Clause
55
Trust
gains on contracts for life
insurance
Question
proposed, That the clause stand part of the
Bill.
Mrs.
Villiers:
I should just like to emphasise that the same
point that I made in relation to the previous clause applies in respect
of this clause, which again makes a correction and, again, the CIOT is
concerned that the Revenue is expecting people to submit tax returns
based on an incorrect assumption. The CIOT goes as far as
saying:
“It is
deplorable that HMRC are...purporting to deny a tax benefit in
direct contradiction to the relevant
legislation.”
The
Treasury has admitted its error. It is unfair to penalise the taxpayer
for a mistake that was made by Ministers. I hope that, in this case,
too, the Economic Secretary and his officials will make the greatest
efforts to ensure that those affected by this correction are well aware
of the need to postpone submitting a return until after Royal
Assent.
Ed
Balls:
I understand that although the clause corrects the
position, unlike the previous clause it corrects it even though the
position was in favour of trusts, rather than against them. In any
case, the hon. Lady made the same point as previously, so I am very
happy to make the same point as previously, too.
Clause 55 ordered to stand part of the
Bill.
Clause
56
Offshore
funds
Ed
Balls:
I beg to move amendment No. 116, in
clause 56, page 38, line 33, at
end insert—
‘(4) But the
reference to offshore funds in section 760(3)(a) does not include any
arrangements which are not a collective investment scheme for the
purposes of that Part of that
Act.”.’.
The
Chairman:
With this it will be convenient to discuss
Government amendment No.
117.
Ed
Balls:
The clause amends the rules of the offshore funds
tax regime, both to enable offshore funds to use popular commercial
structures that allow investors access to a range of financial
instruments through a single product and to ensure that the offshore
fund regime continues to provide a level playing field for onshore
funds.
The offshore
fund rules were introduced in 1984 to deter avoidance schemes that
sought to roll off investment returns free of UK income tax by holding
investments offshore. The regime aims to put UK investors investing in
offshore funds on a similar footing in respect of tax for UK investors
in UK funds. The sector is fast moving and aspects of the regime have
begun to act as a barrier to commercial developments. That is why we
announced in October that the Government would consult with a view to
reforming the regime in next year’s Finance Bill and why we are
making the changes in clause 56 while that consultation
continues.
Industry
highlighted the fact that one of the changes in the clause would
retrospectively affect UK investors in funds that fall within the scope
of the clause, as well as compliant funds investing in such funds. Our
two amendments will ensure that the legislation will not
retrospectively affect any investor and that funds
investing in other offshore funds or which for commercial purposes hold
underlying assets through intermediate holding companies, including
funder fund structures, will not be affected by the changes. The
offshore regime relies on the definition in the Financial Services and
Markets Act 2000. I commend the amendment to the Committee.
Amendment agreed
to.
Amendment
made: No. 117, in clause 56, page 39, line 5, leave out subsection
(7).—[Ed
Balls.]
Clause 56, as
amended, ordered to stand part of the Bill.
Clause
57
Election
out of special film rules for film production
companies
Question
proposed, That the clause stand part of the
Bill.
Mrs.
Villiers:
The clause allows television companies that do
not qualify for film tax credit to opt out of the new tax regime for
film companies. I am delighted to see that provision in the Bill,
because I asked the Government to include it during the debate on the
Finance Bill last year. In scrutinising last year’s Bill, it
seemed unfair to inflict a controversial new tax framework and a
significant compliance burden on companies producing TV and films that
were not destined for general release, and which therefore could not
qualify for the film tax credit.
I therefore tabled an amendment
to remove from the new accounting regime those companies that could not
qualify for the tax credit, such as TV companies. The response of the
Economic Secretary on that occasion, as recorded at column 234 of the
Hansard report of Standing Committee A for 18 May 2006, was to
dismiss my amendment as going “completely against the
intention” of the Bill. Although I am pleased that he has seen
the light and responded to my concerns, I have to ask why the
Government could not get the issue right the first time around. The
explanatory notes refer to discussions with the industry, which no
doubt were useful, but the problem was flagged up with the Government
in Committee last year, while they still had time to solve it in that
Bill.
That is a
recurring theme in the history of the Chancellor’s film tax
legislation. Since he first introduced his film tax break in 1997, the
rules have been revised by Finance Acts in 2000, 2002, 2004, 2005 and
2006, and now they being revised again in 2007. When I highlighted that
unfortunate history in the debate on last year’s Finance Bill,
the Paymaster General and the Economic Secretary dismissed my concerns.
They were entirely confident that they had got film tax completely
right, even though they had got it wrong so many times in the past.
Their confidence has proven to be sadly misplaced, because here we are
again, although this is not the first time that the House has been
asked to consider film tax since the previous Finance Bill. It is
regrettable that after five major changes to the film tax regime in
seven years, the Government have had to come before the House twice in
the past 12 months to ask for approval of its cultural test for its
film tax regime.
