HC Deb 03 July 2002 vol 388 cc249-62

'(1) Relief under the following provisions is available only for a film that is genuinely intended for theatrical release—

  1. (a) section 40D of the Finance (No. 2) Act 1992 (c. 48) (election to claim capital allowances for production or acquisition expenditure);
  2. (b) section 41 of that Act (relief for pre-production expenditure);
  3. (c) section 42 of that Act (three year write-off for production or acquisition expenditure);
  4. (d) section 48 of the Finance (No. 2) Act 1997 (c. 58) (relief for expenditure on production or acquisition of film with total production expenditure of £15 million or less).

(2) For the purposes of subsection (1)—

  1. (a) the relevant intention is the intention at the time the film is completed of the person then entitled to determine how the film is to be exploited;
  2. (b) "theatrical release" means exhibition to the paying public at the commercial cinema; and
  3. (c) a film is not regarded as genuinely intended for theatrical release unless it is intended that a significant proportion of the earnings from the film should be obtained by such exhibition.

(3) Subject to the following provisions, this section applies to any film—

  1. (a) completed on or after 17th April 2002, or
  2. (b) completed before 1st January 2002 but not certified by the Secretary of State before 17th April 2002,

(4) This section does not apply to a film completed on or after 17th April 2002 if—

  1. (a) it is a drama with an average production expenditure per hour of running time of the completed film greater than £500,000, and
  2. 250
  3. (b) it was commissioned on or before 17th April 2002 and the first day of principal photography was on or before 30th June 2002.

(5) For the purposes of subsection (4) "drama" does not include—

  1. (a) anything in the nature of—
    1. (i) an advertisement or promotional film,
    2. (ii) a discussion programme, news or current affairs programme, quiz show, panel show, variety show or similar entertainment, or
    3. (iii) a training film, or
  2. (b) a film of a live event or of a theatrical or artistic performance given otherwise than for the purpose of being filmed;
but it includes a documentary involving the dramatic reconstruction of events if the dramatic content forms 50% or more of the running time.

(6) For the purposes of this section—

  1. (a) a film is completed at the time when it is first in a form in which it can reasonably be regarded as ready for copies of it to be made and distributed for presentation to the general public;
  2. (b) the production expenditure on a film means the total of all expenditure on the production of the film, whenever incurred and whether or not incurred by the person claiming relief; and
  3. (c) subsections (6A) and (7) of section 48 of the Finance (No. 2) Act 1997 (c. 58) (production expenditure: exclusion of deferments and treatment of transactions not at arm's length) apply as they apply for the purposes of that section.'.—[Dawn Primarolo.]

Brought up, and read the First time.

The Paymaster General(Dawn Primarolo)

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker

With this it will be convenient to discuss the following: Government new clause 22—Films: restriction of relief for successive acquisitions of the same film.

Government amendment No. 13.

Dawn Primarolo

The amendments respond to a detailed Standing Committee debate on clause 99 and representations made by the British film industry. I promised in Committee that I would reconsider two issues: relief for high-value television drama, and the possibility of introducing transitional relief where filming has already commenced. I explained to the Committee the difficulties of finding a secure means of providing for those two principles while returning the film relief to its original intention.

The new clauses and the amendment make changes to the proposals for film relief. On high-value television drama, as I said in Committee, it was not clear to us from the evidence presented by the industry that television production companies were subject to the same structural problems and risks as those faced by British film makers. We have subsequently received further evidence from the industry, which indicates that, although television production companies often incur some risk of budget shortfall, such risks are generally not comparable to those taken by British film makers.

Making films for the cinema remains a very high-risk venture. The typical British film is still made by a small, one-off production company. The producer has to stitch together a complex web of funding and the company is at considerable risk of not getting the film screened and recovering its costs. Some 60 per cent. of British feature films completed in 2000 have yet to achieve theatrical release.

