The Paymaster General (Dawn Primarolo): I beg to move,

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 Government’s 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.

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 Government’s 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 films—it 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 1997—it was modelled on a previous tax break introduced by John Major—he 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:

The Paymaster General’s 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 1985—the test with which the Paymaster General did not expect to encounter any problems in getting approval for. The Commission’s 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 months—the first time in March last year, and the second time in December.

Turning to the test under consideration here, and the Opposition’s 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 Government’s view. He said:

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 Treasury’s 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:

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 a great deal of sympathy with the concerns expressed by Mr. Keam and others in the British film industry.

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.

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 perform—if 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 Government—who 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 Government’s 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 encouragement—it 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 ship—call it the Titanic or the Mary Celeste—sailing 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

As the author of “Teach Thissen Tyke”, which is the people’s guide to Yorkshire grammar and language—to speaking Yorkshire—I 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.

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. Friend’s 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

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

and that

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 Majesty’s 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 taxpayer’s 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.

Mrs. Villiers: I am grateful for the Minister’s 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 industry’s 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

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,

Committee rose at two minutes past Five o’clock.