I asked the
Economic Secretary last year whether he anticipated any problems
obtaining European Commission approval for the new film tax credit. In
his confident response, he
said:
“The hon.
Lady suggested that the approach to defining UK expenditure in clause
35 was in some way determined by the European Commission. There was
absolutely no truth in her statement. On the contrary, the definition
of UK expenditure reflects our policy aim of encouraging producers to
make full use of film-making skills, facilities and infrastructure in
the UK.
It is true
that, as is required, we have been discussing with the Commission the
securing of state aids approval for the new relief, but the Commission
has not indicated any concerns about how we define UK expenditure nor
requested that we change the definition in any way. We have, for
example, reduced the qualifying limit from 40 per cent. to 25 per
cent., and we made that decision on the basis of the points put to us
during the consultation. In our view, the definition is well within the
ambit and requirements of the state aids rules. We are confident that
those discussions will proceed
apace.”
The Economic
Secretary goes on to say a little later
that
“productions for
which filming has taken place predominantly or wholly overseas will be
entitled to a level of benefit lower than that of productions filmed in
the UK. That is entirely in line with the
Government’s policy aim, set out clearly in the legislation, of
encouraging filmmakers to make full use of facilities and
infrastructure in the UK. This is an enhanced tax relief for making
British films in Britain, so it is not our intention to spoil overseas
film industries.” —[Official Report,
Standing Committee A, 18 May 2006; c.
232.]
However, that was exactly
what the Commission later told the British Government that it could not
do. It required the deletion of that element of the Economic
Secretary’s cultural test that gave favoured status to films
made in Britain. The only permissible criterion was whether or not a
film was culturally
British.
Therefore,
despite the brave words of the Economic Secretary, the Commission would
indeed determine the approach taken to “UK expenditure”
in relation to the film tax credit. Hence, the Paymaster General was
forced to return to the House to ask for its approval of a second
revised cultural test instead of the one debated in Committee last
year. That had a highly destabilising impact on a number of UK films
which thought that they were going to qualify for the new tax credit,
but then found that they could not. It also delayed the implementation
of the new film tax rules and forced the Government into a temporary
extension of the reliefs outlined in sections 42 and 48 to plug the
gap. Those were the reliefs that the Economic Secretary had repeatedly
told the Committee last year were flawed.
To compound that chapter of
accidents, no sooner had the Treasury announced the temporary extension
of the sections 42 and 48 reliefs, then it announced out of the blue
that it was going to scrap sideways loss relief in relation to those
reliefs, thereby undermining their value. It was reported that more
than 100 films would be negatively affected, including “Casino
Royale”. The film industry lobby swung into action.
Three days later, it forced one of the swiftest U-turns in Government
history. It was frankly astounding that the Government announced a
significant crackdown on sections 42 and 48 reliefs, which they had
just agreed to extend and which HMRC was actively encouraging
filmmakers affected by the debacle over the cultural test to
use. Frankly this is a
shambles. The Government’s incompetent handling of film taxes
has cost the taxpayer billions and caused significant instability for
film financing. I very much hope that the Economic Secretary does not
have to return yet again to this Committee next year to ask for further
changes to the film tax
regime.
Ed
Balls:
Clause 57 allows companies to opt out of the
special rules for film production companies, for which we legislated in
the Finance Act 2006. The clause is designed to respond to
representations from the TV industry in particular and has been
welcomed by it. The laws introduced last year were discussed with a
number of TV production companies and tax professionals. We believed
then, and still believe, that they make sense for many companies.
Therefore, we want to leave them in place. As the hon. Lady said, the
point was made in Committee last year that concerns had been raised.
Rather than rushing to make sudden changes then without consultation at
a later stage in last year’s Finance Bill, we had further
discussion with those who saw problems and proposed a simple
proportionate solution, which is the clause before us today.
As for the European matter that
she raises, the EC treaty prohibits subsidies that distort competition
and trade. Aid is allowed on cultural grounds for films. The Commission
has set out criteria for that. The UK’s cultural test was
notified in December 2005. The Commission considered the test last
September and raised concerns that it was too focused on economic
rather than cultural factors. The Treasury, with the Revenue and the
Department for Culture, Media and Sport, then worked to produce a
revised test that met those concerns, while still supporting the
development of a sustainable film industry. We made those changes to
ensure that, consistent with our European obligations, we would transit
to the new regime, which is operational.
In recent years, we have had to
make changes to the film regime to ensure that tax avoidance was
addressed. Last year’s regime, which we debated at length, is a
simplified, sensible and effective regime. The fact that we have such a
small change before us today is a tribute to the success of that new
regime, and I commend the clause to the Committee.
Clause 57 ordered to stand
part of the
Bill.
Further
consideration adjourned.—[Kevin
Brennan.]
Adjourned
accordingly at twenty-nine minutes to Eight o’clock till
Thursday 24 May at Nine
o’clock.
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