Finance (No. 2) Bill

Public Bill Committee, 18 May 2006.

Standing Committee A

Clause 32

Joe Benton (Labour, Bootle)

I remind the Committee that with this we are discussing the following: Amendment No. 64, in page 29, line 17 [Vol I], leave out lines 17 to 20 and insert—

‘(a) undertakes (whether on its own account or whether it is responsible to a third party)—

(i) principal photography and post production of the film, and

(ii) delivery of the completed film,'.

Amendment No. 31, in page 29, line 18 [Vol I], leave out ‘pre-production'.

Amendment No. 65, in page 29, line 22 [Vol I], leave out ‘pre-production,'.

Amendment No. 32, in page 29 [Vol I], leave out lines 24 and 25.

Amendment No. 33, in page 29, line 26 [Vol I], at end insert—

‘(3A) The Treasury may, by regulations—

(a) amend subsection (3); and

(b) provide that specified activities are or are not to be regarded for the purposes of this Chapter as film making activities;

and in this subsection “specified” means specified in the regulations.'.

Amendment No. 46, in page 29, line 27 [Vol I], after ‘company', insert

‘resident in the United Kingdom (and not resident in another place in accordance with the law of that place relating to taxation)'.

Amendment No. 34, in clause 34, page 30, line 19 [Vol I], after ‘on', insert ‘development,'.

Government amendment No. 26

Amendment No. 35, in clause 35, page 30, line 37 [Vol I], at end insert—

‘But for the purposes of this subsection—

(a) services provided in relation to rented equipment shall be considered to have been performed in the United Kingdom where the equipment is used in the United Kingdom; and

(b) where goods are initially supplied in the United Kingdom, their subsequent transport and use outside the United Kingdom shall not prevent the relevant expenditure from being treated as UK expenditure.'.

Edward Balls (Labour, Normanton)

We have made progress—although not very much, I see from the amendment paper—and our debate has been useful and wide-ranging. When we adjourned, I had addressed amendment No. 31 and was part way through addressing amendment No. 32. As I had explained to the Committee, I was taking the amendments in a slightly different order, so as to make my speech appear logical, as far as was possible.

I should like to make a couple of comments, following on from our wide-ranging debate. We had such a long debate on the nature and definition of a film production company and issues around that, because that goes to the heart of the issues explaining the decision to move away from the old tax treatment of films to the new tax treatment set out in the clauses.

The majority of the debate on Tuesday was about the definition of a film production company. Some Opposition Members, including the hon. Member for Chipping Barnet (Mrs. Villiers), felt that the criteria that we were setting out in the definition of “film production company” were both too broad and too tight, and would exclude some genuine film production companies that might not cover all aspects of all three stages of the processes defined in clause 32.

As I explained on Tuesday, the definitions in the clause are designed to ensure that the Government’s relief is properly targeted on genuine film-makers—those who really make films—so the definition requires the company to be responsible for all phases of film production, not just some. However, as I explained on Tuesday, it does not require the company to be directly responsible for all parts of all phases; nor does it prevent the company from sub-contracting some of the work to others.

We fully recognise that the stages to which the legislation refers—development, pre-production, principal photography and post-production—are, in practice, not sequential, and that there will be overlap between them; and we accept that a company may take over some pre-production work for which it will not have been fully, directly responsible. We also fully understand from our discussions with the industry that the film production company achieves much of what it wants through others, and that sub-contracting is absolutely standard practice. However, to qualify for the tax relief, the film production company needs to be the film-maker—the person who has the vision for the film and who is charged with taking that vision through to delivery. That is why they must be in control of each of the three stages.

During Tuesday’s debate, worries were expressed about the requirements being too tight. Now that I have explained that there is no expectation that the company will do all the work itself, or be responsible for all of every stage, I hope that the hon. Lady will be more comfortable with the clause. There was also concern that by using standard industry terms, such as development, pre-production and so on, without explicitly defining them, we are laying ourselves open to being misled and to allowing the new relief to be abused in the same way as what it replaces. However, as I explained on Tuesday, it must be right to use terms that the industry uses and understands, in order to ensure that it can operate the relief in reality. So if, for instance, developments in the industry mean that new things need to be done during pre-production, they are automatically included.

The hon. Member for Braintree (Mr. Newmark), who is not currently with us but who was certainly here on Tuesday, asked a good question about how we intend to prevent the deliberate manipulation of the divide between development and pre-production. He feared that a less scrupulous film-maker might disguise what were clearly development costs as pre-production costs. Although Treasury Ministers are responsible for the making of tax policy, the administration of the system is the responsibility of Her Majesty’s Revenue and Customs. It will be responsible for ensuring compliance with the new tax rules, and for the proper interpretation of “core expenditure”, just as it ensures compliance with the rest of the tax system. As we shall discuss later, if all else fails, the remedy lies in paragraph 3 of schedule 5, which gives the Treasury the power to specify what is included or excluded in respect of expenditure qualifying for the enhancement. Any attempt to disguise expenditure as something that it was not would allow film production companies to claim tax relief to which they were not entitled. The power in the paragraph deals with that issue.

On Tuesday, Committee members suggested that the rule that a company working in partnership cannot be a film production company would in practice exclude all co-productions, as they are by definition companies in partnership. That is absolutely not the case. From our extensive discussions with the film industry, we know that although it is standard practice for film makers to work collaboratively with others on international co-productions, they are not “in partnership” in the sense intended by clause 32(2). Separate film production companies are set up in every co-producing country, each being responsible for delivering its own contribution to the film as a whole, and each company can claim whatever tax relief is available from its respective Government.

Far from excluding companies that make films in that way, clause 32(4) makes special provision to ensure that co-productions can access the new tax relief in the same way as others. The rules in subsections (2) and (3) are designed to exclude partnerships of companies in which one partner’s only contribution to the film is to provide finance. Such an exclusion is essential to ensure that profitable companies not otherwise engaged in the film business are not able to badge themselves as full making partners and open the door to precisely the kind of abuses and avoidance to which the film tax relief regime has been subject in the past, and which the reforms and clauses are designed to prevent.

Rob Marris (Labour, Wolverhampton South West)

Will my hon. Friend clarify whether he is talking about “partnership” in its everyday sense, using standard industry terms, or whether in the Bill the word is intended to be used in a legal sense, such as that used in the Partnership Act 1896 or whatever?

Edward Balls (Labour, Normanton)

I hoped that I had made that clear already. It is common practice for there to be co-productions and for film makers to work in “partnership” in its colloquial sense. As for the legal use of the term applied for tax purposes, partnerships in that sense will not qualify for the enhanced relief. To qualify, a company must be a film production company as defined in clause 32. I am grateful to my hon. Friend for allowing me to make that absolutely clear, as I hope it now is.

Having spent a few minutes bringing you up to date and clarifying a few of the points debated on Tuesday, Mr. Benton, I shall deal with some of the outstanding points made by the hon. Lady and others on Tuesday.

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 hon. Lady also referred to a recent British film, which she suggested would have difficulty qualifying for the new relief because it was filmed largely outside the UK. I cannot comment on any individual film, at least in so far as it might or might not benefit from tax reliefs in future. On Tuesday, comments were made on films that we had and had not seen and enjoyed, but I shall not refer back to those discussions; at times, they became a little lurid.

I cannot comment on any individual film, nor speculate on whether it might have taken advantage of tax relief in the past. However, 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 film makers 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 support overseas film industries.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I understand from our discussions on the reliefs that the intention is not to foster British talent—to get British film makers to bring things to the starting line—but to help those production companies once there has been a green light, everything is ready to go and all that process has been secured; to make an Olympic analogy, it is not to help with the training to get people to the starting line but to ensure that they have the kit once they get to the start of the race.

Does the Minister think that the post-production skills for which the UK is well known often mean that companies are in a subsidiary partnership? Therefore, according to subsection (5) they might not benefit from the relief because they might not be the company that is “most directly engaged” in the activities referred to in the rest of the clause.

