Mr.
Gauke: I am grateful to the Economic Secretary for
clarifying the matter. Is KPMG wrong in its assumption that the method
of calculation described in the schedule applies only if a film is in
production?
Ed
Balls: I referred earlier to the KPMG letter and to the
hon. Gentleman’s description of the example in appendix 1 of its
notes and its concern that there would be a restriction on the ability
to re-estimate. In our view, it is not right to be concerned about
that. The schedule works through an examination of the difference
between this year’s estimated income and last year’s, and
that is in line with standard accountancy treatment. We do not need to
set a limit at which there can be re-estimation. If the world changes,
estimates will be able to be changed and recalculated for tax purposes
even after the completion phase. I can give the hon. Gentleman the
assurance that he
seeks.
Mr.
Gauke: I apologise if I am being a little slow. Does that
mean that the mechanism contained in the schedule applies not only when
a film is in production but
subsequently?
Ed
Balls: I think that I am right to say that the hon.
Gentleman is asking us to give extra clarification to something that is
normally and readily understood. That is the intention behind the
amendment. In normal accountancy practice, if estimates change, they
are reflected in the following year’s treatment. That applies at
any point in time—forwards or backwards. We do not need a
special clarification or amendment. The hon. Gentleman is right that if
the situation arises and the world changes, re-estimation will be
allowed at any stage, including after the completion of a film. Does
that give him the clarification that he asks
for?
Mr.
Gauke: I think it does. The statement from KPMG suggests
that it presumes that the method of calculation described in the
schedule applies only when a film is in production, as the Economic
Secretary has fully explained. I question that statement; I do not
think that that is right. However, I am grateful for the
clarification.
Ed
Balls: I am also grateful for this opportunity. The hon.
Gentleman thinks that I have clarified the matter and I think that I
have. I see nodding, which suggests that I have. As soon as KPMG
concludes that I have, we will all be
happy.
Rob
Marris: May I ask my hon. Friend and his officials to
re-examine, although not today, paragraph 7(2)(b)? I understand what he
is trying to do, but I am not sure that paragraphs 7(2)(b) and 7(3)
achieve what he
wants.
Ed
Balls: I am disappointed that we did not have a discussion
on the explanatory notes on the matter, which will explain it further.
I am always grateful to my hon. Friend for his advice, and I will have
no problem examining whether we have got the paragraphs absolutely
right. I believe that we have, and any ambiguities could be clarified
in guidance later. When I read the paragraphs, I understood them. Given
that I started from a low base of understanding, I hope that that is of
some
reassurance. Amendment
No. 41 would remove the rules on when costs should be recognised for
tax purposes. A central objective in introducing the new tax relief for
British
films is to design out opportunities for abuse and the tax avoidance
problems that we have had in the past. Chapter 3 contains a number of
provisions that have been designed specifically to prevent the new
relief from being abused in the same way as previous reliefs, and
paragraph 9 to schedule 4 is an example of that intention. In the past,
there have been instances in which the actual level of production
expenditure was artificially inflated by the inclusion of deferments,
fees that are not paid until a film starts to make a profit. They are
fairly common in the industry. Paragraph 9(2) states that any payments
in advance should be ignored until the work is done, and that “deferred payments are recognised
to the extent that the work is represented in the stage of
completion.” Paragraph
9(3) states that only money subject to an unconditional obligation to
pay can be treated as having been incurred, and paragraph 9(4) sets out
that if an obligation is linked to income being earned, the costs can
be included only when an appropriate amount of income has been brought
into account. I hope that that clarifies why our approach is the right
one to take. We do not want to go backwards by accepting amendment No.
41. I must give one
more reassurance to the hon. Member for Chipping Barnet—on the
issue of transfer pricing. In that area, there is nothing particular or
novel about the film
industry— It
being twenty-five minutes past Ten o’clock, The
Chairman adjourned the Committee without Question put,
pursuant to the Standing
Order. Adjourned
till this day at fifteen minutes to Two
o’clock.
| 
