§ 4.34 p.m.
§ Lord TREFGARNE
My Lords, I beg to move, That the draft Cinematograph Films (Collection of Levy) (Amendment No. 7) Regulations 1979, which were laid before this House on 29th November, be approved. I hope that it will be convenient for your Lordships if I speak to the second Motion in my name, relating to the draft Cinematograph Films (Distribution of Levy) (Amendment) Regulations 1979, at the same time. I shall then move the second Motion formally when we come to it.
First, perhaps I should remind your Lordships exactly what the levy is. The Cinematograph Films Act 1957–75 provide for a statutory levy (popularly known as the "Eady levy") to be paid by cinema exhibitors in Great Britain out of their box office receipts, for eventual payment to makers of British films and to certain specified organisations connected with the British film industry. The levy is collected by Her Majesty's Customs and Excise and is remitted by them to the British Film Fund Agency, a statutory body established under the 1957 Act, who carry out the distribution. The levy is thus generated entirely within the trade. The costs of collection and distribution are met out of the levy yield and there is no charge to public funds.
My Lords, I shall read fairly swiftly and I shall be able to provide a copy for the benefit of the Hansard reporters at the end of my speech. The rate at which levy has to be paid is prescribed in the Cinematograph Films (Collection of Levy) Regulations 1968, as amended. The 1397 standard rate is currently one-ninth of the amount by which the price of admission, net of VAT, exceeds 17½p. This portion of the net admission price which is not liable to levy was set at Is. 6d. in 1968; it was increased to 12½p in 1977 and to its present level last year.
The regulations also provide for certain exemptions, the most important of which is in respect of cinemas whose weekly takings are less than £1,100. This exemption limit was set at £400 in 1968 and has since been steadily increased to its present level. To avoid imposing a disproportionate burden on cinemas whose takings just exceed this figure, a levy of 25 per cent. of the excess of the weekly takings over £1,100 is imposed where this is less than the levy calculated on the basis of the standard rate. Assuming an average ticket price of £1 (net of VAT) this lower rate of levy applies where the weekly takings are less than £1,736.
The annual yield from the levy remained steady at about £5 million for a number of years in the early and mid-1970s, as higher seat prices offset a fall in cinema attendances. The falling trend of attendances was, however, reversed in 1978, when attendances rose by a quarter to 127 million, although it is impossible to tell whether this reversal is permanent or temporary. But the result was that the yield of the levy has now risen to about £7 million, even after recent changes in the regulations which were estimated to cut the yield by a total of £2 million. On most market projections the yield would rise still further over the next few years if there were no changes in the regulations. A large number of exhibitors have argued that this increasing burden on their profits is becoming intolerable. In response to these arguments the Government, together with the Cinematograph Exhibitors' Association, the Association of Independent Cinemas, and the Cinematograph Renters' Society (recently renamed the Society of Film Distributors) commissioned a report by a firm of independent accountants on the ability of cinemas to pay the levy. The report was also to consider whether changes in the levy collection regulations were required, and if so to recommend appropriate changes.
The report indicates that many exhibitors are operating either at a loss or at an 1398 unacceptably low profit margin, and that perhaps 350 cinemas (out of a total of some 1600) might fall significantly below break-even level in 1979–80. So the effect of continuing to charge levy at the current rate could well be to exacerbate the disturbing trend of cinema closures in recent years—closures which in many areas have effectively denied the public access to cinema films.
The Government have a statutory obligation, under the 1957 Act, to pay regard to the prevailing economic circumstances of both exhibitors and makers of British films in determining the rate of levy; and they are also obliged to consult the Cinematograph Films Council This has been done; and the Council have recommended, in view of the pressures exhibitors are under, that the adjustments to the rate of levy proposed in the first set of regulations now before you should be made.
In recommending the particular methods for affording this relief, the Council were mindful of the fact that increases in the levy-free portion of the ticket have failed to keep pace with increases in the price of cinema tickets generally. Because this levy-free portion no longer provides any effective relief for cinemas the Council endorsed the recommendation that the levy-free portion should be abolished and that the levy should be charged at a flat rate of one-twelfth of the cost of the ticket (net of VAT). This change by itself would reduce the amount of levy to be paid by all cinemas with a ticket price over 70p (net of VAT)—in other words, the vast majority of cinemas.