Edward Balls (Labour, Normanton)

We discussed the development phase on Tuesday. The Government do a number of things to support it, not least the different ways in which the Department for Culture, Media and Sport supports the fostering of new talent and supports new scriptwriters. That is done in a range of ways through public spending.

We are discussing the application of enhanced tax relief, which is for the production of British films. In our view, the production starts from the green light, pre-production phase. We discussed that at length on Tuesday and I hope that the situation is clear. It is not a tax relief that excludes from benefit films that have a part of that activity occurring overseas or collaborators from abroad. An important part of what we are doing is making Britain an even more attractive place for Hollywood film producers to make their films in. This is about making films in Britain, which I also wished to clarify in response to the amendment tabled by the hon. Member for Chipping Barnet.

Having addressed amendment No. 31 the other day, I turn to the specific remaining amendments tabled in advance of the Committee. Amendment No. 32 seeks to weaken the definition of “film production company” by removing the requirement that such a company must be involved in negotiating, contracting and paying for the various rights, goods and services that together make up the expenditure on making a film. For the reasons that we discussed on Tuesday and again today, I hope it is now clear that any company that is not involved in negotiating, contracting and paying for the fundamental elements of a film is not a film maker—a film production company—for the purposes of the tax relief.

I stress that this part of the definition does not include the word “all”. There is no requirement that the film production company must be responsible for all negotiating, contracting and paying in relation to a film. That would not reflect film-making practice. It is common for certain elements of a production to be delegated or contracted out to a third party, but the intention is now clear to the Committee. I urge hon. Members not to press the amendment to a Division.

Amendment No. 65 also seeks to remove the requirement that a film production company must be actively engaged in production, planning and decision making during pre-production. For the reasons I set out today and on Tuesday, I again urge the Committee not to press the amendment to a Division.

Amendment No. 64 goes even further than the other amendments proposed by the Opposition. It seeks to remove entirely the requirement that a film production company must have any responsibility for pre-production, principal photography and post-production of the film. Instead, it proposes that a film production company should be required to undertake only principal photography, post-production and delivery of the film, including where it undertakes such activities on behalf of a third party.

As I said this morning, a company that does nothave overall direct responsibility for all stages of making of a film is not the type of company at which the Government want to target the relief. A host of specialist subcontractors exist in the film world, and undertake various activities, but we are not targeting the relief at them either; we are aiming it at the person who is making the film and the bringing together of all those activities in the film production company. Again, I urge the Committee not to press the amendment toa Division.

Amendment No. 34 deals with a slightly separatebut not unrelated issue: the types of production expenditure that form the basis for calculating the film tax relief. It would include expenditure incurred on film development under the definition of core production expenditure. We discussed that at length when I explained where we have drawn the line. The Government support young talent being brought on in the pre-pre-production phase, the development phase. However, that is not the target of the tax relief. I urge members of the Committee to reject the amendment.

Amendment No. 47 goes completely against the intention of chapter 3. It would exclude from the basic tax treatment a film that does not qualify for enhanced tax relief. It would do so by imposing a requirement that a film production company must be making a film that satisfies the conditions of clause 38—that the film is British, is intended to be shown in a cinema and has spent at least 25 per cent. of its total budget in the United Kingdom. Such conditions can be met with certainty only on completion, and the new relief includes the mechanism to allow provisional claims while a film is being made. However, the new relief does not provide—as it would under the amendment—that should one of the conditions not be met, a different set of tax rules will apply.

We discussed such matters on Tuesday when debating the preamble to chapter 3, and clause 31. I made it clear that it is vital that we replace and update the old legislation under section 40A to D of the Finance (No. 2) Act 1992, which set out the way in which taxable profits of all film companies were previously calculated, whether or not they met the greater stringency of the tests to qualify for the enhanced tax relief. Those sections of the 1992 Act are outdated. They are cast in terms that were appropriate to, and fitted in with, the language of the old reliefs. We want a single modern system that creates a level playing field for the industry. To have two different systems running side by side, especially when there will always be a level of uncertainty about whether a film will qualify for the full relief until the process has been completed, would be cumbersome and overly bureaucratic. It would make it difficult for film makers to operate. We therefore prefer not to create a muddle caused by two different systems. We urge the Opposition to reflect further on the amendment and withdraw it.

Amendment No. 35 would amend clause 35, which sets out the meaning of United Kingdom expenditure. The clause is subject also to Government amendment No. 26. There is a case for explaining the Government’s rationale for their approach towards United Kingdom expenditure for the purposes of the new relief. The provision of relief only on expenditure in the UK marks a significant shift in how the Government’s support to the industry is targeted and delivered. Under the previous regime, when a film was certified as British, relief was given on the entire production budget including costs that were incurred by filming overseas. United Kingdom film tax relief was unique in that respect.

When the previous reliefs were withdrawn, every other country and jurisdiction that gave support to film making through the tax system did so on the basis of domestic rather than worldwide expenditure. Not only was that an anomaly, it was an inefficient way in which to deliver the Government’s objectives for supporting the British film industry. Because tax relief was given, even when the film production took place overseas, it failed to provide an effective incentive for film makers to use the skills, infrastructure and facilities of the United Kingdom. That was directly contrary to the objective of helping to maintain a critical mass of film-making infrastructure and talent within the UK. It is for that reason that the new relief is provided exclusively on film making in the UK.

The aim of clause 35 is to provide the definition of UK expenditure for the purposes of the new relief. However, representatives of the film industry have pointed out that the opening subsection of the clause might be open to misinterpretation and be problematic to operate in practice. The clause, as drafted, makesa distinction between a supply of services, which is treated as United Kingdom expenditure when it is performed in the UK, and a supply of goods, whichis treated as United Kingdom expenditure when it is supplied in the UK. In other words, to determine whether an item of expenditure counts as UK expenditure for the purposes of the clause, a film production company must first establish whether it was incurred in relation to a supply of goods or a supply of services. In some cases, that might not prove to be straightforward. For example, if a film production company hires costumes and props from a specialist supplier, which are then destroyed completely in the course of film making, the question arises whether there was a supply of goods or a supply of services. There are many other such examples. The industry has made a fair point. The lack of clarity was not intended. The clause could create uncertainty unless amended. We have therefore considered how to do so in order to solve that potential difficulty.

Amendment No. 26 will entirely remove the distinction in clause 35 by replacing the rule with one that is simpler and easier to apply. Under our proposed approach, expenditure on goods and services will be judged based on whether they are used or consumed in the United Kingdom. If they are, the expenditure will be treated as UK expenditure under the rules set out in the clauses. Conversely, if they are used or consumed outside the UK, they will not count as UK expenditure. As we discussed on Tuesday, they will still count as a cost for the purposes of normal tax relief, but they will not qualify for the enhanced tax relief detailed in the clauses.

Philip Dunne (Conservative, Ludlow)

I rise on a point of clarification about whether a specific type of service will be covered by the clause. I think that I know the answer, but I was seeking an opportunity to raise the issue during this part of the debate, and this is the right place.

Next month, the filming of “Atonement”, based on the book by Ian McEwan, will commence in my constituency. A number of my constituents will benefit from supplying their own properties as rental accommodation to actors, actresses and production staff. Will the Economic Secretary clarify that that supply of service will be covered under the Government’s new definition and that relief will be available to the production company? I add that if he would like to visit my constituency during the filming, he might enjoy meeting Keira Knightley, as I hope to. Unfortunately, I shall not be able to benefit from the provisions, although it did occur to me. [Interruption.] The hon. Member for Tooting (Mr. Khan) asks whether I will need to declare a personal interest in that respect, and I assure him that I will not, despite my attempts to persuade my wife that we should move out.

Edward Balls (Labour, Normanton)

As a novice to such proceedings, I found that to be one of the longest, most eloquent and most attractive declarations of an interest that I have ever come across. I congratulate the hon. Gentleman on having his constituency chosen as the site for the making of that film. I am a great fan of Ian McEwan’s books, and hope that the film does justice to a good read. I should love to visit the hon. Gentleman’s constituency. Maybe we could go to the Long Mynd and have a walk on the Stiperstones. As a fan of the novels of Malcolm Saville, I probably have some knowledge of the area.

