Ed
Balls: Returning for a moment to film, I turn to part 1 to
set out some more detail which I hope will help all hon. Members,
particularly the hon. Member for Birmingham, Yardley (John Hemming). He
is asking the same series of questions and I fear that I am giving the
same answer, so if I put the answer in a broader context that may help
the Committee to understand both my answers and his
interventions. Part
1 implements our announcement in the pre-Budget report that a British
film starting principal photography on or after 1 April 2006 and
meeting the conditions that we set out, is entitled to film tax relief,
which is given as an additional deduction in computing its
profits—the amount of which deduction, as debated earlier, is
defined in paragraph 4—and possibly as a payable tax credit as
set out in paragraphs 6 and 7. The amount of the deduction is based on
the actual UK spending subject to a cap of 80 per cent. of the
production company’s spending. That cap, as we have discussed,
is needed to meet European Commission state aid rules requiring that it
must be possible to spend at least 20 per cent. of the film’s
budget elsewhere in the EU without loss of relief. As also discussed,
we reduced that requirement from 40 per cent. at an early
stage. Paragraph
4(3) would allow the Treasury to amend the 80 per cent. limit so that
any future changes in state aid rules could be accommodated, but at
this stage we do not envisage complications in state aid clearance. The
additional deduction is defined in paragraph 4 as the result of that
threshold multiplied by the appropriate rate—100 per cent. for a
limited-budget film and 80 per cent. for a large-budget film. That
additional deduction will alter the overall profit or loss previously
calculated according to schedule 4, which we debated earlier. If the
results of the calculation place a company in loss, paragraph 6 will
allow some of the loss to be surrendered for a payable tax credit. The
amount that can be surrendered is capped at the same threshold amount
as I mentioned a few moments ago—the actual UK spend up to 80
per cent. of the total spend. It is not limited to the amount of the
additional deduction. That is the position in the first period of
account, which in the case of most films will be the only
period. It is
unusual for a film to take several years to make, although it does
happen. In later periods, if there are
any, the rules are slightly more complicated and examine cumulative
spending, but the principle is the same. In calculating the additional
deduction for and the amount of loss that can be surrendered in such
later periods, paragraphs 4(2) and 6(4) take account of the amounts in
previous periods so that the Commission’s 20 per cent. rule is
met over the film’s overall production period. That measure is
necessary because the new film tax relief may be claimed by companies
period-by-period as a film is made, whereas the previous reliefs under
section 42 of the Finance (No. 2) Act 1992 and section 48 of the
Finance (No. 2) Act 1997 could be claimed only on completion of the
film, which was much simpler because all the facts were known and final
positions could be determined. Once the amount of loss to be
surrendered has been determined—a company need not surrender the
maximum amount but can instead retain losses to set against future
income from the film, which might be more advantageous—it is
multiplied by the appropriate credit rate as set out in paragraph 8 to
determine the actual payable credit. Again the credit is higher for a
limited-budget film than for a large-budget film. Were the losses
instead to be retained and set against film incomes, taxed at 30 per
cent., the losses would of course be worth slightly more. Whether to do
that is of course a company’s choice. Once the amount of payable
credit has been determined and a claim made, paragraph 9 requires Her
Majesty’s Revenue and Customs to pay it to the company, although
there are protective provisions in that paragraph to deal with
circumstances where the company owes money to HMRC or its tax return is
being inquired into.
Paragraph 10 makes it clear
that the payment of tax credit is not itself taxable. Paragraphs 12 and
13 are aimed at preventing the inflation of film tax relief. Paragraph
12 addresses circumstances where a payment is deferred. While we accept
that deferred payments are a legitimate practice in the film industry,
we do not accept that the film tax relief should be based on payments
that have not yet been made. When they are made they can be included.
Paragraph 13 is a more general measure aimed at attempts to inflate the
amount of film tax relief. It is along the same lines as other rules,
such as those on the R and D tax credit in paragraph 21 of schedule 20
to the Finance Act 2000, and targets arrangements the sole or main
purpose of which is to obtain or inflate the amount of film tax credit.
That does not include ordinary transactions that would in any case be
undertaken in making a film, such as establishing a film production
company in the first place. We do not want to get in the way of such
transactions, but as we have said, we will not accept amendments that
abuse the new system.
I hope that that detail makes
things clearer to the hon. Member for Birmingham, Yardley. As I said, a
film is typically made by a film production company under a contract.
