can also make
films. They are dependent on co-productions to raise the money to get a
project off the ground, so I encourage the Government to make
absolutely certain that theirnew framework provides the right
conditions for co-productions to flourish.
Such co-productions are often
dependent on the Government’s successful negotiation of
co-production treaties with countries throughout the world. I urge the
Government to press ahead with negotiations of further treaties with
film-making destinations such as South Africa, and other countries with
increasingly vibrant economies that could provide valuable
co-production partners for the British film
industry.
Ed
Balls: I can give the hon. Lady the assurances that she
asks for. The purpose of the clause is to enable a film made under
international co-production agreement to be treated in the same way as
a British film—with the enhanced relief. We discussed earlier
how it will be made to work. As for international treaties, we have
them with many important film-making centres throughout the world, but
we will do what we can to ensure that more countries and film-making
centres are brought within the scope of those international
agreements.
Question put and agreed
to. Clause 36
ordered to stand part of the Bill.
Clause
37Taxation
of activities of film production
company Question
proposed, That the clause stand part ofthe
Bill.
John
Hemming (Birmingham, Yardley) (LD): I have a tendency to
blink when I am in the Whips Office and find myself on a new Committee.
Reading these papers, I must declare a sort of interest, inasmuch as I
am in the intellectual property business, but not the film business
itself. In the intellectual property business, one spends the money at
the start and receives the income
generally at the end. In my reading of schedule 4, to which the clause
relates, we appear to bring forward the tax date for income. That
confuses me. It may be that I have got it all wrong, but as far as I
can see on that reading, I should not want to be deemed a film
production company, because I would pay tax earlier. I thought that the
idea was not
to. 9.45
am
Ed
Balls: The clause introduces the schedule that we will
debate shortly, which sets out the details of the application of the
tax treatment of film production companies. The hon. Member for
Birmingham, Yardley (John Hemming) both gets to the heart of the point
and misses it. He is absolutely right that we are changing the future
taxation treatment of films, and we are doing so precisely, as he says,
so that the tax treatment of a film production company applies over the
course of the making of a film rather than on completion. As we
discussed at length on Tuesday, we are doing that because that is in
line with the way in which films and TV productions are
made—film companies get the income early to pay for the making
of the film. We are bringing the tax treatment into line with how films
are made and accounted for, so that we can then offer enhanced tax
relief over the lifetime of the film. The reason why film production
companies will want this is partly because it is in line with how they
work in any case, and partly because they will then get a fairly
substantial enhanced tax support for doing so. I hope that I have
reassured the hon. Gentleman, and that he understands our
point. Question
put and agreed
to. Clause 37
ordered to stand part of the
Bill.
Schedule
4Taxation
of activities of film production
company
Mrs.
Villiers: I beg to move amendment No. 40, in page 165 [Vol
I], leave out lines 15 to
17.
The
Chairman: With this it will be convenient to discuss the
following amendments: No. 42, in page 165, line 26 [Vol I], at end
insert— ‘(1A) Where a
company incurs expenditure on the development of a film that is
abandoned before pre-production and subsequently begins to carry on a
trade as a film production company in relation to another film, the
expenditure may be treated as expenditure of the trade of the second
film and as if incurred immediately after the company began to carry it
on. Provided that the same expenditure is not to be given more than
once.'. No.
53, in page 166, line 19 [Vol I], leave out paragraphs 7, 8 and 9 and
insert— ‘7 For the purposes
of this Schedule profits and losses are calculated in accordance with
generally-accepted United Kingdom accounting
principles.'. No.
55, in page 167, line 4 [Vol I], at end
insert ‘; and
accordingly— (a) where,
within six years of the end of the first period of account, it becomes
clear that the original estimates
were incorrect, the film production company can elect in writing to
amend the original tax computations to reflect the correct
position; (b) income taxed
under the provisions of paragraph 7 of this Schedule shall not be taken
into account for tax purposes in a subsequent period of
account.'. No.
41, in page 167 [Vol I], leave out lines 6 to
17.
Mrs.
