The
Committee consisted of the following
Members:
Chairman:
Ann
Winterton
Abbott,
Ms Diane
(Hackney, North and Stoke Newington)
(Lab)
Austin,
John
(Erith and Thamesmead)
(Lab)
Breed,
Mr. Colin
(South-East Cornwall)
(LD)
Brennan,
Kevin
(Lord Commissioner of Her Majesty's
Treasury)
Burden,
Richard
(Birmingham, Northfield)
(Lab)
Byers,
Mr. Stephen
(North Tyneside)
(Lab)
Cable,
Dr. Vincent
(Twickenham)
(LD)
Duddridge,
James
(Rochford and Southend, East)
(Con)
Engel,
Natascha
(North-East Derbyshire)
(Lab)
Evennett,
Mr. David
(Bexleyheath and Crayford)
(Con)
Gauke,
Mr. David
(South-West Hertfordshire)
(Con)
Hillier,
Meg
(Hackney, South and Shoreditch)
(Lab/Co-op)
Hollobone,
Mr. Philip
(Kettering)
(Con)
Mitchell,
Mr. Austin
(Great Grimsby)
(Lab)
Primarolo,
Dawn
(Paymaster
General)
Reed,
Mr. Andy
(Loughborough)
(Lab/Co-op)
Villiers,
Mrs. Theresa
(Chipping Barnet)
(Con)
Glen
McKee, Committee
Clerk
attended the Committee
Sixth
Delegated Legislation
Committee
Tuesday 20
March
2007
[Ann
Winterton
in the
Chair]
Draft Corporation Tax (Taxation of Films) (Transitional Provisions) Regulations 2007
4.30
pm
The
Paymaster General (Dawn Primarolo):
I beg to
move,
That the
Committee has considered the draft Corporation Tax (Taxation of Films)
(Transitional Provisions) Regulations
2007.
Good afternoon,
Lady Winterton. It is a pleasure to see you in the Chair
again.
The Finance Act
2006 introduced a new tax relief for British films. That relief is now
in operation, and films are in production on the basis of the generous
support that it provides. A film must meet two main criteria to qualify
for the new relief. First, it must stop filming on or after 1 January
2007. Secondly, it must pass the new cultural test designed by the
Department for Culture, Media and Sport in consultation with the
European Commission to ensure that support is directed only to British
films.
The regulations
enable films that were already in production on 1 January to qualify
for the new relief, provided that they pass the new cultural test.
Films that do not pass the new test will not be eligible for the new
relief, but will instead receive support under the previous film tax
regime. That is in line with the Governments commitment that
there should be no gap between the old and the new film tax
regimes.
I should
emphasise that the regulations affect only those films that are in
production on 1 January. Films completed before then will qualify for
relief under the old tax regime. Those that started on or after 1
January are already eligible for the new relief. The regulations also
introduce two minor relaxations to the rules to ease transitional
cases.
The new relief
was originally intended to go live from 1 April 2006, but as members of
the Committee will be aware, there was a delay before we could agree
the new cultural test with the Commission. Once it was agreed, it had
to be brought into law and the start date for the relief was put back
to 1 January 2007 as a consequence.
By then, of course, a number of
films were in production that had started before 1 January and whose
producers had expected to qualify for the new relief. The purpose of
the regulations is to ensure that those films get support within the
terms agreed with the Commission. They do that by making modifications
to several existing pieces of legislation; the Finance Act 2006, the
Films Act 1985 and the legislation on the old film tax
relief.
The
regulations allow those films that are in production and which pass the
new test to claim the
new tax relief, while preserving the ability of those that cannot pass
the test to receive the old reliefs. They therefore complete the film
tax relief structure, which is an important and valuable support to
film producers, and I commend them to the
Committee.
4.33
pm
Mrs.
Theresa Villiers (Chipping Barnet) (Con): Thank you, Lady
Winterton. First, on the substance of the regulations, it certainly
makes sense to deal with those films that would otherwise fall into the
gap between the old and the new rules. In principle, therefore, we
support what the regulations are designed to do. If the
Governments film tax regime is to work in the way that it is
supposed to, it makes sense to deal with the technical problems in
relation to transitional films.
Having said that, we are
concerned that the Government have had to return to the Committee yet
again to change the regime for the taxation of filmsit really
is Groundhog Day every day when it comes to film tax in
the United Kingdom. The continuing change and instability in the film
tax regime do nothing to support the British film industry, which the
Chancellor claims personally to
support.