In contrast, high-value TV drama—drama costing more than £1 million an hour to make—is usually made by major broadcasters and production companies or combinations thereof. We accept that those companies often fund individual productions with some degree of deficit. In other words, they take some risk in making sufficient overseas sales to cover their budget and make profits. However, they are guaranteed television broadcasting and can usually spread the risk over a wider slate of other productions and commercial interests. Classically, such producers have more than one film in production and make their profit from a range of products.

In considering the further evidence, therefore, the Government do not accept that the industry has made a case for suggesting that television drama of any value should benefit from the special incentives intended to counter the very particular problems of making films for the cinema, so we do not intend to make any changes to the Bill in respect of high-value drama.

Adam Price (East Carmarthen and Dinefwr)

Does the Paymaster General accept that that decision could not have come at a worse time for the independent television sector? Commercial revenue is down by 25 per cent. in the wake of problems in the media and advertising, so is this not the worse possible time to edge television production out of support under section 48 of the Finance (No. 2) Act 1997?

Dawn Primarolo

Television drama was never intended to be covered by the relief, which was specifically provided for the British film industry, in which there is very high risk. It was intended neither for television drama nor game shows, soaps or any of the other productions in respect of which claims were made. The cost to the Exchequer of the use that was made of the relief, even though everybody in the industry knew that such use was not intended, rose hugely last year and this year. In 2001, the cost was £180 million, and it is estimated to rise to £290 million in this financial year. The cost rose very steeply, very quickly for two reasons. First, there was a time-lag between production completion and claiming the relief and, secondly, there was a piling in of those who wanted to make use of it. Although I accept the hon. Gentleman's point about the difficulties faced by some in the industry, the Government had to make a judgment on whether they should allow a relief that was not intended for TV drama to be used for that purpose and on whether that was a good use of taxpayers' money. For the reasons that I gave on Second Reading and in Committee, we do not accept that that massively growing cost represents a sensible use of taxpayers' money. However, we accept the need to secure the film relief for its intended beneficiaries—British films—and we are trying to achieve that.

I turn to the transitional relief. We were not prepared to cross the boundary to say that the relief is now for films and for high-value drama. If that issue needs to be addressed, there is another place to do that—it is not the purpose of the relief. The Government announced the returning of the relief to its original intended use with effect from 17 April, Budget day. Some companies were in production and therefore faced quite serious financial hardship whereby they had committed to sell the product for a price that assumed a tax relief that was no longer there. Whether they should have done that is another matter. The question then arose, and was discussed in Committee, as to whether the Government had an obligation to say that they had noted the situation and that transitional protection would be given. As I explained in Committee, the problem is that the normal way of trying to determine whether transitional relief is applied is the existence of a contract. No contracts were in place. The whole point of the misuse of the relief—if I may put it that way—was that the contract was always drawn up at the end of the process. The producers took the risk in between times because they wanted to maximise the amount of relief that was ultimately available.

The Government accept that there is an obligation to try to deal with the issue of transitional relief. In Committee, I promised to look again at the practical difficulties of devising a relief that could be targeted to those instances for which we have sympathy. I am pleased to report to the House that, following further constructive discussions with the industry, we have found a way of protecting the position of the vast majority of the projects concerned. New clause 21—which, by virtue of amendment No. 13, will replace clause 99—will protect the position of drama series costing more than £500,000 an hour to make, provided that shooting on the production began by 30 June 2002.

Mr. Mark Field (Cities of London and Westminster)

The Paymaster General says that the vast majority of projects will be saved by new clause 21. Can she quantify the precise proportion of projects that will be thus saved, given the representations that she has received and the statistical analysis on which she is no doubt relying in making that statement?

Dawn Primarolo

Yes, approximately 50 production companies would have experienced severe difficulties. We settled on £500,000 as the break point because I was keen to ensure that the game shows, soaps and other productions that were clearly not even drama did not fall within the scope of the transitional relief. Perhaps hon. Members believe that I have been rather stubborn, but including a transitional relief to protect soaps, however enjoyable they may be, was not the intention.

5 pm

I understand that we are considering approximately 80 per cent. of the productions of the 50 companies. The problem when we devised the relief was that the costs became astronomical if the transitional relief was extended further down, in a way in which the House did not want. That was also clear in Committee.