I shall reassure the hon. Gentleman and ensure that my earlier remarks do not worry his constituents. I referred to the reason for needing to resolve the ambiguity, using the example of a supplier of a specialist good whose good was completely destroyed in the course of film-making, although I hope that such an unfortunate event will not befall any of his constituents who are allowing their houses to be used. Those houses will be used but not consumed during the making of a British film in Britain. I cannot comment on the details of that situation, but using a house to make a film in Britain is exactly the kind of expenditure that will now clearly come under the definition in Government amendment No. 26. I think that I can give him that reassurance.

The hon. Member for Dundee, East (Stewart Hosie) asked whether the fee for writing the script for a British film would be treated as UK expenditure even when the screenwriter in question was based in Hollywood. We have deliberately adopted an approach to UK expenditure that reflects the international nature of contemporary film-making. We recognise that a film production company will use skills and people from many countries as well as the UK. It is essential that we do so to ensure that international films are made in Britain and qualify for enhanced relief.

Our approach means in practice that UK expenditure will cover all goods and services used in the UK irrespective of nationality. That will include, to take the hon. Gentleman’s example, the cost of a script written by a Hollywood screenwriter and used to make a British film in the UK. I am sure that Committee members, as well as the film industry and Hollywood, will welcome the measures. I commend amendment No. 26 to the Committee.

Opposition amendment No. 35 covers the same ground as the Government amendment and is, I assume, motivated by some of the same concerns that we picked up during our consultation. It takes a different approach by making explicit the way that a film production company incurs expenditure on renting equipment. Such expenditure will be treated as UK expenditure where the equipment being rented is used in the United Kingdom. I fully sympathise with the desire to clarify that treatment, but Government amendment No. 26 provides a better way of doing so that clears up all the ambiguities that might arise. Unless the hon. Member for Chipping Barnet wants me to go into more detail, I urge her to ask leave to withdraw her amendment and accept that amendment No. 26 does the job for her.

Opposition amendment No. 33 would, if adopted, allow the Treasury by regulations to amend the definition of a film production company. I think that we all appreciate the Opposition’s generous assistance in seeking to provide us with amending powers that we have not asked for, but on this occasion we will decline. We do not see the need to amend the definition of a film production company at this stage. I referred earlier to powers that we will take later on to amend some of the definitions, but, as we have heard in the debate over the past hours, the definition of “film production company” is a cornerstone of this chapter; it drives the whole new, modern approach to supporting the British film industry. If we were to revise that definition, we would be revising the intent of the legislation. It would be appropriate at that point to come back to the Finance Bill, rather than simply have a power generously offered by the Opposition, which we decline. I urge the Committee to reject the amendment.

Theresa Villiers (Conservative, Chipping Barnet)

Just reflecting briefly on the debate on this group of amendments, we had a lively discussion on the border line between development and pre-production costs. I felt that the Economic Secretary was bravely trying to give an answer to the various questions raised on this side of the room about which services and activities fell on the development side and which fell on the pre-production side, but he was in some difficulty. That is no reflection on him, but on the practical difficulty of distinguishing between those two things. I continue to be concerned about the exclusion of development from the scope of core expenditure, because of the uncertainty of that border line and for the reasons that I illustrated in my speech.

I welcome what the Economic Secretary has said about a flexible interpretation of what is meant by “is responsible” for the activities contained in the clause. I welcome his comments on Tuesday that an absolutist approach will not be adopted and I acknowledge that the absence of the word “all” in the clause is relevant and helpful. I welcome his reassurance that this is not a blanket exclusion of subcontracting and that the film production company can engage with other people to undertake certain activities without danger of losing its status. However, I continue to be worried about the requirement that a film production company is responsible for pre-production, because of the possibility that it may be set up after pre-production has been completed, as I outlined in my speech. I feel that the flexible interpretation that the Economic Secretary would adopt does not deal with the problems in relation to direct negotiation and directly contracting. The terms of the statute explicitly require that direct relationship, so that precludes any possibility of subcontracting.

I welcome the Economic Secretary’s positive assurances that co-productions will not be affected by the ban on the use of partnerships in this context. There may still be some problem with drafting, and I hope that we do not, as he indicated at one point in his speech, end up having to clarify this matter in the courts, because that costs a great deal of money and is undesirable. If there were any way that further reassurance could be given by guidelines as to how the term “partnerships” is used in that context, that would be welcome. I also welcome his indication that hedoes not anticipate a problem with the European Commission in getting the rules cleared. I urge him to ensure that a final decision is taken on that so that the uncertainty is removed as soon as possible.

The Economic Secretary referred to the difficulties that would occur under amendment No. 47 if there were a dual regime for different companies. I take his point that it would make the system more complicated and it might be better to tackle the matter by reforming the novel way of computing profits and losses under schedule 4. That has led to concern about its impact on television production companies and if we amended that for all production companies, whether or not they qualified for the tax relief, we would not be left with a dual regime.

In conclusion, I shall not press the lead amendment to a Division, but I shall be grateful if the Committee is prepared to vote on amendment No. 31. I beg to ask leave to withdraw the amendment.

Clause 33

Theresa Villiers (Conservative, Chipping Barnet)

I want to speak briefly to the clause, which covers the meaning of film-making activities, and to emphasise a point that arose during discussions. The clause refers to

“development, pre-production, principal photography and post production”

but there is no statutory definition of those terms. The Treasury’s frequently asked questions document says only that they are

“familiar terms which are well understood within the film industry and take their normal meaning for the purposes of the legislation.”

As we have heard, however, the Minister himself had some difficulty in defining those terms on Tuesday, and it would be exceptionally useful if guidance on the new rules were issued as soon as possible. The indication is that the guidance will not be available until October, which leaves a considerable period of uncertainty. In that respect, I quote Liz Brion of Grant Thorton, who has considerable expertise. She says that if the legislation is

“not entirely clear, then many film productions may well be postponed until publication of the guidance notes, which will obviously have a knock-on effect on levels of film production activity in the UK for much of the rest of the year.”

I hope that the Government will consider bringing forward the publication of guidance.

Edward Balls (Labour, Normanton)

I can give the hon. Lady the assurance that she asks for. We will be able to produce detailed guidance on the matter by the end of the summer. On the basis of our consultations with the industry, we do not believe that that will cause undue difficulty.

Clause 35

Clause 36

Theresa Villiers (Conservative, Chipping Barnet)

I should like to emphasise that the clause concerns qualifying co-production companies. As we have heard, providing an attractive framework for co-production is vital if we are going to encourage an indigenous British film industry. There is a dual purpose to the film tax break: to encourage the big US producers to make films here, and to ensure that home-grown talent can also make films. They are dependent on co-productions to raise the money to get a project off the ground, so I encourage the Government to make absolutely certain that theirnew framework provides the right conditions for co-productions to flourish.

Such co-productions are often dependent on the Government’s successful negotiation of co-production treaties with countries throughout the world. I urge the Government to press ahead with negotiations of further treaties with film-making destinations such as South Africa, and other countries with increasingly vibrant economies that could provide valuable co-production partners for the British film industry.

Edward Balls (Labour, Normanton)

I can give the hon. Lady the assurances that she asks for. The purpose of the clause is to enable a film made under international co-production agreement to be treated in the same way as a British film—with the enhanced relief. We discussed earlier how it will be made to work. As for international treaties, we have them with many important film-making centres throughout the world, but we will do what we can to ensure that more countries and film-making centres are brought within the scope of those international agreements.

Clause 37

John Hemming (Liberal Democrat, Birmingham, Yardley)

I have a tendency to blink when I am in the Whips Office and find myself on a new Committee. Reading these papers, I must declare a sort of interest, inasmuch as I am in the intellectual property business, but not the film business itself. In the intellectual property business, one spends the money at the start and receives the income generally at the end. In my reading of schedule 4, to which the clause relates, we appear to bring forward the tax date for income. That confuses me. It may be that I have got it all wrong, but as far as I can see on that reading, I should not want to be deemed a film production company, because I would pay tax earlier. I thought that the idea was not to.