Since the
Chancellor introduced his first tax break for films in 1997it
was modelled on a previous tax break introduced by John Majorhe
has amended the rules repeatedly, including in the Finance Acts of
2000, 2002, 2004, 2005 and now 2006. When I made that point during the
debate on the Finance Bill, the Minister and her colleague, the
Economic Secretary, dismissed my concerns. They were entirely confident
that this time they had got film tax right. However, their confidence
has proven to be misplaced. As we have heard, the transitional
arrangements seek to deal with the problems resulting from the delay in
agreeing to the Britishness test, or the cultural test, for what
amounts with the European Commission to a British film. During the
debate on the Finance Bill, the Government expressed their confidence
that the European Commission would approve their Britishness test. In a
letter of 29 June 2006, to a concerned member of the public and a man
of some expertise in the film area, Mr. John Keam, the
Paymaster General
wrote:
You go
on to say that the Government has failed to meet its commitment to
introduce the relief smoothly. I am afraid that I cannot agree with you
that the film industry finds itself in an invidious position. We made
it clear in our consultation document last summer that the relief would
be introduced on 1 April with no gap in support for film
making and we have honoured this commitment in the published Finance
Bill.
It is true that
the Government will not be able to make payments to film makers until
the relief has been formally approved as a State Aid by the European
Commission, but that has been well understood by the film
industry.
We have been
in regular contact with the Commission who not have raised any major
concerns about the relief and we do not anticipate any significant
delay in securing their
approval.
The Paymaster
Generals assertions proved to be wrong on almost all counts,
and we are here today seeking to plug the gap that the Paymaster
General denied would occur.
When the Commission gave its
approval on 23 November, it required substantial changes to
the cultural test in schedule 1 of the Films Act 1985the test
with which the Paymaster General did not expect
to encounter any problems in getting approval for. The
Commissions decisions meant that a number of films, including
some high-budget inward investment films such as recent
Batman and Superman films, failed to
qualify for the new tax credit because they were British-made but not
culturally British.
To
attempt to mitigate the problems caused, the Government have agreed to
defer the sunset date of the old sections 42 and 48 reliefs. However,
concerns have been expressed that those reliefs do not give as generous
a treatment as the films under way as they have been led to believe
that they would receive under the tax credit. It is simply regrettable
that the measures are necessary after five major changes to the film
tax regime over the last seven years. It is regrettable that the
Government have twice had to come to the House to ask the House for
approval for their cultural test within the space of 12
monthsthe first time in March last year, and the second time in
December.
Turning to
the test under consideration here, and the Oppositions concern
about no consultation on the revised test, back in March 2006, the
Under-Secretary of State for Culture, Media and Sport set out the
Governments view. He
said:
We want
the test to allow films to qualify either by being British in content
of by being British because of who made them or where they were
made.[Official Report, Eighth Committee on Delegated
Legislation; 15 March 2006;
c.7.]
Both the original and
revised cultural tests are based on a points system, but the weighting
of those points has been significantly changed as a result of the
intervention of the Commission. The number of points relevant to where
a film is made has been reduced; the number of points relevant to the
nationality of the people who are making the film has been reduced; a
new category of contribution to British culture has been introduced.
Significantly, the number of points in respect of whether the content
of the film is British has been significantly altered. Under the old
test, films made in Britain by a British crew with British actors were
British films. However, under the new test, that type of films will not
qualify unless they are culturally British as well.
As my hon. Friend the Member for
Wantage (Mr. Vaizey) memorably put it in Committee in the
House, Ministers have in this area been completely turned over. I want
to ask the Minister how many films completely in production in Britain
would pass the first test, but not the revised test. What research have
the Government done on the impact of the latest uncertainty in the film
tax regime in relation to inward investment in the film industry? Why
are no regulatory impact assessments carried out in relation to the
revised test? Why was no consultation carried out in relation to the
revised test, and why did not the Government take earlier action to get
their proposals cleared by the Commission? Why did the Government fail
so badly to produce a test that would get over the state aid rule
hurdle? Why did they not ask themselves what would happen if the
Commission required the test to be amended and make provision for that
eventuality? The Government were warned directly about the potential
threat to the smooth implementation. Why did they not make provision
for the eventuality of rejection by the
Commission?
I intended
to ask the Paymaster General whether she expected this to be the last
change in the film tax
regime for the foreseeable future, but there would be no point in doing
so, because new measures are certain to be introduced in the Finance
Bill. To compound the Treasurys poor handling of film tax, a
few weeks ago there was one of the fastest U-turns in history on
sideways loss relief. New restrictions announced by the Paymaster
General on 2 March were met with consternation in the film industry. It
was reported that more than 100 films, including Casino
Royale, would be affected badly by the proposed changes. Films
already on release were affected because the finance arrangements had
not always been
completed.
