Rob
Marris: I should like clarification. Although I am not an
accountant but a lawyer by background, the hon. Lady’s last
remarks seemed to contradict her amendment No. 53, which calls for
profit and lossesto be
“calculated in accordance with
generally-accepted United Kingdom accounting
principles.” I thought
that valuing and costing work in progress was a standard and generally
accepted accounting principle. She seems to be saying that valuing work
in progress, which is a standard accounting practice, could cause a
problem, but surely that contradicts her
amendment.
Mrs.
Villiers: My amendment would remove the new regime and
leave in place the existing rules, which would operate in accordance
with standard accounting practice. On that, I conclude my remarks and
look forward to the Committee’s
comments. Mr.
David Gauke (South-West Hertfordshire) (Con): I ask for
clarification, Mr. Benton. May I speak to amendment No.
55?
Mr.
Gauke: I shall add to the comments of my hon. Friend the
Member for Chipping Barnet on paragraphs 7 to 9 to schedule 4.
Paragraph 7 will require a film’s entire estimated income to be
taxed in proportion to how production costs are incurred. Most of the
experts who provided us with representations took that to mean that
once post-production is complete, a company will be taxed on all future
estimated income. I say “most of the experts”, but it is
fair to say that KMPG presumed that the method of calculation would
apply only where a film is in production. That was a presumption,
however, and even KPMG acknowledged some ambiguity in the text.
Clarification on the matter is
important. Amendment
No. 55, which was tabled in my name, was drafted on the basis that the
interpretation of most of the experts is correct. If so, as my hon.
Friend said, there is no mechanism in the Bill for reducing the
estimated income if projections prove optimistic. Given the nature of
the film business, it is difficult to make accurate projections on such
matters. We have a difficulty with the fact that a film might be taxed
heavily but might not receive anything like the projected income a few
years down the line.
The British Screen Advisory
Council pointed out that that income is not discounted for time in any
way. My amendment would merely provide a mechanism to deal with that
problem. As my hon. Friend said, there might be a non-statutory way to
do so, but I should be grateful for the Economic Secretary’s
views on whether he acknowledges the problem and on how he would seek
to address it if not by accepting amendmentsNos. 55 or
53. The second point
that my amendment raises was mentioned by KPMG, which stated that
nothing in the Bill would allow film production companies preparing tax
computations after the end of production to strip out the estimated
income already taxed. That creates a danger of double taxation. Clearly
that would be unfair, and my amendment seeks to address the problem. I
should be grateful for the Economic Secretary’s views on whether
that is an issue, how best to address it and whether amendment No. 55
would do so
successfully.
Ed
Balls: We debated earlier the principles and purpose
behind the new reliefs, and the schedule and the amendment address in
detail how the reliefs will work in practice and how we can make a
sensible and robust regime work properly. I can provide reassurance and
clarification in a number of ways for the hon. Gentleman. As we
discussed on clause 31 on Tuesday, however, the hon. Member for
Chipping Barnet has proposed amendments that, in some cases, strain the
boundaries and risk taking us back towards some of the problems even
though she agrees with the new legislation’s fundamental
purposes of tackling tax avoidance.
Amendment No. 40 is at the
heart of the new regime and the view that it is necessary for each film
to be treated as a separate trade in order to deal with the problems of
the past and to ensure that the tax avoidance industry cannot get its
hands on these new reliefs. The proposal would not impose an
unnecessary regulatory burden and does not run contrary to what has
been explained to us as the normal industry
practice. Film makers are interested in keeping to budget and making a
profit. It is normal practice for them to consider costs and income on
a film-by-film basis. How else would they know whether a film was going
to be profitable? It
is clear that each film is a project, and is handled and accounted for
as such. The requirement to treat each film as a separate trade
acknowledges that, but also recognises that the treatment in schedule
4—and, more particularly, in schedule 5—offers special
and valuable opportunities. However, we need to draw a line round each
film to ensure that the advantages of the reliefs apply to the making
of British films and do not leak out more
widely. Like the hon.