The monetary limit excludes continuous productions that are below budget, for example, soaps. We have used the principal photography device to try to identify the contractual start of the drama. It would risk abuse to base the relief entirely on contractual arrangements. It would also be too complicated to operate.

The proposed transitional relief is sensible and a fair solution to a complex matter. It will be simple to administer and will provide certainty. It will not allow further abuse; that is important. It will cost £50 million in 2003–04. Hon. Members must understand the scale of misuse that was beginning to build up. I stress that the relief is transitional and that the commitment will therefore not be continuing.

New clause 21 clarifies whose intention is relevant for determining whether a film is intended for theatrical release. Clause 99 provided that the relevant intention was that of the film maker, as defined in the Films Act 1985 and copyright law. On reflection, that provision would restrict relief beyond our intention. We were therefore happy to adopt the industry's suggestion and change it.

I mentioned new clause 22, which is an anti-avoidance provision, in Committee. Film makers generally have access to relief under section 48 of the Finance (No. 2) Act 1997 via sale and lease-back arrangements with film partnerships. The partnership claims relief on an amount that is equivalent to the total production expenditure on the film and passes part of it on to the film maker. There is nothing wrong with that and the new clause will not affect it.

Let me simplify complex arrangements for hon. Members. The abuse that the new clause tries to prevent consists of the film partnership subsequently selling the film to another partnership for no commercial purpose, solely so that the second partnership can claim relief on the total production expenditure. The chain is far more complicated than that, and means that the first partnership is able to avoid tax liability on disposal. Through a long chain, the ownership of the film is passed on to prevent the application of the final tax liability on disposal. In theory, the chain could go on for ever.

We spotted that possibility early, and realised that such schemes were beginning to be marketed. We have taken the opportunity of today's debate to introduce an anti-avoidance mechanism.

The Government remain committed to supporting the British film industry, recognising the real challenges that British producers face, and the high risks that they take in producing British films. We are also, however, sending a clear, firm message to the industry—it is regrettable that it has to be done through legislation—which is that, when we intend a relief to be used for films, we shall make sure that that is precisely how it is used in the industry.

I hope that the House is satisfied with my explanation of why we are unable to make any concessions or arrangements in relation to high-value television dramas. I also hope that hon. Members will accept that we have made a fair and proportionate response on the question of transitional relief, and that they will agree with the Government that this relief should be returned to the use for which it was originally intended.

Mr. John Bercow (Buckingham)

I would like briefly to comment on what the Paymaster General has helpfully told us this afternoon. Just before I do, however, and with your indulgence, Mr. Deputy Speaker, I would like to congratulate you—four days in advance of the event—not only on my own behalf but, I hope, on behalf of the House, on the forthcoming 25th anniversary of your election as the Member of Parliament for Saffron Walden, following your four years' service in another constituency. You have given great service to the House and to your constituents, and I am cheekily taking this opportunity to congratulate you before anybody else does so. Moving on—

Mr. Deputy Speaker

Order. I am extremely grateful to the hon. Gentleman for that completely unexpected intervention. I therefore feel that I can be cheeky enough to congratulate him on his engagement.

Hon. Members

Hear, hear!

Mr. Bercow

Well, this is as good as it gets. All good things come to an end, and I fear that I must enjoy this while it lasts.

Dawn Primarolo

If I am allowed to be cheeky just for a moment, Mr. Deputy Speaker, may I say that you must have entered the House at a very young age? May I say, too, how much we value your attention? I also congratulate the hon. Member for Buckingham (Mr. Bercow) on the recent announcement of his engagement. What a lucky man he is! I congratulate him on behalf of all my colleagues, and we look forward to the wedding celebrations—

Mr. Deputy Speaker

Order. I thank the right hon. Lady, but I think that we had better get back to business.

Mr. Bercow

We had certainly better do that, Mr. Deputy Speaker. I thank you for your kindness, and I warmly thank the Paymaster General for what she has just said.