Edward Balls (Labour, Normanton)

The clause introduces the schedule that we will debate shortly, which sets out the details of the application of the tax treatment of film production companies. The hon. Member for Birmingham, Yardley (John Hemming) both gets to the heart of the point and misses it. He is absolutely right that we are changing the future taxation treatment of films, and we are doing so precisely, as he says, so that the tax treatment of a film production company applies over the course of the making of a film rather than on completion. As we discussed at length on Tuesday, we are doing that because that is in line with the way in which films and TV productions are made—film companies get the income early to pay for the making of the film. We are bringing the tax treatment into line with how films are made and accounted for, so that we can then offer enhanced tax relief over the lifetime of the film. The reason why film production companies will want this is partly because it is in line with how they work in any case, and partly because they will then get a fairly substantial enhanced tax support for doing so. I hope that I have reassured the hon. Gentleman, and that he understands our point.

Schedule 4

Theresa Villiers (Conservative, Chipping Barnet)

I beg to move amendment No. 40, in page 165 [Vol I], leave out lines 15 to 17.

Joe Benton (Labour, Bootle)

With this it will be convenient to discuss the following amendments: No. 42, in page 165, line 26 [Vol I], at end insert—

‘(1A) Where a company incurs expenditure on the development of a film that is abandoned before pre-production and subsequently begins to carry on a trade as a film production company in relation to another film, the expenditure may be treated as expenditure of the trade of the second film and as if incurred immediately after the company began to carry it on. Provided that the same expenditure is not to be given more than once.'.

No. 53, in page 166, line 19 [Vol I], leave out paragraphs 7, 8 and 9 and insert—

‘7 For the purposes of this Schedule profits and losses are calculated in accordance with generally-accepted United Kingdom accounting principles.'.

No. 55, in page 167, line 4 [Vol I], at end insert

‘; and accordingly—

(a) where, within six years of the end of the first period of account, it becomes clear that the original estimates were incorrect, the film production company can elect in writing to amend the original tax computations to reflect the correct position;

(b) income taxed under the provisions of paragraph 7 of this Schedule shall not be taken into account for tax purposes in a subsequent period of account.'.

No. 41, in page 167 [Vol I], leave out lines 6 to 17.

Theresa Villiers (Conservative, Chipping Barnet)

I would like to make a couple of preliminary points on schedule 4 and the new framework that it introduces. I welcome the fact that the Revenue said in the Budget that film tax returns would be channelled towards a limited number of tax offices, because this is clearly a specialist and technical area and it would be asking a lot of the average tax office to ask it to deal with that. The Government have made the right decision; if film companies get such specialist offices, that will lead to their tax returns being handled more efficiently.

I wish to raise another matter in this context that it is difficult to fit into a discussion of any particular part of the Bill. It would be useful if the Economic Secretary could say something about the transfer pricing issue that has arisen in relation to the film industry. As we have heard, in many cases films will be made by special purpose vehicles, and the practice in respect of SPVs will be to sell the film back to its parent company on completion. I am told that if the Revenue insists that the price that has to be paid for this to count as an arm’s-length sale transaction to the parent is any more than cost minus tax credit, that could pose problems in terms of film financing. Therefore, I shall be grateful for any guidance that the Economic Secretary can give on that.

Amendment No. 40 would delete paragraph 2 of schedule 4, which requires each film to be treated as a separate schedule D class 1 trade. We have examined the issues involved as they specifically apply to TV companies, but I would like to address them in the broader context of all companies that will be covered by the new regime, including those that can get the tax break. This is designed to deal with the significantly increased compliance burden of requiring each film to be treated as a separate trade. The procedure would not be hugely burdensome for the standard model, where a single film is made by a single company—a single SPV—and where compiling a single set of accounts for one film is the logical approach. However, the inclusion of pre-production in the definition in clause 32 means that there will be problems with that model.

Also, in many cases an SPV structure is not used, particularly where companies are in the film business for the long term. The Government have been encouraging companies that produce film after film. In their consultation document, they specifically talk about the desirability of a slate approach being taken by film companies and encouraging them to producea succession of films. In that case, there may be a considerable increase in the compliance burden. KPMG has helpfully circulated a briefing to all hon. Members, which states that some of its clients estimate that they might have to keep separate tax records for up to 600 films, whether or not they qualify for tax breaks.

The Chartered Institute of Taxation has stated that the new regime could give rise to considerable expenditure-tracking headaches. That arises because a company producing a succession of films or a number at the same time, will inevitably incur expenditure that is difficult to allocate between the films. It would be complex to allocate that expenditure sensibly between the different projects. Furthermore, some expenses that are currently deductible will cease to be so for no obvious reason. The amendment would restore the existing position in which the overall results of the film production company are taken as the single trade for tax purposes, rather than require it to account separately for tax purposes for each film.

I come now to amendment No. 42. Will the Committee consider the treatment of expenditure on a film that does not go into production? That expenditure cannot qualify for the enhanced relief, because the film is not made. However, with the repeal of the existing rules on deduction under section 41 of the Finance (No. 2) Act 1992, that would leave companies without any statute to rely on to allow them to make a deduction along ordinary tax law principles. Can the Minister confirm that such expenses will be treated as an ordinary trading expense, so that even though they do not receive the enhanced deduction, they can be deducted in the normal way?

The Chartered Institute of Taxation considers that the Bill leaves those costs in limbo. Amendment No. 42 suggests another way to solve the matter. It would enable the expenditure on a film that has been abandoned to be carried over to the next film project carried out by a film production company. I emphasise that costs for films that do not get made should be considered a legitimate expense. Those films are encouraging creative talent in the film industry. It is inevitable that, if we are to have a flourishing industry that encourages innovation and the development of projects, a considerable number of those projects will never get off the ground. Film companies should not be deterred from embarking on the expenditure necessary to get films off the ground.

Paragraphs 6 to 9 of the schedule introduce the complicated and controversial new way of calculating profits and losses in the film industry, to which the Committee’s attention has already been drawn. Amendment No. 53 proposes to delete those paragraphs and substitute them with the provision:

“For the purposes of this Schedule profits and losses are calculated in accordance with generally-accepted United Kingdom accounting principles.”

Instead of the new regime applying, we will have accounting required according to generally accepted practices. The amendment disapplies the controversial new regime and leaves the film companies to account for their profits according to ordinary accounting principles. If the paragraphs are not deleted, the new tax framework could cause significant practical problems for some companies.

Paragraph 7 requires the entire estimated income from the film—regardless of how far in the future that income may arise—to be taxed in proportion to how the production costs are incurred. Once post-production is complete, a company will be taxed on all future estimated income, whether or not it has been earned by that stage. The requirement for estimated income could be very problematic, both for independent film makers and large production companies, mainly because it is almost impossible to predict the success of a film. The proposed new rules will mean basically that companies will be paying tax, or receiving less by way of tax credit, on income that they never received. They could also mean that many companies will pay tax well ahead of receiving the relevant income. It may be that the experts who have written to Committee members are wrong in their interpretation of the provision, but I should like the Economic Secretary’s reassurance that the schedule will not have the effect that I have described, because it would be very damaging.

The impact is particularly harsh when a company not only produces a film but then exploits it through licensing. Examples of such licensing are in the DVD and TV markets, in soundtrack sales, in character merchandising, which is particularly relevant to children’s films, and in computer games, which are enormously important and provide a long-term income flow to film makers. Paragraph 6 of schedule 4 contains a wide definition of income for the purposes of the new regime, and takes account of income from all such licensing projects. That income can be unpredictable—I am sure that Members can think of many examples of films that were expected to generate substantial revenues but flopped at the box office and were never heard of again, whereas some films have limited initial success and are very small-scale, but begin to generate significant revenues some years down the line. That is particularly true of films that acquire cult status.

I quoted the accountancy firm of Malde and Co. in Tuesday’s sitting. They said that trying to calculate this income

“is like asking someone ‘how long is a piece of string’”.