Lady, I have studied the submission from KPMG but, in our view and on
the basis of our consultations, KPMG’s fears about compliance
burdens are not broadly shared in the industry. What we are doing is in
line with how the industry normally accounts for films
already. Amendment
No. 42 addresses cases where development expenditure needs to be passed
from an abortive film to an active film in order for it to be
recognised for tax purposes. Our view is that amendment No. 42 is
unnecessary. To return to some of the issues that I set out earlier,
development expenditure goes on deciding whether to make a film, not on
making it. If the idea for a film is abandoned, what has been abandoned
is the idea, not the film. The idea becomes a film only when the film
starts to be made, and the special tax treatment applies to the making
of the film, as we discussed earlier.
If production has started, the
value of the development is brought into the trade of
producingthe film. The film production company buys the
development work to make the film—it cannot be made without that
work—or there is a transfer of costs within the company to
recognise them. That is what paragraph 4 to the schedule is about. If
the film is subsequently abandoned, those development costs are
recognised.
Amendment No. 42 suggests that
the expenditure on abandoned and fruitless ideas needs to be passed on
to the film production trade, in order for it to be relieved, but that
is not so. Just because a film production trade is ring-fenced does not
preclude other expenditure in the company from being handled under
normal rules for normal tax purposes. I can therefore give the hon.
Lady the assurance that she asked for that those costs will still be
treated for normal tax purposes; it is just that they will not be
included in the calculation of the enhanced
relief. Amendment No.
53 is more radical and containsat its heart the proposition
that tax must follow accountancy. As I said in my introductory remarks,
the accounting treatment of film is not without doubt and, where doubt
exists, there is the opportunity to rearrange things for tax advantage.
The purpose of the Bill is to ensure that such activity does not cause
tax avoidance or the leakage of reliefs away from the making of British
films. Amendment No. 53 proposes that profits and losses should
be “calculated in
accordance with generally-accepted United Kingdom accounting
principles.” However,
the problem, as we have discovered in recent years, is that there is no
generally accepted treatment.
In the end, treatment falls
back on industry practice for reporting profits to company owners. The
danger is that the proposal smacks of letting the company’s own
accountants decide what the taxable profits should be; but until the
introduction of new international accounting standards, that is not
where we want to be. The method set out in the Bill is in accordance
with where international accounting standards are going, best practice
in the industry, and where accountants’ standards are moving
to—so much so that some companies will need to make few, if any,
computational adjustments to their accounts. Amendment No. 53 would
take us backwards and away from international best
practice.
John
Hemming: The key question about amendment No. 53 is: when
does the cash come in as income? One can make an estimate at the start,
but it is a finger in the air. That is why amendment No. 55 is a good
amendment if amendment No. 7 fails. However, I still have a problem
understanding why anyone would want to go through this regime if they
are in the business of producing film, because most of the income comes
in at the tail; it does not come at the start. Where is the cash coming
from to pay all these taxes?
Ed
Balls: In our earlier debates, it was explained why we are
bringing in a tax treatment to qualify for an enhanced relief. People
would want to go through these procedures to get the 20 per cent. tax
credit for a smaller film and 16 per cent. for a larger film. That is
why companies will go through the regime: to get the advanced tax
support. We are
applying this model because of the way in which the industry works. I
do not know whether the hon. Gentleman had the chance to read the KPMG
briefing to which the hon. Member for Chipping Barnet referred earlier,
but it contains a worked example on a different point about whether
estimates could be revised. In the example, the film does not get made
in the end, but costs are applied through the life of the making of the
film, and there are two tranches of income, one of which comes in the
first 18 months and one of which is to come on completion. Because the
film is not made, a concern about estimates is claimed. In the example,
the income to the film production company comes well in advance of the
completion of the film precisely so that the costs of making the film
can be covered. We are putting in place a tax treatment that allows
income and costs to be spread over the lifetime of the film. With the
old system, that occurred only on
completion.