Mr. Deputy Speaker, I am about to astonish you, the Paymaster General and all right hon. and hon. Members present in the Chamber by making the shortest speech that I have ever made since 1 May 1997, when I was elected. The new clauses give a partial transitional relief to certain TV productions that meet cinematic standards. As the right hon. Lady acknowledged, we raised these issues in Committee, and my hon. Friends tabled two amendments that offered some protection, although it is only fair for me to say that, in financial terms, our proposals were more generous.

Nevertheless, it is encouraging that the Paymaster General has listened. She was slightly stung—perhaps legitimately so—towards the end of our deliberations in Committee, when her word appeared to be questioned. In fact, on one occasion, I think that I appeared to question the reliability of her word. Certainly, in this case, she has come up with the goods. She said that she would look at the matter, and she has done so. We understand the rationale behind the Government's position, and some relief is certainly much to be preferred to none. On that, I will rest my case.

Mr. Chris Smith (Islington, South and Finsbury)

In contributing to this brief debate on new clause 21 and other new clauses and amendments, I should perhaps remind the House of the interests that I have recorded in the Register of Members' Interests.

When the Chancellor introduced the relief for investment in the production of films in the UK, in his first Budget five years ago, it was widely and warmly welcomed by the film community. I very much hope that the decisions that the Government have taken over recent months will not endanger the warmth of that reception. In one important respect, the Government have moved to acknowledge some of the difficulties that the decisions announced in the Budget were likely to cause. New clause 21 contains a scheme for transitional relief, which I welcome.

I know that particularly in the independent film and television programme-making sector in the UK, there is a feeling that the Government have recognised the problems of natural justice that arose where commitments had already been entered into, but the relief was on the point of immediate withdrawal. The Government have now tackled that. Yes, they have circumscribed the transitional arrangements, but they have done so in a reasonably fair way, and there will be a welcome across the industry and across the House for the transitional measures included in new clause 21.

However, I am deeply disappointed that the Government did not move on the other issue which they committed themselves to consider—the withdrawal of relief for high value mini-television series, especially those made with inward investment money in the UK. Those are usually major undertakings costing many millions of pounds to make. They have all the features of a movie-making exercise—the amount of money, the scale of the operation, the kind of skills required and the type of film used to make the movie. All are akin to the making of a film for theatrical distribution, rather than to the making of a run-of-the-mill television series.

With those high-value television series, there are major employment and skill benefits for us here in the UK. In the past year, for example, £173 million-worth of inward investment came into the UK to assist the making of such major television series. A large segment of that was the HBO series "Band of Brothers", but there were other major series as well. The employment consequences of that inward investment were substantial, as were the opportunities that were given to people in the UK to learn the process of making film and television programmes, to develop their skills, and to find employment not just directly on the movie sets, but in all the ancillary occupations around the making of television programmes and movies. I fear that as a result of the decisions that the Government have taken, we will lose such opportunities in the future.

When the Government made their announcements in the Budget, they rightly drew attention to the fact that the original intention of the relief was to provide support for the British film industry, and not the British television industry. They stated in their Budget press release that they were trying to refocus the reliefs on the original intention of stimulating the production of films in the UK and to promote growth, employment, investment and opportunities in the British film industry". I would argue that the making of major television series of high value—very often well over £1 million per hour in terms of the cost of making the programme—do precisely that. They are films in all but name.

5.15 pm

Undoubtedly, there have been abuses of the system, as the Paymaster General rightly said, in that soaps, game shows and even the weather forecast have been eligible for tax relief. It was not the intention of the original relief to assist such programmes, and it is right that the Government have taken action to restrict relief so as to prevent such abuse. However, I fear that, in seeking to catch the abuses of the system, they are eliminating genuine, major investment in British employment in the making of major series.

My right hon. Friend said that the makers of television mini-series are not subject to the same risk as film makers. Yes, that is true in the majority of cases. Most major mini-series, especially those reliant on inward investment, are made by substantial companies, which usually have some guaranteed outlet for distribution before they start to make the series. If that were the only test to be used, the conclusion that the Government have reached would be the right one. However, that is not the only test to be applied.

