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Session 2005 - 06 Publications on the internet Standing Committee Debates Finance (No. 2) Bill |
Finance (No. 2) Bill |
The Committee consisted of the following Members:Frank Cranmer, Emily
Commander, Committee Clerks †
attended the Committee Standing Committee AThursday 18 May 2006(Afternoon)[sir john butterfill in the Chair]Finance (No. 2) Bill(Except
clauses 13 to 15, 26, 61, 91 and 106, schedule 14 and new clauses
relating to the effect of provisions of the Bill on section 18 of the
Inheritance Tax Act
1984)
Schedule 4taxation
of activities of film production
company Amendment
proposed [this day]: No. 40, in schedule 4, page 165 [Vol I], leave
out lines 15 to 17.—[Mrs.
Villiers.] 1.45
pm Question
again proposed, That the amendment be
made.
The
Chairman: I remind the Committee that with this it will be
convenient to discuss the following amendments: No. 42, in schedule 4,
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 schedule 4, 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 schedule 4, 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 schedule 4, page 167 [Vol I], leave out lines 6 to
17.
The
Economic Secretary to the Treasury (Ed Balls): I welcome
you back to the Chair, Sir John. We had a long debate this morning on a
number of the clauses relating to schedule 4, and I was just coming to
the end of my remarks. I had referred to all five
amendments—
amendments Nos. 40, 42, 53, 55 and 41—and I
was answering a final question from the hon. Member for Chipping Barnet
(Mrs. Villiers) on transfer pricing. I concluded by saying that we did
not think that there was anything novel in the situation for transfer
pricing that will face the film industry. It will be no different from
the normal way in which transfer pricing rules apply. The normal rules
will apply and although that may be uncomfortable for those who
attempted to use them for tax avoidance reasons, we do not think that
there will be a problem to trouble any genuine film makers. On that
basis, I ask the hon. Lady to withdraw the
amendment.
Mrs.
Theresa Villiers (Chipping Barnet) (Con): I welcome a
number of points in the Economic Secretary’s response to the
debate. I welcome his clear indication that development costs for films
that never go into production could be deducted according to ordinary
tax law principles. Even if he is not prepared to accept my amendment,
which suggests that they should receive the enhanced deduction, it is
welcome that they have not accidentally been excluded from the ordinary
regime. I also
welcome his reassurance that film production companies will definitely
be able to correct estimates if they prove to be incorrect. That was my
understanding of what he said. I still have some anxieties as to how
that tallies with the Bill’s terms, but his reassurance on that
point is welcome. I
take issue, however, with his repeated assertion that what is proposed
in schedule 4 is in line with standard industry budget and accounting
practice. As I acknowledged in my speech on the amendments, there are
some structures that involve special purpose vehicles, where the
proposed new framework might not produce a significant burden. However,
as the British Screen Advisory Council points out, not all film
producers will want to use that model. It states that if so, the
requirement to look out for estimated income could be problematic both
for independent film makers and large production companies. It is
almost impossible to predict the success of a film in advance. The new
obligation would run counter to the process of tax buying accounting
treatment and could result in companies paying tax or receiving less by
way of tax credit on income that never materialises or well ahead of
receiving that income. It also questions its application to films, such
as television programmes, that do not attract the tax credit. That
illustrates the concern across the industry since that organisation
represents a broad-ranging coalition of film industry interests. In
contrast, the Economic Secretary seemed to imply that those issues were
somehow dreamed up by an incorrect brief from KPMG. I wanted to assure
the Committee that they are more widely felt.
I reassure the Economic
Secretary that it is not the intention of any of my amendments to leave
the Government scheme open to abuse. I stand entirely by what I said in
opening the debate. My amendments have been tabled with a view to
exploring important issues regarding the computation of profits for
film production companies. At the end of the discussion, I remain to be
convinced that the move to the new method of calculating profit and
loss is necessary to prevent the abuse of the film tax scheme, but I
take on
board his comments. I will reflect on them, particularly those about
amendment No. 41 and possible abuse relating to deferral.
In the
light of that, I will not press any of the amendments, but I hope that
the Economic Secretary will reflect with care on whether this punitive
new regime is necessary to prevent abuse of the film tax scheme. I beg
to ask leave to withdraw the amendment.
Amendment, by
leave,
withdrawn. Schedule
4 agreed
to. Clause 38
ordered to stand part of the
Bill.