I should be interested to hear from the Minister what type of supporting material would be needed to support an estimate of future income. Are film production companies required to rely on critics’ comments? Are sales agents’ predictions to be used? They could certainly produce some over-optimistic estimates.

Paragraph 8 refers to compiling estimates

“on a fair and reasonable basis, taking into consideration all relevant circumstances.”

That is an extremely broad approach, and it seems to leave the way open for serious disputes between film production companies and the Revenue as to what constitutes “fair and reasonable.” It could lead to uncertainty over the level of a tax break and the date when it might be paid.

To conclude, I quote the Chartered Institute of Taxation. Speaking of schedule 4, it said that it firmly believed

“that the new provisions will result in excessive taxation and move us further away from the tax follows accounts principle.”

I hope that the Government will either reconsider the structure, or at least reassure us that it will not work in the way that is anticipated by the experts who have sent representations to Committee members.

If, as I expect, the Government are reluctant to delete paragraphs 7 to 9, I hope that they will consider the alternative proposal suggested by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) in the form of amendment No. 55. The amendment would insert, at the end of paragraph 8, a provision allowing estimates to be revised subsequently if they prove incorrect. I hope that that modest change will be considered. If not, will the Economic Secretary indicate that the Government will find a way to ensure that estimates can be revised in those circumstances? If the Government are not prepared to accept amendment No. 55, I hope that a non-statutory procedure will be found, because it seems unfair to require companies to abide by estimates that subsequently prove to have been over-optimistic.

Amendment No. 41 would delete paragraph 9, and to that extent my comments on the deletion of paragraphs 7 to 9 embrace it. However, it was tabled individually for a specific reason—to highlight a further problem with paragraph 9, separate from the accounting difficulties. Paragraph 9 introduces a new concept of when film expenditure is incurred. Itsays that

“costs are incurred when they are represented in the state of completion of the work in progress.”

I am informed that that definition could produce difficulties in respect of film exploitation costs, which a company may incur at the same time as ongoing production. It seems to add an unnecessary layer of complexity for no apparent reason. Normally one would expect a cost to be incurred when there is an unconditional obligation to pay for it. Perhaps with interpretation we will find that the new rules operate similarly to the old ones, but if they differ from the current rules and ordinary accounting principles, that will add to the complexity of the tax regime faced by film companies. Can the Minister explain why it is proposed to depart from a well-understood definition of whether cost is incurred for tax purposes?

Rob Marris (Labour, Wolverhampton South West)

I should like clarification. Although I am not an accountant but a lawyer by background, the hon. Lady’s last remarks seemed to contradict her amendment No. 53, which calls for profit and lossesto be

“calculated in accordance with generally-accepted United Kingdom accounting principles.”

I thought that valuing and costing work in progress was a standard and generally accepted accounting principle. She seems to be saying that valuing work in progress, which is a standard accounting practice, could cause a problem, but surely that contradicts her amendment.

Theresa Villiers (Conservative, Chipping Barnet)

My amendment would remove the new regime and leave in place the existing rules, which would operate in accordance with standard accounting practice. On that, I conclude my remarks and look forward to the Committee’s comments.

David Gauke (Conservative, South West Hertfordshire)

I ask for clarification, Mr. Benton. May I speak to amendment No. 55?

Joe Benton (Labour, Bootle)

Yes.

David Gauke (Conservative, South West Hertfordshire)

I shall add to the comments of my hon. Friend the Member for Chipping Barnet on paragraphs 7 to 9 to schedule 4. Paragraph 7 will require a film’s entire estimated income to be taxed in proportion to how production costs are incurred. Most of the experts who provided us with representations took that to mean that once post-production is complete, a company will be taxed on all future estimated income. I say “most of the experts”, but it is fair to say that KMPG presumed that the method of calculation would apply only where a film is in production. That was a presumption, however, and even KPMG acknowledged some ambiguity in the text. Clarification on the matter is important.

Amendment No. 55, which was tabled in my name, was drafted on the basis that the interpretation of most of the experts is correct. If so, as my hon. Friend said, there is no mechanism in the Bill for reducing the estimated income if projections prove optimistic. Given the nature of the film business, it is difficult to make accurate projections on such matters. We have a difficulty with the fact that a film might be taxed heavily but might not receive anything like the projected income a few years down the line.

The British Screen Advisory Council pointed out that that income is not discounted for time in any way. My amendment would merely provide a mechanism to deal with that problem. As my hon. Friend said, there might be a non-statutory way to do so, but I should be grateful for the Economic Secretary’s views on whether he acknowledges the problem and on how he would seek to address it if not by accepting amendmentsNos. 55 or 53.

The second point that my amendment raises was mentioned by KPMG, which stated that nothing in the Bill would allow film production companies preparing tax computations after the end of production to strip out the estimated income already taxed. That creates a danger of double taxation. Clearly that would be unfair, and my amendment seeks to address the problem. I should be grateful for the Economic Secretary’s views on whether that is an issue, how best to address it and whether amendment No. 55 would do so successfully.

Edward Balls (Labour, Normanton)

We debated earlier the principles and purpose behind the new reliefs, and the schedule and the amendment address in detail how the reliefs will work in practice and how we can make a sensible and robust regime work properly. I can provide reassurance and clarification in a number of ways for the hon. Gentleman. As we discussed on clause 31 on Tuesday, however, the hon. Member for Chipping Barnet has proposed amendments that, in some cases, strain the boundaries and risk taking us back towards some of the problems even though she agrees with the new legislation’s fundamental purposes of tackling tax avoidance.

Amendment No. 40 is at the heart of the new regime and the view that it is necessary for each film to be treated as a separate trade in order to deal with the problems of the past and to ensure that the tax avoidance industry cannot get its hands on these new reliefs. The proposal would not impose an unnecessary regulatory burden and does not run contrary to what has been explained to us as the normal industry practice. Film makers are interested in keeping to budget and making a profit. It is normal practice for them to consider costs and income on a film-by-film basis. How else would they know whether a film was going to be profitable?

It is clear that each film is a project, and is handled and accounted for as such. The requirement to treat each film as a separate trade acknowledges that, but also recognises that the treatment in schedule 4—and, more particularly, in schedule 5—offers special and valuable opportunities. However, we need to draw a line round each film to ensure that the advantages of the reliefs apply to the making of British films and do not leak out more widely.

Like the hon. Lady, I have studied the submission from KPMG but, in our view and on the basis of our consultations, KPMG’s fears about compliance burdens are not broadly shared in the industry. What we are doing is in line with how the industry normally accounts for films already.

Amendment No. 42 addresses cases where development expenditure needs to be passed from an abortive film to an active film in order for it to be recognised for tax purposes. Our view is that amendment No. 42 is unnecessary. To return to some of the issues that I set out earlier, development expenditure goes on deciding whether to make a film, not on making it. If the idea for a film is abandoned, what has been abandoned is the idea, not the film. The idea becomes a film only when the film starts to be made, and the special tax treatment applies to the making of the film, as we discussed earlier.

If production has started, the value of the development is brought into the trade of producingthe film. The film production company buys the development work to make the film—it cannot be made without that work—or there is a transfer of costs within the company to recognise them. That is what paragraph 4 to the schedule is about. If the film is subsequently abandoned, those development costs are recognised.

Amendment No. 42 suggests that the expenditure on abandoned and fruitless ideas needs to be passed on to the film production trade, in order for it to be relieved, but that is not so. Just because a film production trade is ring-fenced does not preclude other expenditure in the company from being handled under normal rules for normal tax purposes. I can therefore give the hon. Lady the assurance that she asked for that those costs will still be treated for normal tax purposes; it is just that they will not be included in the calculation of the enhanced relief.

Amendment No. 53 is more radical and containsat its heart the proposition that tax must follow accountancy. As I said in my introductory remarks, the accounting treatment of film is not without doubt and, where doubt exists, there is the opportunity to rearrange things for tax advantage. The purpose of the Bill is to ensure that such activity does not cause tax avoidance or the leakage of reliefs away from the making of British films. Amendment No. 53 proposes that profits and losses should be

“calculated in accordance with generally-accepted United Kingdom accounting principles.”