But the Council were also mindful of the importance of giving relief to the least profitable cinemas—primarily the smaller cinemas which attract smaller audiences, and which in general have a lower ticket price. It is for this reason that they also endorsed the accountants' recommendation for two further changes in the levy; an increase from £1,100 to £1,400 per week in the amount by reference to which total or partial exemption from the levy is allowed; and a reduction from 25 per cent. to 20 per cent. in the rate at which levy is charged for cinemas whose takings just exceed this exemption limit. Together with the changes I have already referred to, these changes will substantially reduce 1399 the burden of the levy on smaller and less profitable cinemas, while also providing some relief to the larger ones.
The effect of these measures taken together will be to reduce the expected levy yield in a full year by between £1.5 million and £2 million, depending upon market conditions. As I mentioned earlier, however, the yield from the levy has increased sharply in recent years, and without any changes in the regulations could be expected to rise still further. Even given the reduced yield resulting from the application of these measures, the amount available for distribution to film-makers will be close to or above the long-term average.
In summary, then, the purpose of the draft Collection Regulations is, first, to increase the amount by reference to which total or partial exemption from levy is allowed, from £1,100 to £1,400; secondly, to reduce from 25 per cent. to 20 per cent. the rate at which the marginal levy is applied; and thirdly, to change the normal rate of levy to one-twelfth of the ticket price (net of VAT).
I now turn to the draft Distribution of Levy (Amendment) Regulations. The present method for distributing the levy is prescribed in the Cinematograph Films (Distribution of Levy) Regulations 1970. These regulations provide, as I mentioned earlier, that after grants have been made to certain bodies—that is to say, the Children's Film Foundation, the National Film School, the British Film Institute and the National Film Development Fund—the remainder of the levy is to be distributed according to a formula which relates payments to the rental earnings of eligible films in Great Britain. "Rental earnings" are incidentally the amounts paid by exhibitors to distributors for the hire of films—which, because they are related to box-office takings, indirectly reflect the success of the film with the cinema-going public.
For the purpose of this distribution formula, eligible films are divided into three categories: high-cost long films; low cost long films; and short films. "Short films" are defined as films with a playing time of less than 33½ minutes—which corresponds apparently to 3,000 feet of standard 35 mm film. All other 1400 films are long films. "Low-cost" long films are films whose labour costs do not exceed £50,000; and all other long films are defined as "high-cost long films.
The regulations prescribe a different distribution formula for each class of film. The simplest formula applies to high-cost long films, which receive a levy payment proportional to their rental earnings. A more complex formula applies to low-cost long films, which, when the regulations were introduced, were generally made as second feature films. Because such films were typically allocated a very small share of the rentals, the formula provides that rental earnings should be inflated to establish a film's entitlement to payments from the levy. The earnings are inflated by multiplying the first tranche of earnings—up to a limit of £18,750, or the labour costs of the film, whichever is lower—by two-and-a-half. Thereafter levy payments are made at the flat rate. A similar logic lay behind the formula for short films. In this case, however, there is no limit; all rental earnings are multiplied by two-and-a-half to give the inflated earnings figure in proportion to which payments are made.
The film industry is of course not static; and it is only to be expected that a formula which has been in operation more or less unchanged for over 30 years will need to be revised to take account of changes in the industry. It is noteworthy that in earlier years the levy earnings of individual films were not published. Publication of these details was then arranged with effect from the levy year commencing in September 1978. The figures now published monthly have permitted informed debate, as was intended. Before proposing changes in the formula however, the Government are obliged to consult the Cinematograph Films Council. This has been done, and the Council considered in the light of the published figures that three particular anomalies had arisen.
First, the absence of a ceiling on the amount which can be earned by any one film means that in years when a "blockbuster" of a British film is released a very substantial amount of levy is paid out in respect of only one film. The most recent examples are "Superman" and "Moonraker"—good entertainment—which have already between them earned some £1.8 million from the levy. This 1401 reduces the amount available for other films: so that films which are moderately successful can suffer badly from being released in the same year as a "blockbuster when had they been released in some other year they could have received much higher payments. Moderately successful films, however, need the levy much more than "blockbusters"; for them it can be the difference between profit and loss—whereas "blockbusters "invariably earn very large sums internationally. The new draft regulations provide for a ceiling of £500,000 on the amount of levy any one long film can receive. This figure is, we feel, high enough not to reduce the incentive value of the levy in attracting film investment to Britain, but at the same time low enough to prevent any one film creaming off a quite disproportionate share.