I put three arguments to the Government. First, they are in danger of losing substantial amounts of valuable inward investment as a result of this decision. Secondly, the makers of mini-series may not be faced with the same risks as the movie maker, but they have the same temptation to make their mini-series elsewhere around the world where they can get tax relief, he it Canada, Ireland, Australia or anywhere else. That temptation is still there. The removal of the relief in the United Kingdom makes other environments more attractive to the makers of mini-series.

Thirdly, the making of these mini-series has helped to sustain the infrastructure of the film industry, especially in the past year and a half when times have been difficult for parts of the industry. By damaging the television mini-series potential in the UK, the Government are in danger of damaging the film infrastructure. I urge them to reconsider that point.

I realise that, for the time being, the Government's mind is made up. I would warmly welcome a proposal from the Paymaster General that she will come to tomorrow's proceedings in the House with a draft amendment to put this matter right, but I suspect that she will not do that. I am sad about that, but I hope that she will commit herself to reconsidering this question over the next year or so to see how in broad terms the new restricted relief is working in practice, and whether damage to inward investment is occurring as I fear it might. If that is what the analysis shows, she should introduce measures, perhaps in next year's Finance Bill, to put right the damage caused.

I hope that a review of what is happening on this relief will be put in place. I shall listen with great interest to hear whether my right hon. Friend is able to assist in this matter.

Mr. Edward Davey

I fear that I am about to strike a discordant note in the debate, but before I do, may I join in the congratulations to the hon. Member for Buckingham (Mr. Bercow)? We will be looking at the Conservatives' policy on the married couples allowance to see whether there are any changes in the future. [Interruption.] The Paymaster General has just mentioned the child tax credit as well. Perhaps there are other announcements that I have not yet heard.

On new clause 21, it is always nice when Ministers tell us that they have listened and introduced changes in consultation with the industry. However, bearing in mind the general interests of the taxpayer, I am concerned when the Minister says that the industry is very happy with this measure. I have great respect for the right hon. Member for Islington, South and Finsbury (Mr. Smith), who made a powerful and informed speech. However, many industries and individuals across the country would like a bit of tax relief, given half the chance. Is this tax relief necessary and are the provisions sensible? Let me deal with the details before discussing the principles.

New clause 21 contains an attempt to prevent tax avoidance. As the Minister said, when the relief was originally introduced, it was not intended that it could be abused in the way that it has been. My concern is whether new clause 21 will be sufficient. I predict that we will be back here, perhaps not next year but the year after, discussing other anti-avoidance measures to stop the abuse of this tax relief. That is what happens when reliefs are provided in this way.

Proposed subsection (2)(c) provides that a significant proportion of the earnings from the film should be obtained by such exhibition. Making a judgment will be extremely difficult. When one is making a film and looking at a business case, presumably one looks at the future revenue projections, such as sales of videos, DVDs, television rights, and so on. The business case might not be disclosed to the tax authorities if the film makers wanted to ensure that they obtained the tax relief. There will still be many ways in which to get round these provisions.

I do not know whether this is the first time in tax legislation that the words "quiz show" have appeared. The new clause refers to a range of different types of programmes; it has to be extremely specific to ensure that abuse does not take place. I am worried that the tax commissioners will determine whether something is a film or a quiz show. Will there be case law on that? I can see the policing costs mushrooming in the future. So although the Government are quite right to want to tighten up the provisions, I am worried that they have not gone far enough.

When the Paymaster General was discussing new clause 22 she said, almost as an aside, that although the new clause restricts relief, providing transitional relief in the process, the costs in the coming year will be about £50 million. That is an awful lot of money. The right hon. Lady says that it will not reoccur because it is transitional, but let us imagine what £50 million could have done for an endowment for a higher education institution, providing training and education for the skills that people need in the industry.

We will still be spending significant sums on giving the industry tax relief. The question that the House should really address is whether those sums, directed in a different way, would help the wider industry, the individuals who work in it, and UK plc overall. Should we be giving tax relief to those who are effectively the companies' shareholders, although they may be few in number, rather than investing in the skills and talents of British people who would work in the United Kingdom and abroad? I fear that we may be choosing the wrong method to support the industry by investing in shareholders rather than the skills and talents of British people.

