HL Deb 04 March 2004 vol 658 cc769-71

11.7 a.m.

Viscount Falkland asked Her Majesty's Government:

Whether they will consider transitional arrangements following the termination of film production tax relief for investors so as to allow current projects to continue without the need for financing packages to be restructured.

Lord Davies of Oldham

My Lords, film production tax relief has not been terminated. A number of tax reliefs exist specifically for film production and remain available for film makers. The most frequently used are known as Sections 42 and 48 relief. What have been terminated are certain highly aggressive tax planning schemes that used general accounting principles to create paper trading losses for wealthy people. The Government acted decisively on 10 February to stop that abuse with immediate effect.

Viscount Falkland

My Lords, the Minister has attributed to me an objection to matters that I had not intended to raise. He must know that the sudden end to what was accepted by the film industry as being quite a reasonable closing of a perceived and actual tax loophole was not expected to be introduced as abruptly and with such a retrospective flavour as it was. As I am sure the noble Lord knows, it has caused the termination of about 40 film projects and has put at risk a number of production companies, with all the hardship that that entails for employment and so on. Was that decision taken, at such high cost, because of the gravity of what was perceived to be damaging to the nation as a tax loophole? Did his department not realise what absolute turmoil would be caused in the industry by such a sudden decision?

Lord Davies of Oldham

My Lords, I am grateful that the noble Viscount recognises, as the industry does, that serious abuse was taking place. The Treasury's motivation was with one objective solely in mind: to end the abuse of the tax system. That abuse represented £100 million and was therefore considerable.

The closing of the loophole is not retrospective; it was implemented on 10 February and stopped the abuse from that point. But I appreciate that, as the noble Viscount says, there have been effects upon the film industry, and we recognise that representations are being made in that respect.

Lord Trefgarne

My Lords, I have an interest in this matter as I have a son who works in the industry. Is the noble Lord proud of the fact that a dozen or more major film productions have either been cancelled or delayed and that a number of film workers have been placed out of work, or is he grievously ashamed, as he should be?

Lord Davies of Oldham

My Lords, the reliefs available to the film industry extend to about 15 per cent of production costs. The tax avoidance schemes being employed took those exemptions as high as 45 per cent. The Treasury had to act to stop such a significant abuse. The film industry agrees with the position we have taken.

The noble Lord's remarks reflect the fact that several films in production were based upon this source of finance and are now looking for other sources of finance which do not fall foul of these requirements.

Baroness McIntosh of Hudnall

My Lords, does my noble friend accept that—notwithstanding the point he quite rightly makes, that this was a tax loophole that needed to be plugged—to call this action not retrospective fails to take account of the fact that film preparation takes a very long time? One major project lost in this mêlée was in preparation for six years and was about to go into production and will not now do so. Although technically what my noble friend says is correct, will be accept that possibly there is an argument for suggesting that projects that have been that long in preparation are being quite unfairly punished by the sudden closure of this loophole?

Lord Davies of Oldham

My Lords, of course we are aware of the long production costs for films. That is why the Treasury has signalled that one of the reliefs due to expire in 2005 is the subject of discussion between the Treasury and the film industry in order to safeguard the future. The Chancellor has made clear that we will be looking towards ensuring that there is proper consideration for the film industry in the next Budget Statement. But this particular abuse had to be stopped forthwith. That was done.

Baroness Strange

My Lords, is the Minister aware that as a result of this many films will now not be made in Britain but in other places, such as the Isle of Man? It is surely better to have some tax coming in rather than none at all.

Lord Davies of Oldham

My Lords, the situation is that the legitimate tax reliefs make the British film industry and the making of films in Britain competitive with most other countries. Reflected in the abuses taking place was an extraordinarily advantageous scheme for a limited number of people, and the Treasury had the right—and in fact the duty—to put an end to it.

Lord Tebbit

My Lords, does the Minister not regard this as a classic example of the effects of friendly fire?

Lord Davies of Oldham

My Lords, I think not. The Treasury remains on the side of the film industry, to the extent that we intend to ensure the support which has been offered in the past with regard to legitimate tax reliefs. In fact the industry is in discussion with the Treasury with regard to the future position on this. The Chancellor has already signalled his intent in the matter.

The fire was directed at people who were using tax avoidance in an exceedingly extravagant way and the Treasury has the right to safeguard public revenues by dealing with such forms of tax avoidance.

Lord Morgan

My Lords, does my noble friend agree that in fact the Treasury need not be on the defensive in this situation at all? In fact it should be congratulated on stopping widespread abuse and a proper attempt to aid the film industry. There is nothing to apologise for.

Lord Davies of Oldham

My Lords, I am grateful to my noble friend for making explicit what perhaps I was dealing with in a more rotund way.