The film
industry lobby swung into action and by the Wednesday, just a few days
later, it had forced one of the swiftest U-turns in history on the
Government when the Treasury announced that the new anti-avoidance
provisions would not apply to film tax relief under section 42 of the
Finance (No. 2) Act 1992 and section 48 of the Finance (No. 2) Act
1997.
According to the
Financial Times, a Treasury spokesman had the nerve to
say:
This is
not an about-face.
If it
is not an about-face, I do not know what is. A lamentable lack of
joined-up thinking was demonstrated when the Government announced
restrictions on sideways loss relief that would have undermined the
value of the section 48 and section 42 reliefs that they were
encouraging people to rely on because of the problems relating to
securing approval for the new cultural
test.
This is a
shambles. It reflects ill on the present Government that they have
failed to produce a stable system in which to promote a sustainable
film industry. I shall close by quoting the expert to whom I referred
earlier. Mr. Keam says in a letter to the Chancellor of the
Exchequer on 5 March that he has been writing to him regularly since
1997. He says that nine years after he first advised the Chancellor
that he should aim tax relief at production companies rather than at
individuals, the Chancellor has had to implement that. Mr.
Keam says:
I
have over the years garnered written proof that on each and every
occasion my warnings...have been ignored. However, on each
occasion my predictions were proved to be correct and your
mismanagement of the application of these measures has cost the British
taxpayer an incalculable amount of money, failed to deliver a self
sustaining British film industry...and...on many occasions caused
mayhem amongst both the financial community and the British Film
industry.
I
have a great deal of sympathy with the concerns expressed by
Mr. Keam and others in the British film
industry.
4.42
pm
Mr.
Colin Breed (South-East Cornwall) (LD): It is difficult to
argue against much of what the hon. Member for Chipping Barnet has just
said, because the tax regime for the film industry must be one of the
most played-about-with regimes in terms of reliefs that we have seen in
recent years, to such an extent that it is sometimes very difficult to
determine exactly what value the taxpayer is getting from this quite
considerable relief. We do not have a regulatory impact assessment
specifically for these regulations, but it would be interesting to know
whether we have done some value-for-money
and cost-benefit analysis, because it is almost impossible to work out
some of the figures.
An
awful lot of films used to be made down in my part of the world, in
Cornwall. That meant that we benefited from location spending, which
was extremely helpful. The film companies used to buy an awful lot
locally and employ many people locally. A lot of money went into it,
but we seem to have lost that entirely. Anything that is supposed to be
based in Cornwall now seems to be located in Ireland, which does not
benefit us too much, so it is extremely difficult to determine exactly
what benefits we are now getting from the film
industry.
That said, it
is obviously a highly competitive industry and it requires very
considerable private investment. The private investors invest, I
suspect, as much on the basis of their ability to use the tax regime in
a tax-efficient way as on any other basis, and they need to know
exactly what can be obtained. I understand that because of the
difficulties in determining that, some films have started production
but are now beginning to lose their money and other films will not
start production until the tax regime is sorted out. Of course, any
disruption and anything that causes uncertainty in any industry is not
usually very helpful. It is important that we try to get some stability
in the system somewhere and some understanding of how the taxpayer is
benefiting.
Overall, I
am happy to agree to the regulations. It seems reasonable for us at
least to try to get some clear sense for film makers, particularly
those whose films have already started; they had proceeded under a
regime that they thought was going to start. However, it is beholden on
the Government to sort the issue out and make it much clearer, not only
for those in, and those thinking of investing in, the film industry,
but, more particularly, for taxpayers. They ought to understand
precisely how beneficial the regulations are to them, given the money
that the Exchequer pays on their behalf to what as a whole is a pretty
profitable industry. Some of the people who work in it sometimes seem
to get a lot of money for doing some rather nice
things.
4.45
pm
Mr.
Austin Mitchell (Great Grimsby) (Lab): Reluctant as I am
to take up any media opportunity, I was not going to intervene in this
debate; then, however, I heard the carping criticisms from the
Opposition, who made heavy weather of talking around the fact that the
regulations are due to the activities of the European Commission. I
would have thought that the Conservative party would take any
opportunity to bash the European Commission and its interference in
this country. Yet the hon. Member for Chipping Barnet (Mrs.
Villiers) missed that opportunity and put all the blame on the
Government for what is a serious attempt to support
the
Mrs.
Villiers:
I was trying to make the point that the
Paymaster General told the Public Bill Committee and Parliament that
she would get approval for the cultural test. That proved not to be the
case. I am concerned that she misinterpreted, and failed to get the
approval for the test that was put
together.