Adam Price

Does the hon. Gentleman accept the point made by the right hon. Member for Islington, South and Finsbury (Mr. Smith), that the reality of the industry is that there is strong tax competition and there simply will not be a film industry in the UK unless we offer tax relief to support it?

Mr. Davey

My concern with that argument is that the logic of it is that the UK Government should respond to every tax relief given by every other country and should engage in a competition of tax reliefs across the world. We live in a global economy and globalisation affects many industries, not just the film industry. If this is the first example of the Government and the country giving in to such pressures, it is a severe mistake. Rather than getting into that battle, we should invest in our people; that is the best way to secure our future.

As the Paymaster General said, one of the reasons why the Government gave the relief was because they believed that the risks faced by the particular type of companies involved were significant and that there were higher risks than in other industries. That creates a disturbing principle. Will the Government give a series of reliefs to industries involved in high risk? Should we have a tax relief for impresarios who take on the risk of a theatre production? Should we have tax reliefs for the risks involved in developing a new record, and for all high-risk industries?

Should we have tax relief for North sea oil companies, who are clearly engaged in risky ventures and do not appear to be enjoying the generosity of the Government tonight? If we are going to give tax relief because an industry happens to be particularly risky—in this case, the film industry—how far do we extend that principle? It is a worrying principle.

Mr. Chris Smith

The hon. Gentleman dismisses the point about global competition far too lightly. This industry is far more mobile than virtually any other industry across the world. The industry is ready to move a major investment in production from one tax environment to another, depending on the relative attractions of those tax environments; much more so than virtually any other industrial activity.

Mr. Davey

The right hon. Gentleman accentuates my concern. Will we have a new principle, concerning mobility of capital? There are many other industries that, arguably, are even more mobile than the film industry; for example the IT sector—later we will discuss IR35—in which we have seen the mobility of capital and labour. If we decide our tax policy simply and purely on that basis, we will be handing tax relief after tax relief to industry after industry. We have to be exceedingly careful.

The Government were ill-advised to go down this route in the first place. We will be coming back and passing further anti-avoidance legislation for this relief year after year until a future Government have the courage to say that enough is enough. If we are going to promote the industry, we should do so by investing in the training and education of the people who work in it, and not a few shareholders who may not be United Kingdom citizens.

Mr. Mark Field

I agree in part with some of the well-made points of the hon. Member for Kingston and Surbiton (Mr. Davey), particularly in relation to the worry that we may come back in years to come to try to correct other sorts of tax avoidance. Of course, that is the very nature of the tax advice given in all industries.

5.30 pm

I represent the constituency in which the home of the British film industry—Soho—is located. Unlike the right hon. Member for Islington, South and Finsbury (Mr. Smith), I have no other declarations to make. I must confess that the Government have got things just about right. Because such relief was widely regarded as open to abuse, the film business's great worry was that it would be scrapped entirely, in the way that the hon. Member for Kingston and Surbiton suggests it should be in future years.

Mr. Iain Luke (Dundee, East)

The hon. Gentleman mentions, as he did in Committee, that the film industry is located in Soho, but does he not accept that many small production companies in Scotland and elsewhere benefit from this relief, given the efforts of the Scottish Executive—and, indeed, of the Welsh Assembly—to encourage filming and film production as a means of stimulating the economy in areas outwith London?

Mr. Field

I was not trying to claim exclusivity for my constituency, and as we speak, new film businesses are doubtless springing up in every last suburb of Dundee.

As I said, the Government have more or less got the matter right, and the film industry's great worry was that, if widespread abuse were perceived, the relief would be scrapped entirely. I am glad that the Government took on board several of the issues concerning transitional relief that Opposition Members raised in Committee, and I am encouraged by the Paymaster General's comment that roughly 80 per cent. of film projects will be saved under her proposals. I take on board the comments of the right hon. Member for Islington, South and Finsbury, who knows a great deal about this subject. It is clear that the matter will have to be re-examined, and if evidence were to come to light that we were losing significant business, the Government would doubtless want to do so during the course of a future Finance Bill. The original intention was to ring-fence tax benefits for the film industry, and although one might argue that the film industry is part of a global communications world that includes television and the like, that intention has clearly been open to abuse.