Villiers: I would like to make a couple of preliminary
points on schedule 4 and the new framework that it introduces. I
welcome the fact that the Revenue said in the Budget that film tax
returns would be channelled towards a limited number of tax offices,
because this is clearly a specialist and technical area and it would be
asking a lot of the average tax office to ask it to deal with that. The
Government have made the right decision; if film companies get such
specialist offices, that will lead to their tax returns being handled
more efficiently. I
wish to raise another matter in this context that it is difficult to
fit into a discussion of any particular part of the Bill. It would be
useful if the Economic Secretary could say something about the transfer
pricing issue that has arisen in relation to the film industry. As we
have heard, in many cases films will be made by special purpose
vehicles, and the practice in respect of SPVs will be to sell the film
back to its parent company on completion. I am told that if the Revenue
insists that the price that has to be paid for this to count as an
arm’s-length sale transaction to the parent is any more than
cost minus tax credit, that could pose problems in terms of film
financing. Therefore, I shall be grateful for any guidance that the
Economic Secretary can give on that.
Amendment No. 40 would delete
paragraph 2 of schedule 4, which requires each film to be treated as a
separate schedule D class 1 trade. We have examined the issues involved
as they specifically apply to TV companies, but I would like to address
them in the broader context of all companies that will be covered by
the new regime, including those that can get the tax break. This is
designed to deal with the significantly increased compliance burden of
requiring each film to be treated as a separate trade. The procedure
would not be hugely burdensome for the standard model, where a single
film is made by a single company—a single SPV—and where
compiling a single set of accounts for one film is the logical
approach. However, the inclusion of pre-production in the definition in
clause 32 means that there will be problems with that model.
Also, in many cases an SPV
structure is not used, particularly where companies are in the film
business for the long term. The Government have been encouraging
companies that produce film after film. In their consultation document,
they specifically talk about the desirability of a slate approach being
taken by film companies and encouraging them to producea
succession of films. In that case, there may be a considerable increase
in the compliance burden. KPMG has helpfully circulated a briefing to
all hon. Members, which states that some of its clients estimate that
they might have to keep separate tax records for up to 600 films,
whether or not they qualify for tax breaks.
The Chartered
Institute of Taxation has stated that the new regime could give rise to
considerable expenditure-tracking headaches. That arises because a
company producing a succession of films or a number at the same time,
will inevitably incur expenditure that is difficult to allocate between
the films. It would be complex to allocate that expenditure sensibly
between the different projects. Furthermore, some expenses that are
currently deductible will cease to be so for no obvious reason. The
amendment would restore the existing position in which the overall
results of the film production company are taken as the single trade
for tax purposes, rather than require it to account separately for tax
purposes for each film. I come now to amendment No.
42. Will the Committee consider the treatment of expenditure on a film
that does not go into production? That expenditure cannot qualify for
the enhanced relief, because the film is not made. However, with the
repeal of the existing rules on deduction under section 41 of the
Finance (No. 2) Act 1992, that would leave companies without any
statute to rely on to allow them to make a deduction along ordinary tax
law principles. Can the Minister confirm that such expenses will be
treated as an ordinary trading expense, so that even though they do not
receive the enhanced deduction, they can be deducted in the normal
way? The Chartered
Institute of Taxation considers that the Bill leaves those costs in
limbo. Amendment No. 42 suggests another way to solve the matter. It
would enable the expenditure on a film that has been abandoned to be
carried over to the next film project carried out by a film production
company. I emphasise that costs for films that do not get made should
be considered a legitimate expense. Those films are encouraging
creative talent in the film industry. It is inevitable that, if we are
to have a flourishing industry that encourages innovation and the
development of projects, a considerable number of those projects will
never get off the ground. Film companies should not be deterred from
embarking on the expenditure necessary to get films off the
ground. Paragraphs 6
to 9 of the schedule introduce the complicated and controversial new
way of calculating profits and losses in the film industry, to which
the Committee’s attention has already been drawn. Amendment No.
53 proposes to delete those paragraphs and substitute them with the
provision: “For
the purposes of this Schedule profits and losses are calculated in
accordance with generally-accepted United Kingdom accounting
principles.” Instead of
the new regime applying, we will have accounting required according to
generally accepted practices. The amendment disapplies the
controversial new regime and leaves the film companies to account for
their profits according to ordinary accounting principles. If the
paragraphs are not deleted, the new tax framework could cause
significant practical problems for some companies.