However, the problem, as we have discovered in recent years, is that there is no generally accepted treatment.

In the end, treatment falls back on industry practice for reporting profits to company owners. The danger is that the proposal smacks of letting the company’s own accountants decide what the taxable profits should be; but until the introduction of new international accounting standards, that is not where we want to be. The method set out in the Bill is in accordance with where international accounting standards are going, best practice in the industry, and where accountants’ standards are moving to—so much so that some companies will need to make few, if any, computational adjustments to their accounts. Amendment No. 53 would take us backwards and away from international best practice.

John Hemming (Liberal Democrat, Birmingham, Yardley)

The key question about amendment No. 53 is: when does the cash come in as income? One can make an estimate at the start, but it is a finger in the air. That is why amendment No. 55 is a good amendment if amendment No. 7 fails. However, I still have a problem understanding why anyone would want to go through this regime if they are in the business of producing film, because most of the income comes in at the tail; it does not come at the start. Where is the cash coming from to pay all these taxes?

Edward Balls (Labour, Normanton)

In our earlier debates, it was explained why we are bringing in a tax treatment to qualify for an enhanced relief. People would want to go through these procedures to get the 20 per cent. tax credit for a smaller film and 16 per cent. for a larger film. That is why companies will go through the regime: to get the advanced tax support.

We are applying this model because of the way in which the industry works. I do not know whether the hon. Gentleman had the chance to read the KPMG briefing to which the hon. Member for Chipping Barnet referred earlier, but it contains a worked example on a different point about whether estimates could be revised. In the example, the film does not get made in the end, but costs are applied through the life of the making of the film, and there are two tranches of income, one of which comes in the first 18 months and one of which is to come on completion. Because the film is not made, a concern about estimates is claimed. In the example, the income to the film production company comes well in advance of the completion of the film precisely so that the costs of making the film can be covered. We are putting in place a tax treatment that allows income and costs to be spread over the lifetime of the film. With the old system, that occurred only on completion.

John Hemming (Liberal Democrat, Birmingham, Yardley)

On that point, I understand that the system is designed to replace a regime that effectively allows the capital that is placed on risk and invested in intellectual property to be treated as a revenue spend right at the start and then for the income to be brought in against that—meaning not only income in terms of investment, but income from which one gets the cash right at the start. There is some merit to that. However, I just do not understand where the cash comes from. Who pays whom for what?

Edward Balls (Labour, Normanton)

Without wanting to delay the Committee unnecessarily on this point, I reiterate my earlier comments that this is how film making works. Cost is spread through the lifetime of the making of the film, and income is generally spread through the lifetime of the film to cover those costs. According to our consultation with the industry, that model works for film making in order to qualify for the reliefs. The old model to which the hon. Gentleman referred was both out of date with best practice and subject to substantial abuse. We are trying to implement a model that will avoid some of the problems that we discussed earlier.

Theresa Villiers (Conservative, Chipping Barnet)

What abuse are the Government afraid of? If the system gives rise to abuse, the Opposition will, of course, support the Government’s approach, but we have not heard a convincing explanation about the abuse they are trying to prevent, or how the new structure requiring payment of tax in advance of income is needed to solve a real problem.

Edward Balls (Labour, Normanton)

We are in danger of repeating our debate on clause 31. We are trying to move from a regime that was out of line with the accounting practices of film production companies. It too often allowed tax relief to leak out of the making of films; instead, it could be shared by financial vehicles and financiers. We are putting in place a new model, which we debated at length under clauses 31 and 32, to ensure that the tax relief goes to the maker of the film—the film production company. It does so throughout the making of the film.

If, under schedule 4, we were to debate how we operate those rules, it would be a sensible debate. However, as I said at the beginning, although the hon. Lady proclaims to support the new model, she is swayed by those who have proposed amendments and who want to take us back to the old world. We have to make a choice. We can operate the old regime, but she seems to want it for only part of the time—for TV companies and for DVD films. We want to operate the new regime all the time because we want to avoid the old problems; we do not want to be taken back to them. I urge her to reflect again on the good speech that she made at the beginning of the debates on this chapter, and I ask her to help us to implement the measure rather than always harking back to past problems.

I turn to amendment No. 55. The hon. Member for South-West Hertfordshire, in what I think is a probing amendment, is trying to help us clarify how estimates should be used in the calculation of taxable income or allowable losses. The amendment would ensure that estimates can be revisited, and that something included as an estimate in one year would not be included in another year if the income projection proved to be accurate and hence taxed twice. I assure the hon. Gentleman that the way in which schedule 4 treats estimates and revisions will meet his concerns.

Paragraph 8 to schedule 4 makes it clear that estimates are to be made using a proper view of the situation at the accounting date. It is possible that estimates made in relation to that date may not be correct when taking all the information available into account. In such cases, returns can be amended. No special legislation is needed to enable companies to do so, nor is it necessary to set a time limit on when that can be done. In our view, the mechanisms to allow companies to do what the hon. Gentleman asks are already available in the schedule.

We also do not need legislation to reflect changing estimates that arise from new facts or new situations, including new estimates of income or costs. For example, if I have a contract this year to exploit my company’s film that, in the substance of the transaction, will yield me £1 million over five years, I shall make an estimate, which is akin to fair value in accountancy terms—I use that term with some trepidation, as I am neither an accountant nor a lawyer. However, things may change, and the new estimate, based on all the relevant circumstances, including the new ones, may be that I will receive only £900,000.

The formula in paragraph 7 to the schedule says that such a decrease will be recognised in the second year. That is not new; it is the normal sort of accountancy valuation and re-estimate required properly to reflect the substance of the arrangement, which adjusts year on year to track the proper view of income. We do not need specific provisions to allow that sort of change to be made to estimates; it can be done within the ambit of the schedule. I hope that I have reassured the hon. Gentleman.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to the Economic Secretary for clarifying the matter. Is KPMG wrong in its assumption that the method of calculation described in the schedule applies only if a film is in production?

Edward Balls (Labour, Normanton)

I referred earlier to the KPMG letter and to the hon. Gentleman’s description of the example in appendix 1 of its notes and its concern that there would be a restriction on the ability to re-estimate. In our view, it is not right to be concerned about that. The schedule works through an examination of the difference between this year’s estimated income and last year’s, and that is in line with standard accountancy treatment. We do not need to set a limit at which there can be re-estimation. If the world changes, estimates will be able to be changed and recalculated for tax purposes even after the completion phase. I can give the hon. Gentleman the assurance that he seeks.

David Gauke (Conservative, South West Hertfordshire)

I apologise if I am being a little slow. Does that mean that the mechanism contained in the schedule applies not only when a film is in production but subsequently?

Edward Balls (Labour, Normanton)

I think that I am right to say that the hon. Gentleman is asking us to give extra clarification to something that is normally and readily understood. That is the intention behind the amendment. In normal accountancy practice, if estimates change, they are reflected in the following year’s treatment. That applies at any point in time—forwards or backwards. We do not need a special clarification or amendment. The hon. Gentleman is right that if the situation arises and the world changes, re-estimation will be allowed at any stage, including after the completion of a film. Does that give him the clarification that he asks for?

David Gauke (Conservative, South West Hertfordshire)

I think it does. The statement from KPMG suggests that it presumes that the method of calculation described in the schedule applies only when a film is in production, as the Economic Secretary has fully explained. I question that statement; I do not think that that is right. However, I am grateful for the clarification.

Edward Balls (Labour, Normanton)

I am also grateful for this opportunity. The hon. Gentleman thinks that I have clarified the matter and I think that I have. I see nodding, which suggests that I have. As soon as KPMG concludes that I have, we will all be happy.

Rob Marris (Labour, Wolverhampton South West)

May I ask my hon. Friend and his officials to re-examine, although not today, paragraph 7(2)(b)? I understand what he is trying to do, but I am not sure that paragraphs 7(2)(b) and 7(3) achieve what he wants.