Mr.
Mitchell:
The hon. Lady knows that the Commission moves in
mysterious ways its wonders to performif it performs any. Given
her own long experience in Europe, she should know that this is to be
explained by the vagaries of the Commission, not by the clear,
independent thinking of the British Governmentwho do not see
any difficulty, think that there cannot be any rational difficulty, so
why should the Commission try to create a difficulty? The defence just
does not wash.
The
hon. Member for South-East Cornwall (Mr. Breed) rather
grudgingly asked what taxpayers would get. They will get a flourishing
film industry and employment for British people in British films. That
is the Governments objective, and it is of paramount
importance. Unless he wants to play a big part in this
drama
Mr.
Breed:
I only wish that we did see a considerable number
of British people working in the British film industry. The truth is
that because, unfortunately, much of our film industry has declined and
much of it is now abroad, we are seeing far less of that. I agree that
the regulations are an attempt to redress that balance. Unfortunately,
however, I suspect that, relative to the money that is being generated,
the money that we have to pile in is nothing like what we
imagine.
Mr.
Mitchell:
The hon. Gentleman knows very well that the
previous attempt was vitiated because it was used as machinery for tax
avoidance on a massive scale. He might well ask why we are putting
money into tax avoidance schemes. The regulations are to direct the
money more specifically to the film industry and employment in it. That
is a serious issue. There are competition problems; production costs
are cheaper in some other countries. However, it is still necessary to
give the industry this kind of encouragementit is valid under
European law and provides the money
directly.
Mrs.
Villiers:
The concern is not so much the switch from the
old reliefs to the new tax credit regime; that is certainly a positive
move to a more rational system which we hope will be less prone to
avoidance. The concern is about why it has taken the Government so long
to get anywhere near getting film tax
right.
Mr.
Mitchell:
There is a problem with that, but then the
massive machinery of tax avoidance and advice, available just down the
river in the City, grinds away at every proposal that the Government
make. We have to make things watertight as far as we can. What takes
time is the massive machinery of advice on avoidance available for
people to pick holes in any scheme that the Government offer. We cannot
blame the Government for a serious attempt to bring help directly to
the industry. I am all in favour of the Government proposal, and that
is a very unusual position for me.
I ask my right
hon. Friend a couple of not very important questions, but perhaps she
can answer them. It is interesting that the method for allocating 16
points to decide whether a film is British, which was explained to me
by my hon. Friend the Member for Erith and Thamesmead (John Austin), is
somewhat complicated.
For instance, for both documentaries and non-documentaries, four points
are awarded to a film if at least 75 per cent. of it is set in the
United Kingdom. Suppose that a film, whether a drama or a documentary,
is set on a British shipcall it the Titanic or the Mary
Celestesailing on the Atlantic, how many points will it
get?
I am delighted, my
right hon. Friend will be pleased to hear, that up to four points may
be awarded, depending
on
the percentage of the
original dialogue that is recorded in the English language or in a
recognised regional or minority
language.
As the author
of Teach Thissen Tyke, which is the peoples
guide to Yorkshire grammar and languageto speaking
YorkshireI expect that my sales will be enormously increased by
that concession to regional language, so I welcome
it.
There are various
points for actors and personnel; for example, principal photography,
visual effects, special effects. All are very important in the film
business. Can my right hon. Friend tell me why the system of points
allocation is so complicated, and was it agreed in consultation with
the unions and the industry which jobs were best safeguarded and needed
protecting? That will be my only
intervention.
4.52
pm
Dawn
Primarolo:
I am grateful for the forceful way in which my
hon. Friend the Member for Great Grimsby (Mr. Mitchell) made
his point, but I will not stand here and apologise for the fact that,
regrettably, on several occasions the Government have had to act
against tax avoidance and people who were taking advantage of the film
relief. I make no apology for that, and he would not expect me to. Such
activities did not help the film industry, because they were not about
getting money to it. Films were constantly being undermined and were
not perceived, in their own right, as sensible investments in
productive
activities.
I shall
quickly answer my hon. Friends questions about the cultural
test. The DCMS undertook a thorough consultation with the industry and
all parties interested in the industry, not just those who were
interested in financing films, prior to going to the Commission. The
crucial point that the Government have made all along is that we want
the film industry in the UK, which involves excellent and undoubted
skills, to be sustainable and to grow. We want to give the industry
that chance, rather than, unfortunately, being used as a vehicle for
tax avoidance.