If that contract results in the film production company making a loss,
the tax credit may be payable, but the film may be profitable to
whoever commissioned
it. Question put
and agreed
to. Schedule
5, as amended, agreed
to. Clauses 43
and 44 ordered to stand part of the
Bill.
Clause
45Films:
terminal
losses
Mrs.
Villiers: I beg to move amendment No. 36, in page 33, line
21 [Vol I], leave out
‘qualifying'.
The
Chairman: With this it will be convenient to discuss the
following amendments: No. 37, in page 33, line 26 [Vol I], leave out
‘qualifying'. No.
38, in page 33, line 32 [Vol I], leave out first
‘qualifying'. No.
39, in page 34, line 6 [Vol I], leave out from ‘Schedule 4' to
end of line
8.
Mrs.
Villiers: The clause concerns terminal losses. When a film
production company making a film that qualifies for tax relief ceases
trading, the clause will allow its losses to be transferred to another,
similar trade of the same company or within the same group. At present,
clause 45 relief for terminal losses on the cessation of activity on a
film is limited to films qualifying for the enhanced tax credit.
Amendments Nos. 36 to 39 would remove that restriction. They are
probing amendments so that we can discover the Government’s
motivation for providing relief only for certain films. Will the
Minister outline his reasons for the proposed restrictions? The
amendments would provide that terminal loss relief could be claimed on
all films, not only those that qualify for enhanced tax credit. I can
see no good reason for the Bill to restrict terminal loss in such a
way. My second point
relates to the losses generated by enhanced deductions when they can be
surrendered intra-group when the film is completed or has been
abandoned. The possibility of surrendering them intra-group is welcome.
It is an important part of the clause. My worry relates to subsection
(1)(a), which requires that a
company “ceases to carry
on a trade in relation to a qualifying
film” before the losses
can be passed on. I should welcome the Economic Secretary’s view
on the situation in which receipts continue to come in over months or
years afterwards. As we have discussed, some of the income that falls
within schedule 4 may come in at much later stages, unexpectedly. It
would be useful to have a point at which the terminal loss regime can
kick in, despite the outside possibility that revenue may be received
for the film in an unexpected way in the future. Will the possibility
of delayed receipts preclude the possibility of the loss being passed
on? I welcome the Minister’s
clarification.
Ed
Balls: I shall explain the purpose of clause 45, and then
discuss the amendments. The clause allows the unrealised losses that
will be available to a qualifying film in one trade to be handed to
another qualifying film, when it is no longer possible to utilise them
in relation to the original film. It will encourage films to be made
and rights held together in a company or within a group. If a film
production company chooses not to surrender losses for film tax
credits, it will make use of the film tax relief by setting the losses
created by the additional deductions against income from other films
that it produces, reducing the tax that it has to pay on real
profits.
If, and
when, the trade ceases because the film is sold or is no longer capable
of exploitation, it is possible that there will be unrealised film tax
relief. If nothing were to be done, those reliefs would be stranded or
lost for ever. One purpose of this chapter is to ensure that we not
only support individual British films, but encourage individual British
film makers to make slates of films: to implement a strategy for a
series of films over time—even avante-garde films—and to
use their losses
appropriately. One of
the aims of the relief is to encourage films to be held as a slate,
where risk and reward is pooled by producing and holding films at
different stages, so that films that make losses can be balanced
against those that are profitable. Under clause 45, when a qualifying
film produced by a film production company is sold or ceases to be
exploitable—that is, when the trade cases—and there are
losses that could have been carried forward, they can be passed on. But
it is important that the losses that would otherwise be stranded are
passed on only in a way that recognises the purpose of the chapter,
which is to support British films and thus meet our sustainability
objective. The
terminal losses can be passed to another trade within the company, or
to another company in the group only if that company is making another
qualifying British film. It will not be enough to buy in rights to
provide income against which to set the losses or to make any old film
that will make a profit. In their original setting, the losses could
only be set against the income of a British film so, in the trade that
acquires them, the losses are similarly restricted in their
use. Although the
drafting of amendments Nos. 36 to 38 is not quite right in that it
would remove a reference to schedule 4 at the end of clause 45(6), it
is clear that the intent of those amendments is to remove the
requirement that, for terminal loss relief to apply, a film must be
qualifying film. It should be clear to the Committee, on the basis of
my remarks so far, that that is not acceptable to us. The terminal loss
relief is part of a balanced package designed to encourage the British
cinema and film industry. That is why it is restricted to films that
qualify for the new relief in schedule 5.