Edward Balls (Labour, Normanton)

I am disappointed that we did not have a discussion on the explanatory notes on the matter, which will explain it further. I am always grateful to my hon. Friend for his advice, and I will have no problem examining whether we have got the paragraphs absolutely right. I believe that we have, and any ambiguities could be clarified in guidance later. When I read the paragraphs, I understood them. Given that I started from a low base of understanding, I hope that that is of some reassurance.

Amendment No. 41 would remove the rules on when costs should be recognised for tax purposes. A central objective in introducing the new tax relief for British films is to design out opportunities for abuse and the tax avoidance problems that we have had in the past. Chapter 3 contains a number of provisions that have been designed specifically to prevent the new relief from being abused in the same way as previous reliefs, and paragraph 9 to schedule 4 is an example of that intention. In the past, there have been instances in which the actual level of production expenditure was artificially inflated by the inclusion of deferments, fees that are not paid until a film starts to make a profit. They are fairly common in the industry. Paragraph 9(2) states that any payments in advance should be ignored until the work is done, and that

“deferred payments are recognised to the extent that the work is represented in the stage of completion.”

Paragraph 9(3) states that only money subject to an unconditional obligation to pay can be treated as having been incurred, and paragraph 9(4) sets out that if an obligation is linked to income being earned, the costs can be included only when an appropriate amount of income has been brought into account. I hope that that clarifies why our approach is the right one to take. We do not want to go backwards by accepting amendment No. 41.

I must give one more reassurance to the hon. Member for Chipping Barnet—on the issue of transfer pricing. In that area, there is nothing particular or novel about the film industry—

Standing Committee A

Schedule 4

John Butterfill (Conservative, Bournemouth West)

I remind the Committee that with this it will be convenient to discuss the following amendments: No. 42, in schedule 4, page 165, line 26 [Vol I], at end insert—

‘(1A) Where a company incurs expenditure on the development of a film that is abandoned before pre-production and subsequently begins to carry on a trade as a film production company in relation to another film, the expenditure may be treated as expenditure of the trade of the second film and as if incurred immediately after the company began to carry it on. Provided that the same expenditure is not to be given more than once.'.

No. 53, in schedule 4, page 166, line 19 [Vol I], leave out paragraphs 7, 8 and 9 and insert—

‘7 For the purposes of this Schedule profits and losses are calculated in accordance with generally-accepted United Kingdom accounting principles.'.

No. 55, in schedule 4, page 167, line 4 [Vol I], at end insert

‘; and accordingly—

(a) where, within six years of the end of the first period of account, it becomes clear that the original estimates were incorrect, the film production company can elect in writing to amend the original tax computations to reflect the correct position;

(b) income taxed under the provisions of paragraph 7 of this Schedule shall not be taken into account for tax purposes in a subsequent period of account.'.

No. 41, in schedule 4, page 167 [Vol I], leave out lines 6 to 17.

Edward Balls (Labour, Normanton)

I welcome you back to the Chair, Sir John. We had a long debate this morning on a number of the clauses relating to schedule 4, and I was just coming to the end of my remarks. I had referred to all five amendments— amendments Nos. 40, 42, 53, 55 and 41—and I was answering a final question from the hon. Member for Chipping Barnet (Mrs. Villiers) on transfer pricing. I concluded by saying that we did not think that there was anything novel in the situation for transfer pricing that will face the film industry. It will be no different from the normal way in which transfer pricing rules apply. The normal rules will apply and although that may be uncomfortable for those who attempted to use them for tax avoidance reasons, we do not think that there will be a problem to trouble any genuine film makers. On that basis, I ask the hon. Lady to withdraw the amendment.

Theresa Villiers (Conservative, Chipping Barnet)

I welcome a number of points in the Economic Secretary’s response to the debate. I welcome his clear indication that development costs for films that never go into production could be deducted according to ordinary tax law principles. Even if he is not prepared to accept my amendment, which suggests that they should receive the enhanced deduction, it is welcome that they have not accidentally been excluded from the ordinary regime.

I also welcome his reassurance that film production companies will definitely be able to correct estimates if they prove to be incorrect. That was my understanding of what he said. I still have some anxieties as to how that tallies with the Bill’s terms, but his reassurance on that point is welcome.

I take issue, however, with his repeated assertion that what is proposed in schedule 4 is in line with standard industry budget and accounting practice. As I acknowledged in my speech on the amendments, there are some structures that involve special purpose vehicles, where the proposed new framework might not produce a significant burden. However, as the British Screen Advisory Council points out, not all film producers will want to use that model. It states that if so, the requirement to look out for estimated income could be problematic both for independent film makers and large production companies. It is almost impossible to predict the success of a film in advance. The new obligation would run counter to the process of tax buying accounting treatment and could result in companies paying tax or receiving less by way of tax credit on income that never materialises or well ahead of receiving that income. It also questions its application to films, such as television programmes, that do not attract the tax credit. That illustrates the concern across the industry since that organisation represents a broad-ranging coalition of film industry interests. In contrast, the Economic Secretary seemed to imply that those issues were somehow dreamed up by an incorrect brief from KPMG. I wanted to assure the Committee that they are more widely felt.

I reassure the Economic Secretary that it is not the intention of any of my amendments to leave the Government scheme open to abuse. I stand entirely by what I said in opening the debate. My amendments have been tabled with a view to exploring important issues regarding the computation of profits for film production companies. At the end of the discussion, I remain to be convinced that the move to the new method of calculating profit and loss is necessary to prevent the abuse of the film tax scheme, but I take on board his comments. I will reflect on them, particularly those about amendment No. 41 and possible abuse relating to deferral.

In the light of that, I will not press any of the amendments, but I hope that the Economic Secretary will reflect with care on whether this punitive new regime is necessary to prevent abuse of the film tax scheme. I beg to ask leave to withdraw the amendment.

Clause 39

Edward Balls (Labour, Normanton)

I beg to move amendment No. 27, in clause 39, page 31, line 28 [Vol 1], leave out subsection (3) and insert—

‘(3) Whether this condition is met is determined for each accounting period of the film production company during which film-making activities are carried on in relation to the film, in accordance with the following rules.

(4) If at the end of an accounting period the film is intended for theatrical release, the condition is treated as having been met throughout that period (subject to subsection (5)(b)).

(5) If at the end of an accounting period the film is not intended for theatrical release, the condition—

(a) is treated as having been not met throughout that period, and

(b) cannot be met in any subsequent accounting period.

This does not affect any entitlement of the company to relief in an earlier accounting period for which the condition was met.'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments: No. 43, in clause 39, page 31, line 28 [Vol I], leave out subsection (3) and insert—

‘(3) Whether this condition is met may be determined at any time after film making activities begin, so long as the film is intended for theatrical release prior to delivery of the completed film'.

No. 44, in clause 41, page 32, line 4 [Vol I], at end insert

‘and expenditure incurred by a person which is reimbursed by a film production company shall be deemed to be expenditure by the film production company for the purposes of this section where it would have fallen within this section had it been incurred directly by the film production company'.

I call Dawn Primarolo—I am sorry: Ed Balls.

Edward Balls (Labour, Normanton)

It is a great honour to serve under your chairmanship, Sir John, and a great compliment to be mistaken for the Paymaster General.

John Butterfill (Conservative, Bournemouth West)

The similarity is not that great, I know.

Edward Balls (Labour, Normanton)

It is a first, but I hope not a last.

It might help the Committee if I set out a little of the thinking behind the clause. It sets out the first condition that a film must meet to be eligible for the new tax relief: subsection (1) makes it clear that it must be intended for theatrical release. That is the same requirement that a film had to meet to qualify for the old relief. Both the old and new reliefs are intended to provide support to films that are made to be shown at the cinema, and exclude other films, which we discussed in our debates on clause 31, such as those made for television. The television industry is healthy and productive and was excluded from the old film tax reliefs in 2002, so this is not a new rule.

Subsection (2) gives more detail on this requirement. Theatrical release means exhibition to the general public at a commercial cinema—again the common-sense, generally understood definition—and a film is considered to be intended for theatrical release only if it is planned that a significant proportion of its income should come from cinema exhibition. This condition was originally imposed because the old reliefs were being abused, and claims were being made for soap operas, news programmes and even for doubtful productions that were clearly not intended to be viewed anywhere, by anyone.

