The
Committee consisted of the following
Members:Chairman:
Mrs.
Janet Dean †
Blackman,
Liz (Erewash) (Lab) †
Breed,
Mr. Colin (South-East Cornwall)
(LD) †
Davidson,
Mr. Ian (Glasgow, South-West)
(Lab/Co-op) Fallon,
Mr. Michael (Sevenoaks)
(Con) Goldsworthy,
Julia (Falmouth and Camborne)
(LD) Gray,
Mr. James (North Wiltshire)
(Con) †
McDonnell,
John (Hayes and Harlington)
(Lab) †
Moffat,
Anne (East Lothian)
(Lab) Mudie,
Mr. George (Leeds, East)
(Lab) †
Palmer,
Dr. Nick (Broxtowe)
(Lab) †
Primarolo,
Dawn (Paymaster
General)†
Reed,
Mr. Andy (Loughborough)
(Lab/Co-op) †
Selous,
Andrew (South-West Bedfordshire)
(Con) Smith,
John (Vale of Glamorgan)
(Lab) †
Tipping,
Paddy (Sherwood)
(Lab) Viggers,
Peter (Gosport)
(Con) †
Villiers,
Mrs. Theresa (Chipping Barnet)
(Con) Emily Commander, Committee
Clerk † attended the
Committee Second
Standing Committee on Delegated
LegislationWednesday
14 June
2006[Mrs.
Janet Dean in the
Chair]Draft Partnerships (Restrictionson Contributions to a Trade)Regulations 20062.30
pm The
Paymaster General (Dawn Primarolo): I beg to
move, That the
Committee has considered the draft Partnerships (Restrictions on
Contributions to a Trade) Regulations
2006. Good afternoon,
Mrs. Dean. What a pleasure it is to see you in the Chair. It is the
first time that you have chaired a Committee in which I am the Minister
and I am looking forward to a successful debate this
afternoon. The
regulations are made under powers introduced in the Finance Act 2005
and provide detailed rules to tackle tax avoidance schemes used by
wealthy individuals investing in partnerships. The schemes were a
direct attempt to sidestep the anti-avoidance rules under the Finance
Act 2004, which prevented individuals exiting from film partnerships
free of tax. That was an outright tax avoidance
measure. The
regulations, together with the legislation under the Finance Acts 2004
and 2005, bring that practice to an end and ensure that the abuse
cannot take place. They exclude certain amounts from an
individual’s contribution to a partnership when calculating the
amount of a film exit charge under the anti-avoidance rules in the
Finance Act 2004, particularly when an individual’s share of
future partnership profits is reduced after a new partner has been
admitted into the partnership. The regulations exclude from the
individual’s contributions an amount based on the capital
contribution made by the new partner. When individuals have claimed tax
relief for film-related losses in excess of the amount of their capital
contribution to the partnership, an exit charge will arise under the
anti-avoidance rules in the FinanceAct
2004. I shall now
explain the background to the regulations and say what they will
achieve. Generally speaking, film partnerships obtain tax benefits from
the previous reliefs for film production by means of a sale and
leaseback structure. The partnership buys a film from a producer who
then immediately leases it back in return for a series of rental
payments, usually over a period of 15 years. In the early years of the
lease period, the initial cost of buying the film creates losses that
the members of the partnership can use to offset against their income
and gains, thereby reducing the amount of tax that they have to pay.
However, when the loss has been used up, the share of lease rental
payments that the partner receives in later years constitutes income on
which the tax is due. In other words, the benefit of a sale and
leaseback structure
delivers a tax deferral whereby investors can postpone their tax
liability to a future date, but there is still a tax
liability. The
mischief that the regulations are aimed at dealing with is those
schemes that seek to transform the deferrals into an outright tax
advantage by allowing the individual investors effectively to exit from
the partnership at the point at which the taxable income starts to
arise. We have seen schemes that sought the same outcome, and
legislation was introduced under the Finance Act 2004 to ensure that
individuals could not simply walk away from their tax liability once
they had taken advantage of the up-front tax benefit of a sale and
leaseback arrangement. Further legislation under the Finance Act 2005
also stopped corporate investors exiting from agreements at the point
at which they would have to start paying tax. As I said, that is
outright
avoidance. The schemes
were a direct attempt to get around the existing anti-avoidance rules
that stop that sort of exit. They did so by means of a totally
artificial structure in which an existing film partnership is
restructured to admit a new partner. That new partner is based offshore
and contributes capital that the partnership uses to purchase
additional film rights. That expenditure is offset against the income
from the lease payments on which the United Kingdom partners would
otherwise have been
taxed. The income
arising from the new film rights is allocated to the new partner. The
UK partners receive taxable income only if there are further profits
realised much further into the future—if at all. In that way,
the UK partners can avoid paying tax on their income from the original
lease payments as they arise. In theory, there is no limit on the
number of times that their liability to tax can be postponed. The
effect is to transform the simple tax deferral, which is in the system,
into a permanent tax advantage. Needless to say, the Government
rejected the suggestion that that was a legitimate form of tax planning
and the regulations specifically aim to prevent
it. The regulations
are effective from 20 December 2005—the date on which they were
announced. They build on the current exit rules and impose a charge to
income tax on the individuals in a film partnership if a new partner is
admitted into the partnership and contributes capital to it, if changes
are made to the arrangements for sharing profits and losses in the
partnership or if the rights of the existing partners to share in
future profits from the partnership are reduced. Where those conditions
are met, the amount that the new partner introduces into the
partnership is apportioned between each of the existing partners, in
line with the arrangements that were in place for sharing profits and
losses before the new partner was admitted.