On that basis, I urge the
Committee to reject the
amendment. 2.45
pm
Mrs.
Villiers: I am grateful for the Economic
Secretary’s comments. I am disappointed that he was not
sympathetic to the amendments. However, as I do not feel that it would
be productive to press it to a vote, I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Clause
45 ordered to stand part of the
Bill. Clause
46Films:
withdrawal of existing reliefs (corporation
tax)
Mrs.
Villiers: I shall not move amendments Nos. 48 to 52,
because they are consequential to an amendment
that has already been discussed and withdrawn, so it would not be
productive for the Committee to consider these matters
again. Clauses 46
to 53 ordered to stand part of the
Bill. Clause
54Transactions
with substantial
donors Mr.
Paul Goodman (Wycombe) (Con): I beg to move amendment No.
77, in page 38, line 34 [Vol I], at end
insert ‘at a rate that is less than
an arm's length
rate'.
The
Chairman: With this it will be convenient to discuss the
following: Amendment No. 78, in page 38, line 35 [Vol I], at end
insert ‘at a rate that is less than
an arm's length
rate'. Amendment
No. 79, in page 38, line 36 [Vol I], at end
insert ‘at a rate that is less than
an arm's length
rate'. Amendment
No. 80, in page 38, line 37 [Vol I], at end
insert ‘at a rate that is less than
an arm's length
rate'. Amendment
No. 81, in page 38, line 39 [Vol I], at end
insert ‘at a value that differs
from market value so that the charity is disadvantaged by the
transaction'. Amendment
No. 82, in page 39, line 3 [Vol I], after ‘investment',
insert ‘other than a Qualifying
Investment for the purposes of Schedule 20 of ICTA
1988'. Amendment
No. 83, in page 39 [Vol I], leave out lines 15 to
17. Amendment No. 84,
in page 39 [Vol I], leave out lines 18 to
23. Amendment No. 85,
in page 39, line 26 [Vol I], after ‘remuneration',
insert ‘unless it is paid either
under a contract of employment at a rate not exceeding an arm's length
rate
or'. Amendment
No. 86, in page 39 [Vol I], leave out lines 37 and
38. Amendment No. 87,
in page 40, line 9 [Vol I], leave
out ‘on a recognised stock
exchange' and
insert ‘or admitted to trading on
any market which from time to time appears on the most-recently updated
list of regulated markets as published by the European Commission under
Acticle 16 of Directive 93/22/EEC (OJL 141, 11.6.1993) or Article 47 of
Directive 2004/39/EC (OJL 145, 30.4.2004) together with securities
admitted to trading on the Alternative Investment Market of the London
Stock Exchange PLC; or is a Qualifying Investment for the purposes of
Schedule 20 of ICTA
1988'. Government
amendment No.
62. Amendment No. 88,
in page 40, line 23 [Vol I], leave out ‘which is wholly' and
insert ‘of which 50 per cent. or
more of the shares
is'. Government
amendment No. 63.
Amendment No. 89, in page 41
[Vol I], leave out lines 1 to 6 and
insert— ‘(4) Subsection 3 of
section 506A shall not apply to any transaction to which subsection 4
applies.'. Amendment
No. 90, in page 41, line 28 [Vol I], at end
insert— ‘(10) Where a person
who considers that subsection 3 or 4 of Section 506A above may apply to
any transaction or proposed transaction, supplies to the inspector to
whom he makes his return of income written particulars of the
transaction or proposed
transaction— (a) the
inspector shall, within 30 days from his receipt of the particulars,
notify that person whether or not he is satisfied that, in the
circumstances as described in the particulars, the transaction would
not be chargeable to tax on that person under this section;
and (b) if the inspector
notifies that person that he is so satisfied, the transaction shall not
be chargeable on that person under this
section. (11) If the
particulars given under this section with respect to the transaction
are not such as to make full and accurate disclosure of all facts and
considerations relating thereto which are material to be known to the
inspector, any notification given by the inspector under subsection
(10) above shall be
void.'. Amendment
No. 91, in page 41, line 31 [Vol I], leave
out ‘by reference to gifts made at
any time' and
insert ‘only by reference to gifts
made on or after that
date'.
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