Some
51,000 people in the UK are involved in the film industry. When we
discussed the regulations to the Finance Act 2006, Conservative Members
predicted that 2006 would be a disastrous year. They made many of the
same points that they just made about insecurity and the film industry
not being able to plan. Instead, 2006 turned out to be the
second-highest year on record for the film industry in terms of
production of feature films. Total production spending in the UK
increased by 48 per cent. to £840 million. Inward investment by
international film-makers increased by 83 per cent. and 50 indigenous
feature films were produced in 2006.
What the hon. Member for Chipping
Barnet is really trying to conceal in her remarks is that the Forsyth
commission, which is reporting for the Conservative party, advises the
abolition of all support to the film industry. That would destroy the
excellent skills that we need more of in the creative industries in
this country if we are to continue to be a world leader. It would
perhaps be helpful if she was a little more direct in discussing those
issues rather than picking holes and making misrepresentations. I say
to her that it is not about repeatedly coming back to the House. These
powers were in the Finance Act 2006 and it was always intended that
there would be regulations to cater for overlapping films.
The test, which I outlined to my
hon. Friend the Member for Great Grimsby, was widely consulted on. As
when we introduced the research and development tax credit to encourage
scientific research, the Government are interested in ensuring that we
help and invest in developing skills here in the UK rather than
financing something that would take place elsewhere in the world. Those
were precisely the points made by the hon. Member for South-East
Cornwall about the benefits of the industry to the UK, such as
employment, expertise and other potential benefits.
In terms of the creative
industry, frankly, it is important that we establish the industry in a
sustainable fashion and that it is not a sitting target for every tax
avoidance scheme around. Such schemes have nothing to do with caring
about, investing in or developing the film industry and everything to
do with high-value individuals looking for creative losses in order not
to pay the tax that they should pay to the Exchequer. That is
recognised by the editor of Screen International who in an article on
the website, screendaily.com, on 9 March made the position quite clear
by saying
that
The
surprise is that there is surprise every time the Government act. There
have been at least 12 individual actions to close tax loopholes in the
UK alone since 2000.
That is entirely regrettable, but it shows
the scope and misuse that the industry was being put to. The editor
goes on to say that he believes, as we do, that the new
arrangement
heralds a new
era of finance in which films can be taken seriously as investment in
their own right,
and
that
the UK Government
may be doing its industry a
favour.
I say that we are
doing so and it is about time that that was recognised.
On the cultural test, the UK
notified its test in December 2005, which had been drafted after wide
consultation. The Commission considered the test alongside the details
of the tax relief itself and in September 2006 raised concerns that it
focused too much on economic rather than cultural factors. Jointly, the
Department for Culture, Media and Sport, the Treasury and Her
Majestys Revenue and Customs worked with the Commission to
produce a revised test that met those concerns while supporting the
development of a sustainable British film industry. I sometimes wonder
about the experience of the hon. Member for Chipping Barnet and whether
she has any. She was a Member of the European Parliament and knows full
well that such issues would have to be
considered. The industry has in fact congratulated the Government on
devising a structure that is workable.
The hon. Lady asked about films
that would pass the first test, but not the second. DCMS advises me
that it is aware of only a handful of films that will fail the new
test, but would have passed the old test. That is regrettable, but as
the hon. Member for South-East Cornwall said, if the Government invest
in a tax relief on the taxpayers behalf, they want to see a
return to the taxpayer through jobs and investments. If there is no
return, we should not invest. The new test arranges for precisely that,
and I commend it to the
Committee.
4.51
pm
Mrs.
Villiers:
I am grateful for the Ministers reply,
and I want to respond briefly to some of the points she made. She
talked about the consultation being carried out for the original test,
but it was not carried out for the revised test, which was what I
expressed concern about.
The Minister talked about the
Forsyth report. Yes, it considered ending film tax relief, but we made
it plain that while we were considering the Forsyth report and
that package, we were taking representations from those who wished to
make the case for the retention of their special release. We have made
no final decision on the future of film tax, and we are always open to
listen to the industrys representations on whether the relief
should be retained or should be amended as part of a wider reform of
the tax system, which is desperately
needed.
The Minister
robustly defended the fact that there had been
12 individual actions to close
loopholes.
Why did it
take 12 actions to close loopholes? Why was it nearly 10 years before
the Government realised that the sections 42 and 48 reliefs were
fundamentally flawed? That is the point that we come back to again and
again as the Government come back to the House again and again to
revise their film tax. That has not only produced instability in the
industry, but cost the taxpayer literally
billions.
Question
put and agreed
to.
Resolved,
That the Committee has
considered the draft Corporation Tax (Taxation of Films) (Transitional
Provisions) Regulations
2007.
Committee rose
at two minutes past Five
oclock.