Clause 39Conditions
of relief: intended theatrical
release
Ed
Balls: I beg to move amendment No. 27, in clause 39, page
31, line 28 [Vol 1], leave out subsection (3) and
insert— ‘(3) Whether this
condition is met is determined for each accounting period of the film
production company during which film-making activities are carried on
in relation to the film, in accordance with the following
rules. (4) If at the end of an
accounting period the film is intended for theatrical release, the
condition is treated as having been met throughout that period (subject
to subsection (5)(b)). (5) If
at the end of an accounting period the film is not intended for
theatrical release, the
condition— (a) is
treated as having been not met throughout that period,
and (b) cannot be met in any
subsequent accounting
period. This does not affect
any entitlement of the company to relief in an earlier accounting
period for which the condition was
met.'.
The
Chairman: With this it will be convenient to discuss the
following amendments: No. 43, in clause 39, page 31, line 28 [Vol I],
leave out subsection (3) and
insert— ‘(3) Whether this
condition is met may be determined at any time after film making
activities begin, so long as the film is intended for theatrical
release prior to delivery of the completed
film'. No.
44, in clause 41, page 32, line 4 [Vol I], at end
insert ‘and expenditure incurred by
a person which is reimbursed by a film production company shall be
deemed to be expenditure by the film production company for the
purposes of this section where it would have fallen within this section
had it been incurred directly by the film production
company'. I
call Dawn Primarolo—I am sorry: Ed
Balls.
Ed
Balls: It is a great honour to serve under your
chairmanship, Sir John, and a great compliment to be mistaken for the
Paymaster
General.
It
might help the Committee if I set out a little of the thinking behind
the clause. It sets out the first condition that a film must meet to be
eligible for the new tax relief: subsection (1) makes it clear that it
must be intended for theatrical release. That is the same requirement
that a film had to meet to qualify for the old relief. Both the old and
new reliefs are intended to provide support to films that are made to
be shown at the cinema, and exclude other films,
which we discussed in our debates
on clause 31, such as those made for television. The television industry
is healthy and productive and was excluded from the old film tax
reliefs in 2002, so this is not a new
rule. Subsection (2)
gives more detail on this requirement. Theatrical release means
exhibition to the general public at a commercial cinema—again
the common-sense, generally understood definition—and a film is
considered to be intended for theatrical release only if it is planned
that a significant proportion of its income should come from cinema
exhibition. This condition was originally imposed because the old
reliefs were being abused, and claims were being made for soap operas,
news programmes and even for doubtful productions that were clearly not
intended to be viewed anywhere, by anyone.
We acted to narrow the scope
of the relief to genuine cinema productions, which is what was always
intended, and that intention remains. The question is: when should the
definition of the film be judged? Under the old system of reliefs, that
was done when the film was finished, which was when the old reliefs
were claimed. As we discussed earlier, we mean the new reliefs to be
claimable from the start to assist film makers with cash flow. That
approach is based on a modern understanding of best accounting practice
and the way in which TV and film makers work.
As a consequence of the
decision to change the model for film tax relief—enhanced tax
relief—the film maker now needs to take a view at the outset.
But what if something changes? With the original drafting, we would
have preserved the original judgment, which was made at an early stage,
even when the situation soon changed. However, since the Bill was
published, we have held discussions with the industry, and we accept
that preserving the original judgment could have unintended
consequences. We were particularly concerned that that might lead to
film makers taking overly optimistic views in the early stages, so that
makers of many productions that are inevitably destined for television
or other media would claim film tax relief in the early stages of
production. Our amendment will allow greater flexibility when the
position changes. It will allow a film that was originally intended for
the cinema to drop out of the film tax relief without losing any relief
that it has earned to date. I invite the Committee to accept the
amendment.
I
turn to amendment No. 43. It will not surprise members of the Committee
to learn that I think that the Opposition amendment, which I accept
seeks to address the same issue, lacks clarity. The amendment would
allow a theatrical release to be determined at any time, which means
that it could well change back and forth several times, which means
that the tax position could also change, possibly leading to payments,
repayments and even re-repayments. The whole position could become
confusing and lack clarity. Rather than our accepting the
Opposition’s amendment, therefore, I hope that the Committee
will reflect on my comments and instead support ours.
Amendment No. 44 seeks to make
it explicit that expenditure incurred by a third party that is
reimbursed by a film production company—[Interruption.] I
feel as though I am caught in the crossfire in an exchange of semaphore
messages. I hesitate to turn to the explanatory notes for
guidance.
Mr.
Mark Francois (Rayleigh) (Con): I apologise to the
Economic Secretary. There was some confusion on my part. We thought,
looking at the seating arrangements, that the hon. Member for
Wolverhampton, South-West (Rob Marris) had been made a Parliamentary
Private Secretary. That was a cause for surprise and delight on our
Benches, but we have now clarified that that is not the
case.
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