I hope that the Paymaster General is comfortable with the amendments. We will have to see how things pan out in future, and I shall continue to look towards the interests of a film industry that, hopefully, will remain strong in the years to come.

Chris Grayling (Epsom and Ewell)

I begin by thanking the Paymaster General, and congratulating her on listening to the discussions in Committee, and to the other representations that she received. Through these measures, the Government have addressed the transitional issues in an admirable way, and I am grateful to her for that. I am also particularly grateful for the reference in new clause 21 to documentary programmes in which the dramatic content is substantial. There is an increasingly grey area in production, in terms of programmes with a substantial mix of documentary and drama, so that measure is especially welcome.

However, I retain two anxieties about the provisions in the clause, which were reflected in the comments of the right hon. Member for Islington, South and Finsbury (Mr. Smith). The Paymaster General said that the relief is used by large companies to gain financial benefit, but I remind her of what I said in Committee. It is not simply the majors that invest in and produce such programmes; we also have a thriving independent sector. Television mini-series, major television dramas and cinematic films are often made by the same companies. My anxiety is that we may lose some of the higher-quality international productions. More to the point, we could put our own industry at a disadvantage in competing in substantial markets—in which it is much easier to get major productions off the ground, as in the United States—and in those that offer tax incentives to their own industries.

I accept the Paymaster General's decision, but I ask the Treasury to keep the matter under review, and to be receptive to representations from the industry, in case there is a significant adverse effect on the production of major dramas in the United Kingdom. Should that happen, I hope that she will remain sufficiently open-minded to revisit the issue.

I would be grateful if the Minister would also give a commitment to keep the issue of different distribution channels under review. I mentioned the issue in Committee, because it is far from clear that cinema will continue to be the sole driving outlet for independent producers. I gave the Minister examples of the development of online technology, which may lead to theatrical productions being produced not for the cinema but for an environment in which the same risks are taken—perhaps pay per view or as part of a subscription service, but not the conventional linear television channels that we have known for many years.

I hope that the Minister will keep under consideration the changing nature of outlets and seek to be sure that the restriction of the relief to productions destined for a theatrical release is not stifling creativity in the independent sector. That sector is seeking new outlets and opportunities to develop its talents.

I am grateful to the Minister for what she has done, but I hope that she will keep those two points in mind.

Dawn Primarolo

A great misunderstanding has arisen about what we are discussing today. We are discussing a relief that was introduced following the Middleton report on film finance in 1996, which focused especially on the long-standing structural problems of the British film industry. The main relief sought to redress market failure and respond to the fact that British film-makers are denied access to the market and can make films only at considerable risk. That is because of the structure of the industry and, in particular, the distribution of films.

The main relief, which we are attempting to return to its original intention, is intended to stimulate the production of low-budget British films for distribution in the cinema. If the House wishes to have a discussion on whether to have a tax relief for high-value drama on television, that should be a separate discussion. The issue before us is the relief and whether it should be returned to its original intention, as the Government have sought to achieve.

The UK is not unique in using the tax system to overcome those specific problems. Many other countries do the same, including Australia, Canada and Ireland. Increasingly, eastern Europe is introducing similar reliefs for the same reasons.

We do not need to have a long debate about the value of encouraging the British film industry and, especially, the production of low-budget films. The relief was never intended to help to subsidise American companies' inward investment in making dramas for television. The hon. Member for Kingston and Surbiton (Mr. Davey) thought that the £50 million cost of the transition to 2003–04 was enough. However, if the Government had decided to allow relief to the production of high-value television drama, which is what attracts the inward investment, and had put a figure of £1 million per hour on that, the cost to the Exchequer would have been £100 million-plus a year. That investment by the Exchequer for £150 million of inward investment from film production and financing companies would not be a good deal for the taxpayer.