Paragraph 7 requires the
entire estimated income from the film—regardless of how far in
the future that income may arise—to be taxed in proportion to
how the production costs are incurred. Once post-production is
complete, a company will be taxed on all future estimated income,
whether or not it has been earned by that stage. The requirement for
estimated income could be very problematic, both for independent film
makers and large production companies, mainly because it is almost
impossible to
predict the success of a film. The proposed new rules will mean
basically that companies will be paying tax, or receiving less by way
of tax credit, on income that they never received. They could also mean
that many companies will pay tax well ahead of receiving the relevant
income. It may be that the experts who have written to Committee
members are wrong in their interpretation of the provision, but I
should like the Economic Secretary’s reassurance that the
schedule will not have the effect that I have described, because it
would be very
damaging. The impact
is particularly harsh when a company not only produces a film but then
exploits it through licensing. Examples of such licensing are in the
DVD and TV markets, in soundtrack sales, in character merchandising,
which is particularly relevant to children’s films, and in
computer games, which are enormously important and provide a long-term
income flow to film makers. Paragraph 6 of schedule 4 contains a wide
definition of income for the purposes of the new regime, and takes
account of income from all such licensing projects. That income can be
unpredictable—I am sure that Members can think of many examples
of films that were expected to generate substantial revenues but
flopped at the box office and were never heard of again, whereas some
films have limited initial success and are very small-scale, but begin
to generate significant revenues some years down the line. That is
particularly true of films that acquire cult
status. I quoted the
accountancy firm of Malde and Co. in Tuesday’s sitting. They
said that trying to calculate this
income “is like asking
someone ‘how long is a piece of
string’”. I
should be interested to hear from the Minister what type of supporting
material would be needed to support an estimate of future income. Are
film production companies required to rely on critics’ comments?
Are sales agents’ predictions to be used? They could certainly
produce some over-optimistic
estimates. Paragraph
8 refers to compiling
estimates “on a fair and
reasonable basis, taking into consideration all relevant
circumstances.” That is
an extremely broad approach, and it seems to leave the way open for
serious disputes between film production companies and the Revenue as
to what constitutes “fair and reasonable.” It could lead
to uncertainty over the level of a tax break and the date when it might
be paid. To conclude,
I quote the Chartered Institute of Taxation. Speaking of schedule 4, it
said that it firmly believed
“that the new provisions will
result in excessive taxation and move us further away from the tax
follows accounts
principle.” I hope that
the Government will either reconsider the structure, or at least
reassure us that it will not work in the way that is anticipated by the
experts who have sent representations to Committee
members. If, as I
expect, the Government are reluctant to delete paragraphs 7 to 9, I
hope that they will consider the alternative proposal suggested by my
hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) in the
form of amendment No. 55. The amendment would insert, at the end of
paragraph 8, a provision
allowing estimates to be revised subsequently if they prove incorrect. I
hope that that modest change will be considered. If not, will the
Economic Secretary indicate that the Government will find a way to
ensure that estimates can be revised in those circumstances? If the
Government are not prepared to accept amendment No. 55, I hope that a
non-statutory procedure will be found, because it seems unfair to
require companies to abide by estimates that subsequently prove to have
been
over-optimistic. Amendment
No. 41 would delete paragraph 9, and to that extent my comments on the
deletion of paragraphs 7 to 9 embrace it. However, it was tabled
individually for a specific reason—to highlight a further
problem with paragraph 9, separate from the accounting difficulties.
Paragraph 9 introduces a new concept of when film expenditure is
incurred. Itsays that
“costs are incurred when they are
represented in the state of completion of the work in
progress.” I am informed
that that definition could produce difficulties in respect of film
exploitation costs, which a company may incur at the same time as
ongoing production. It seems to add an unnecessary layer of complexity
for no apparent reason. Normally one would expect a cost to be incurred
when there is an unconditional obligation to pay for it. Perhaps with
interpretation we will find that the new rules operate similarly to the
old ones, but if they differ from the current rules and ordinary
accounting principles, that will add to the complexity of the tax
regime faced by film companies. Can the Minister explain why it is
proposed to depart from a well-understood definition of whether cost is
incurred for tax
purposes? 10
am
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