The second anomaly is the application of the two-and-a-half times multiplier to the earnings of low-cost films. As I have said, this multiplier was introduced when second feature films were still commonplace: one cannot visit the cinema nowadays without realising that the second feature film as a separate genre is, by and large, a thing of the past. That is not to say that double bills are not still shown; but it is rare for films to be made intentionally as second feature films. At the same time an increasing number of low-cost films are released as first feature films, or in tandem with another low-cost film, and have in many cases proved commercially successful. It seems somewhat unfair that, purely on the grounds that they cost less to make, these films should benefit from the two-and-a-half times multiplier.
In addition, a recent development has been that one of the main beneficiaries from the multiplier has been cheap films, known in the industry as "sexploitation films ", which can be made without expensive stars or sets. Despite some Press comment to this effect, these films are not pornographic, as I understand the word—the British public is protected from public exhibition of true pornography both by the law and by the British Board of Film Censors—but it is distasteful that such films should benefit from levy payments at an enhanced rate. It has understandably been suggested that such films should receive no levy, but the levy system is not an appropriate medium for 1402 censorship—which already exists—and we do not want to set up another body to apply subjective standards of judgment. For all these reasons the draft Regulations provide that the multiplier for low-cost films should be abolished. This will remove the statutory distinction between low-cost and high-cost films; and with this simplification all long films will in future be treated alike.
The third anomaly revealed, which we seek to correct, is the application of the multiplier to the earnings of short films. In this case, the justification for the multiplier has not disappeared to the same extent. Unlike low-cost long films, short films cannot generally be shown as the main attraction, only as support to a feature film; and typically the feature film still receives the lion's share of the rental. But because the rental earnings of the whole programme depend on the popularity of the main feature rather than of the supporting short, an anomaly has arisen.
I can best explain this anomaly by illustrating it. A little-known short film about skateboarding called "Hot Wheels "—admirable entertainment for the young, no doubt—was circulated with the very successful film" Grease ", which was not eligible to receive anything from the levy because of its American origin; but "Hot Wheels" was British and therefore eligible. Because it was allocated its share of the rental earnings from the programme, and these earnings were multiplied by two-and-a-half to determine its share, this short film has received nearly £¼ million from the levy—many times its production costs and very much more than most long films can hope to receive.
While we can agree that some special treatment is required to encourage the making of short films, we cannot believe that this means that a few short films should be eligible for sums of this order at the expense of all other films. The draft regulations provide, therefore, that for a short film the two-and-a-half times multiplier will apply only until levy payments reach £30,000. They also provide that payments over £30,000 will be made at the flat rate; and that no short film should receive more than £50,000 from the levy.
In summary, then, the purpose of the draft Distribution Regulations is, first, to limit to £500,000 the amount of levy which any one long film can receive; 1403 secondly, to abolish the two-and-a-half times multiplier for low-cost long films; thirdly to limit the application of the two-and-a-half times multiplier for short films; and fourthly, to limit to £50,000 the amount of levy which any one short film can receive. I therefore recommend these two orders for the approval of your Lordships. I beg to move that the draft Cinematographic Films (Collection of Levy) (Amendment No. 7) Regulations 1979 laid before the House on 29th November be approved.
Moved, that the draft regulations laid before the House on 29th November 1979, be approved.—(Lord Trefgarne.)
§ 4.50 p.m.
§ Lord PONSONBY of SHULBREDE
My Lords, may I thank the noble Lord, Lord Trefgarne, for explaining these two orders. May I assure the House that I will not take 14 minutes in replying to his speech, as I know that there is an important function later this afternoon. It is certainly very convenient for us to take these two orders at once, and I was grateful to the noble Lord for his explanation. Indeed, I found his explanation more satisfactory than the explanatory note attached to the two orders, which leaves one slightly bemused as to exactly the purpose of the two orders other than to alter the rates of levy for the reasons which have now been made clear by the noble Lord.
It is also clear that although the effect is of reducing the percentage of the levy, it will increase again as inflation will no doubt continue to push up the amount of levy collected each year as prices of cinema seats rise with inflation. Indeed, it seems that we have been considering every other year a variation in the amount of the levy and the way the percentages are calculated. I was also interested to hear from the noble Lord of the tendency for cinema audiences in fact to increase during the last year or two. I was grateful to him for explaining to us the anomalies in the provisions at the present time. As he said that he would, he did read his speech at a fairly fast rate, and I shall look forward to reading it at a slightly slower rate in Hansard tomorrow. I am sure that the House in general would agree with the proposed changes in these draft statutory instruments.
§ On Question, Motion agreed to.