We have to consider whether the United Kingdom has the skills and critical mass to attract the production of those films—we do—and whether we have a structure that helps. We are talking about films costing £15 million. That is what we call a low-budget film. We are trying to encourage those films and help the industry to blossom and grow.

Mr. Chris Smith

Will my right hon. Friend also take into account the economic impact on the Exchequer and our whole economy of the 60,000 working weeks of employment that such investment would generate?

Dawn Primarolo

I considered the employment question very carefully, and I have to tell my right hon. Friend that, regrettably, although the relief is claimed on the full production expenditure of those dramas, sometimes as little as 20 per cent. of the expenditure occurs in the United Kingdom. When we look at the industry's structure, we see that people are employed in many different parts of the industry and that they move around. The industry is not wholly dependent on such inward investment.

I also have to tell my right hon. Friend that I have considered the inward investment issues very carefully. I have not ignored them, but the difficulty is that we have to consider whether any contribution would be made to the industry's development if a British company made a television drama costing £800,000 and did not receive the relief, but a high-value drama did—or, vice versa, whether a wholly British company should not receive the relief and, for example, American finance company should.

Mr. Edward Davey

I congratulate the Paymaster General on not listening to those voices and on saving the taxpayer £100 million. Although the relief will be restricted under the Bill, what will the ongoing cost be to the taxpayer?

Dawn Primarolo

I had that figure to hand a moment ago because I thought the hon. Gentleman might ask me about it, but I have put it down. I believe that the ongoing cost of the relief is about £70 million, but I will certainly check that figure, and I will write to the hon. Gentleman if it is incorrect.

This is not a "push me, pull you", "congratulate you on listening, congratulate you on not listening" game. As a Treasury Minister, I have sought to consider the arguments put before us on the relief's importance to the industry, on the impact on low-budget films in particular and on the industry's structure and employment. I have considered whether it was fair to allow the relief to be used in a way that was never intended, whether it represented a good investment for the taxpayer and whether the Government were behaving fairly in relation to taxpayers' legitimate expectations.

The Government's underlying view, which is not shared by the hon. Member for Kingston and Surbiton, is that we are committed to the British film industry, and we intend to continue to be committed to it. However, we will not allow parts of the industry that do not require the relief to get it, thus bringing into disrepute a relief that was intended for small producers, as I have said.

My right hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) and the hon. Members for Epsom and Ewell (Chris Grayling) and for Kingston and Surbiton asked whether the Government would continue to review this issue. First, there is no question but that the Government will keep a very close eye on how this relief is used, the costs, and whether it is stretched beyond what is intended. In response to the hon. Member for Kingston and Surbiton, I am as confident as I can be that the Government have made the necessary corrections, but there are some very clever tax planners, who work very long hours for very high fees, and I am not in a position to say that they will never find a way around this provision. That is a fact of life, and that is true of any relief.

I will confirm, however, that this relief expires in 2005. Clearly, the Government and the House will need to take a view at that stage about whether it is the best way to continue to give encouragement and support to the British film industry. I will also bear in mind the comments of the hon. Member for Epsom and Ewell with regard to the different distribution channels, online developments and so on. To return to my point about £1 million per hour allowing access to relief, when I examined which categories of companies might gain as a result, I saw—looking at the development and movement of the industry—that they were not start-up companies or those to which the hon. Gentleman referred. Those companies are at the other end of the chain, where the low-budget British films are made. We must strike a balance in relation to whom we support in the industry.

I assure the House that I will consider this issue very carefully, now, throughout the rest of the year, and, if I am still the Minister responsible, when it is up for review in 2005—I would have considered it very closely by then. I assure the House that whoever has responsibility for this relief would have done so, and that those issues that hon. Members have raised will be considered in the round. However, I cannot give any hope at this stage—it would mislead the House were I to do so—that we will change our minds on the question of high-value television drama. I do not have a closed mind on the matter, but I have not been convinced, and there is no substantive evidence to justify providing that relief. I could not therefore recommend it to the House.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

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