Finance Bill

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Dawn Primarolo: I am grateful for what the hon. Gentleman has said. I hope that he understands that I shall continue to consider the matter until the Bill returns to the House. I have tried to explain clearly the major issues that must be settled.

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Mr. Flight: I understand and accept what the Paymaster General has said. Let us hope that she and the Revenue can craft something that meets the point without costing too much. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move amendment No. 88, in page 75, leave out lines 30 and 31 and insert—

    'unless before 17th April 2002 expenditure has been incurred on a film or a binding commitment to incur expenditure on a film has been entered into, in either case or in aggregate representing more than 20 per cent. of the budgeted cost of the film.'.

The amendment is about an issue that has been raised by those in the industry and in the accounting profession. The Bill could produce retroactive effects of cutting off incentives in midstream for productions for which contractual commitments have been made, because they become non-qualifying. Clause 98(4) provides that the restrictions apply to all films

    ''(a) completed on or after 17th April 2002, or

    (b) completed before 1st January 2002 but not certified by the Secretary of State before 17th April 2002,

    unless an application for certification was received by the Secretary of State before 17th April 2002.''

Section 42 of the Finance (No. 2) Act 1992 permits two or three years after the time that the expenditure arises to make a claim, so the exception should not have wide application. However, some film makers—the Government will be aware of them, as some high-profile figures have been banging on their door—have incurred expenditure, entered into binding commitments to incur expenditure or concluded financing arrangements on the basis of the wider relief that had effectively been in place, even though the Government may not have intended it, until 2 July 2005.

Therefore, there will be some contractual messes resulting from the retrospective nature of the changes to tax relief. Projects were appraised and commitments made but, clearly, some projects might have been rejected in the absence of wider tax relief. In moral terms, the Paymaster General could say, ''Naughty boys! You were not doing what we wanted you to do''. They were, however, doing what the law permitted them to do. Unfortunately, a principle of our tax system is that the moral argument does not matter if the shutters come down after commitments have been entered into.

As I commented earlier, perhaps the Government have done their homework and found out the number of people who will be affected—perhaps it will be few. However, if there is no major financial exposure, when and where the shutters come down should be reconsidered.

11.15 am

Chris Grayling: I support the amendments moved by my hon. Friend because production companies sometimes live on a wing and a prayer in cash-flow terms. Financing major productions, paying the bills on time, getting revenues in, selling products and getting them into the marketplace and generating

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income give regular nightmares to accountants in the business.

The amendment addresses the unwelcome shock in the clause. The Paymaster General is right to point out that the industry has had indications for some time that the Government were minded to make changes, but productions have nevertheless begun and work is under way that have factored in the relief; if they lose it, the knock-on effect on the cash flow of businesses producing films could be significant. The very survival of a production company could be undermined by the shock generated by the sudden loss of relief mid-production. I hope that the hon. Lady will take on board a sensible amendment that would ensure that damage is not done to current commitments while achieving the objectives that she set out.

Dr. Pugh: I support the amendment. We could have a debate on whether the fault lies with the drafting or with those that have abused the relief. Regardless of whether people have kept in line with the spirit of the law, or have second-guessed its intentions, people will have embarked on enterprises and, in some cases, engaged in contracts with others who depend on their services. As a matter of moral principle, people who have made an honest error about future legislation, but who have acted thoroughly and according to the letter of the law, should not be penalised. The amendment should therefore be supported.

Mr. Hoban: I want to speak in support of the amendment moved by my hon. Friend the Member for Arundel and South Downs.

To cut relief off in midstream, as the clause appears to do, will cause damage to the film industry. The Paymaster General referred to sending out messages about the abuse of relief, but we should bear in mind the section 48 relief, which is the one that some production companies have abused. My hon. Friend the Member for Cities of London and Westminster (Mr. Field) referred to the creative sector being based in Soho; I also suspect from the way in which the relief has been abused that the creative sector also rests in the City.

The original relief was set up for three years, but was extended in last year's Finance Act before the election until 2 July 2005, so it was legitimate for companies to plan—notwithstanding the messages that the Paymaster General may have given out—that productions in progress would benefit from the tax relief. It is therefore unfair for such a relief to be removed in midstream. We should recognise that companies were perhaps led to believe that tax relief under section 48 would continue for some time, and that any productions in progress would receive it. Suddenly to withdraw that tax relief at this stage will, I think, damage the film production industry as well as the companies that produce such a diverse range of outputs as quiz shows and the reality television shows to which the Paymaster General referred. Removal of the relief in midstream is the wrong measure to take. I hope that the Government recognise that and accept the amendment.

Dawn Primarolo: Before discussing the amendment specifically, perhaps I can answer the hon.

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Gentleman's point about the extension of the relief in 2001. At that point, the relief had been running for less than four years and as the film industry was labouring very hard, the relief has been very helpful to it. It takes years to make a film, for the financing to be finalised and for the profits to come through and I know that the hon. Gentleman will understand, from his experience outside the House, that there was a time lag before we saw that the relief was moving into areas where we had not intended it to apply. That is precisely why we felt that we had to move now and why the figures in the Red Book for the relief that will not be paid if the relevant clauses are passed seem suddenly so high.

The question of transitional relief is worthy of consideration. I want to explain the Government's attitude to the amendment and to transitional relief proposals. We have received much representation since Budget day that revolves around programmes already in production. We have some sympathy with producers who have contracted to make a drama for firms who have factored the tax relief into their budgets. However, there are considerable difficulties in constructing a transitional relief that can be limited to circumstances in which it would not be abused.

I shall explain what the problem was in the way in which the relief was being misused. As I said earlier, television production companies make programmes on commission from a broadcaster for an agreed amount. When the series is completed, the producer certifies it with the Department for Culture, Media and Sport as a British qualifying film. The producer then does a sale and leaseback deal with a third party, normally a film partnership. The third party takes the tax relief on the purchase of the film, and a proportion of the tax relief is then passed back to the producer through the leasing structure. That is the crux, relating to the point that the hon. Member for Fareham (Mr. Hoban) kept making about contractual relationships. Normally, there is no contractual agreement with the third party until the film is completed. That is the mechanism that caused all the difficulty.

The new rules apply to films completed on or after 17 April. That means that a producer with a series in commission on 17 April will not be able to use a tax-based sale and leaseback deal when the series is completed. If I may try to describe the situation, that part of the deal is not yet in place. There is no contract. It is not as simple as saying that there was a complete contract and that the producer had made commitments and already taken a substantial risk in agreeing to sell a programme, while not knowing whether their costs were covered until the end of the production when the programme had been sold and worked its way through the system. By any stretch of the imagination, that is not what we intended to happen.

Mr. Hoban: Will the Paymaster General consider a situation in which, for example, a production company has entered into a contract with a broadcaster to provide 40 per cent. of the cost of a production relating to its sale in one country, perhaps with overseas sale providing additional revenue? In such cases, a chunk of the budget is often speculative

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because the producer hopes to sell the programme on the international market. That producer will have factored into the equation the likelihood of receiving the relief in some shape or form at the end of budget and will have contracted artists, camera crews and so on for half the cost of the production. Then 17 April arises and that company is up a gum tree.

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