John
Hemming: On that point, I understand that the system is
designed to replace a regime that effectively allows the capital that
is placed on risk and invested in intellectual property to be treated
as a revenue spend right at the start and then for the income to be
brought in against that—meaning not only income in terms of
investment, but income from which one gets the cash right at the start.
There is some merit to that. However, I just do not understand where
the cash comes from. Who pays whom for
what?
Ed
Balls: Without wanting to delay the Committee
unnecessarily on this point, I reiterate my earlier
comments that this is how film making works. Cost is spread through the
lifetime of the making of the film, and income is generally spread
through the lifetime of the film to cover those costs. According to our
consultation with the industry, that model works for film making in
order to qualify for the reliefs. The old model to which the hon.
Gentleman referred was both out of date with best practice and subject
to substantial abuse. We are trying to implement a model that will
avoid some of the problems that we discussed
earlier.
Mrs.
Villiers: What abuse are the Government afraid of? If the
system gives rise to abuse, the Opposition will, of course, support the
Government’s approach, but we have not heard a convincing
explanation about the abuse they are trying to prevent, or how the new
structure requiring payment of tax in advance of income is needed to
solve a real
problem.
Ed
Balls: We are in danger of repeating our debate on clause
31. We are trying to move from a regime that was out of line with the
accounting practices of film production companies. It too often allowed
tax relief to leak out of the making of films; instead, it could be
shared by financial vehicles and financiers. We are putting in place a
new model, which we debated at length under clauses 31 and 32, to
ensure that the tax relief goes to the maker of the film—the
film production company. It does so throughout the making of the
film. 10.15
am If, under
schedule 4, we were to debate how we operate those rules, it would be a
sensible debate. However, as I said at the beginning, although the hon.
Lady proclaims to support the new model, she is swayed by those who
have proposed amendments and who want to take us back to the old world.
We have to make a choice. We can operate the old regime, but she seems
to want it for only part of the time—for TV companies and for
DVD films. We want to operate the new regime all the time because we
want to avoid the old problems; we do not want to be taken back to
them. I urge her to reflect again on the good speech that she made at
the beginning of the debates on this chapter, and I ask her to help us
to implement the measure rather than always harking back to past
problems. I turn to
amendment No. 55. The hon. Member for South-West Hertfordshire, in what
I think is a probing amendment, is trying to help us clarify how
estimates should be used in the calculation of taxable income or
allowable losses. The amendment would ensure that estimates can be
revisited, and that something included as an estimate in one year would
not be included in another year if the income projection proved to be
accurate and hence taxed twice. I assure the hon. Gentleman that the
way in which schedule 4 treats estimates and revisions will meet his
concerns. Paragraph
8 to schedule 4 makes it clear that estimates are to be made using a
proper view of the situation at the accounting date. It is possible
that estimates made in relation to that date may not be correct when
taking all the information available into
account. In such cases, returns can be amended. No special legislation
is needed to enable companies to do so, nor is it necessary to set a
time limit on when that can be done. In our view, the mechanisms to
allow companies to do what the hon. Gentleman asks are already
available in the schedule. We also do not need
legislation to reflect changing estimates that arise from new facts or
new situations, including new estimates of income or costs. For
example, if I have a contract this year to exploit my company’s
film that, in the substance of the transaction, will yield me £1
million over five years, I shall make an estimate, which is akin to
fair value in accountancy terms—I use that term with some
trepidation, as I am neither an accountant nor a lawyer. However,
things may change, and the new estimate, based on all the relevant
circumstances, including the new ones, may be that I will receive only
£900,000. The
formula in paragraph 7 to the schedule says that such a decrease will
be recognised in the second year. That is not new; it is the normal
sort of accountancy valuation and re-estimate required properly to
reflect the substance of the arrangement, which adjusts year on year to
track the proper view of income. We do not need specific provisions to
allow that sort of change to be made to estimates; it can be done
within the ambit of the schedule. I hope that I have reassured the hon.
Gentleman.
| 