The regulations stipulate that
the amounts apportioned to each of the existing partners should be
excluded when determining whether the restructuring of the partnership
constitutes an exit event for the purposes of the 2004 anti-avoidance
rule and, if so, what amount is chargeable to
income. The
regulations only affect partnerships that sought to avoid the tax
charge that arises in the deferral income arrangements by introducing a
new partner into the partnership in the circumstances that I have
described. They have no impact on the straightforward sale and leaseback
structures in which tax liabilities are merely
deferred. On this
occasion, with this type of tax avoidance, we can be specific about
what we are seeking to prevent with straight objective tests, so clear
is this arrangement. Unfortunately, this is not the first time that the
Government have had to act to end deliberate abuses of tax reliefs put
in place for film production. The reliefs are in place until 1 April
2006. The Government have made clear statements on numerous occasions
that they will continue to monitor the use of the reliefs and take firm
action to stop avoidance where it occurs. The schemes that I have
mentioned are a perfect illustration of the type of abuse at which
those statements are directed. They also demonstrate why the Government
were entirely right to replace the old film reliefs with the new
regime, which is only available to film production companies and cannot
be claimed by investment partnerships whose only involvement in film
making is arranging or providing
finance. Although the
Government are committed to supporting the British film industry and
have been generous in doing so over the years, we are equally committed
to tackling avoidance wherever it happens—in the film industry
or anywhere else. We hope that the tax avoidance industry has now got
the message, but it can rest assured that the Government will act
decisively to stop any attempt at future abuse. I commend the
regulations to the
Committee. 2.39
pm Mrs. Theresa
Villiers (Chipping Barnet) (Con): The Opposition share many of the
Government’s concerns about the extent to which the film tax
relief regime has been used for aggressive and artificial tax avoidance
purposes. Therefore, we have no objection to a statutory instrument
that is focused on one such aggressive attempt to get round the
existing anti-avoidance legislation for film-related
partnerships. The
statutory instrument seems to be in line with the approach that the
Government have taken with other such legislation. As we have heard, it
targets attempts to transform a deferral of tax into a permanent
outright tax reduction. Hence, we are broadly supportive of the
approach taken. We
are concerned that the costs of sections 42 and 48 film tax relief have
spiralled from £10 million in 1997-98 to £520 million in
2004-05 and a staggering £560 million in 2005-06, according to
the Paymaster General’s response to a recent parliamentary
question. Those are huge sums when one takes into accountthe
fact that the UK’s entire cinema sales were only £770
million last year.
The Opposition remain concerned
about the continued avoidance problems with film tax relief and that
those have necessitated more or less continuous change in the structure
of the tax system. The tax break scheme for film has been revised by
the Finance Acts 2000, 2002, 2004 and 2005 and radically by the Finance
Act 2006. We hope that the scheme set out in this year’s Finance
Bill will prove a more stable structure—one that is less open to
abuse, yields better
value for money for the taxpayer and is more directly targeted on the
people who are producing the films. The jury is out on the way in
which the new film tax structure will work. We hope that it will
achieve all those goals and be a significant improvement on the current
regime. As we have heard from the Paymaster General this afternoon, the
regime has significant flaws that have created opportunities for its
use for avoidance purposes, which were never intended by the Exchequer
when it was
adopted. 2.42
pm Mr.
Colin Breed (South-East Cornwall) (LD): I, too, have no
problem with the regulations, as they will prevent a clear abuse of the
system that should be stopped as soon as possible. One has to marvel at
the ingenuity of people who can utilise relatively sensible and
innocent proposals designed to assist a valuable part of the UK economy
for such nefarious purposes. That is a shame because, as has been
demonstrated, the film tax credits have been targeted in a way that is
wholly unhelpful to the film industry.
The tax avoidance industry, as
the Paymaster General calls it—accountants and
lawyers—might begin to understand that their continual seeming
to undermine such things will only harden people’s views about
providing assistance to genuine parts of the UK economy. I hope that
the message goes out to the appropriate people. I am therefore pleased
to support the
regulations. 2.43
pm Dawn
Primarolo: Given that acceptance, there isnot
much to add. I want to take the opportunity to thank the hon. Member
for South-East Cornwall(Mr. Breed). I think that the hon.
Member for Chipping Barnet (Mrs. Villiers) made the same point, but the
hon. Gentleman made it clearly: there are lots of good reasons to have
reliefs in a tax system, and sale and leaseback is one example. If they
are persistently abused or used in ways that were never intended by the
House, legitimate business and enterprise will be damaged in the end,
because Her Majesty’s Revenue and Customs will inevitably take
steps, through legislation as well as enforcement, to protect the
revenue and prevent such activity. That makes things more complex and
more difficult for everyone. I am grateful to the hon. Gentleman for
reinforcing that strong message, which is a clear one that the House
should send out. On
reliefs in film, sale and leaseback is a general relief in the tax
system, in the sense that it can and does apply in lots of places. Film
has been targeted by such schemes, but the new tax credit, which is
paid to the producer rather than through financiers, will take us a
long way towards protecting the film industry, by ensuring that those
involved are committed to films, as opposed to trying to find tax
avoidance schemes. With those closing comments, I commend the
regulations to the Committee.
Question put and agreed
to. Committee
rose at fourteen minutes to Three
o’clock.
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