We acted to narrow the scope of the relief to genuine cinema productions, which is what was always intended, and that intention remains. The question is: when should the definition of the film be judged? Under the old system of reliefs, that was done when the film was finished, which was when the old reliefs were claimed. As we discussed earlier, we mean the new reliefs to be claimable from the start to assist film makers with cash flow. That approach is based on a modern understanding of best accounting practice and the way in which TV and film makers work.

As a consequence of the decision to change the model for film tax relief—enhanced tax relief—the film maker now needs to take a view at the outset. But what if something changes? With the original drafting, we would have preserved the original judgment, which was made at an early stage, even when the situation soon changed. However, since the Bill was published, we have held discussions with the industry, and we accept that preserving the original judgment could have unintended consequences. We were particularly concerned that that might lead to film makers taking overly optimistic views in the early stages, so that makers of many productions that are inevitably destined for television or other media would claim film tax relief in the early stages of production. Our amendment will allow greater flexibility when the position changes. It will allow a film that was originally intended for the cinema to drop out of the film tax relief without losing any relief that it has earned to date. I invite the Committee to accept the amendment.

I turn to amendment No. 43. It will not surprise members of the Committee to learn that I think that the Opposition amendment, which I accept seeks to address the same issue, lacks clarity. The amendment would allow a theatrical release to be determined at any time, which means that it could well change back and forth several times, which means that the tax position could also change, possibly leading to payments, repayments and even re-repayments. The whole position could become confusing and lack clarity. Rather than our accepting the Opposition’s amendment, therefore, I hope that the Committee will reflect on my comments and instead support ours.

Amendment No. 44 seeks to make it explicit that expenditure incurred by a third party that is reimbursed by a film production company—[Interruption.] I feel as though I am caught in the crossfire in an exchange of semaphore messages. I hesitate to turn to the explanatory notes for guidance.

Mark Francois (Conservative, Rayleigh)

I apologise to the Economic Secretary. There was some confusion on my part. We thought, looking at the seating arrangements, that the hon. Member for Wolverhampton, South-West (Rob Marris) had been made a Parliamentary Private Secretary. That was a cause for surprise and delight on our Benches, but we have now clarified that that is not the case.

Edward Balls (Labour, Normanton)

I am grateful to the hon. Gentleman for clarifying the situation. Even though my hon. Friend the Member for Wolverhampton, South-West is not a PPS, I find his presence behind me reassuring. I am sure that the fact that he will continue to hold the Government properly to account from the Back Benches on the detailed issues is reassuring not just to me but to the taxpayer at large.

Amendment No. 44 seeks to make it explicit that the expenditure incurred by a third party, which is reimbursed by a film production company, should be treated as if it had been incurred by the film production company for the purpose of determining whether the film production company meets the 25 per cent. minimum UK expenditure test. It is common in the film industry for legitimate production costs to be recharged to a third party rather than charged directly to the film maker. That is almost universal in the United States, where the Screen Actors Guild—the Hollywood actors’ trade union—has rules to limit the number of companies to which an actor can charge fees for his or her services. That is likely to be the film production company’s parent company, rather than the film production company itself. I imagine that that is the sort of situation that the amendment seeks to address.

It is accepted accounting practice for costs that are recharged in that way to be treated as though they were incurred directly by the company, and there is nothing in the legislation to indicate that that practice will not continue for the purposes of the new film tax relief. Where costs are recharged to a film production company through a third party, they can be treated as qualifying production expenditure of the film production company as if they were incurred directly by the film production company, provided that they are recharged on a commercial basis and are not designed to inflate the amount of film tax relief that can be claimed. That has already been made clear by Her Majesty’s Revenue and Customs in guidance, which I fear might not yet have been read by members of the Committee, with the possible exception of my hon. Friend the Member for Wolverhampton, South-West. It has been published since 11 April on the website—www.hmrc.gov.uk\films\faqs\htm—which says:

“Q: Can costs charged through third parties be included in production costs? A: The recharging of costs to a subsidiary by its parent company is standard practice in the film industry and elsewhere. Where such costs relate to qualifying production expenditure, they can be included for the purposes of film tax relief, provided they are recharged on a commercial basis and are not designed to inflate the amount of film tax relief that can be claimed.”

Obviously, such costs will be taken into account when determining whether the clause 41 expenditure test is met. Given that that guidance is already on the website, the amendment raises a moot point, so I suggest that it be withdrawn.

Theresa Villiers (Conservative, Chipping Barnet)

I very much agree with the policy objective of the Government to ensure that television production is not subsidised by the film tax break. That has led in the past to problems with the tax break being used in an inappropriate way, and I would not seek to reverse it. What concerns me, which is why I tabled the amendment, is the problem adverted to by the Economic Secretary in relation to the point at which the decision that a film is to be made for theatrical release is made. The original text of the Bill would have provided that that had to happen at a preliminary stage, as soon as film-making activities began. Clause 33 states that those film activities include development and so, to use the example given by the Economic Secretary on Tuesday, the writing of a book that is to become a blockbuster trilogy of films 40 years later could conceivably be considered to be development.

It would make no sense whatsoever to determine the tax status of a film at the start of the development stage. I welcome the Government’s amendment and I am happy not to press mine because theirs does an adequate job in meeting the problem outlined by me and the Economic Secretary.

On amendment No. 44, I welcome the clear indication given by the Economic Secretary that costs incurred by a third party and recharged to the production company will count as expenditure under clause 41. There is therefore no need for me to press the amendment.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

There is no need to dwell any further on the amendments tabled by the hon. Member for Chipping Barnet, since she has made it clear that she will not press them. We will not call for them to be pressed either.

I also welcome the Government amendment to clause 39(3). It seems that the subsection as it stood would have created a series of perverse incentives and would have been an incentive for people to misrepresent the intentions of their film-making activities.

I will not keep the Committee too long, but I wanted to draw its attention to the word “significant” in subsection (2)(b), because the subsection states that

“a film is not regarded as intended for theatrical release unless it is intended that a significant proportion of the earnings from the film should be obtained by such exhibition.”

I would appreciate some clarification of how that can be demonstrated. It is obviously not always easy to predict the proportion of earnings that a film will generate from theatrical release compared with DVD or video release. If the Minister could clarify what the word “significant” represents, I would be grateful.

Edward Balls (Labour, Normanton)

It is a pleasure to be able to give an answer to the hon. Lady. Films do not just happen by accident but are carefully planned, so we would hope that the intended outlet for the film would be clear from an early stage. That will be reflected by who commissions the film, its intended outlet, how it is made and the distribution agents that are put in place.

The Revenue will look carefully at the plans in each individual case, to see not only the intended degree of revenue but how the film will be introduced to the distributional channels. Different indicators can be brought together to allow the judgment to be made, so to set a number on the word “significant” and to make that the only test would be too narrow a view. It is much better to say, as the legislation does, that the proportion needs to be significant and that it needs to be clearly and demonstrably the case that the film is intended for the cinema. That should be a judgment made in the round based on a number of factors.

Clause 40

Theresa Villiers (Conservative, Chipping Barnet)

Clause 40 focuses on the requirement that a film be culturally British. I can see the merits of focusing film tax relief on culturally British films and of the indirect benefits of the promotion of UK plc around the world by the film industry. Those benefits would be more direct and stronger with films of particular cultural Britishness.

I shall flag up one concern, however: there could be room for debate on what is sufficiently British. For example, would “The Chronicles of Narnia” have been sufficiently British? Will the “Red Dwarf” movie—currently in production—be sufficiently British? There is a lot of involvement in that film by the British film production industry. Would that pass the test?

The points-scoring system, whereby it is possible to take diverse factors into account such as a film’s cultural content and setting, the nationality of its characters and its use of UK cultural hubs, seems to be broadly workable. I welcome the fact that the test makes provision for a UK cultural hub for visual and special effects because those are some of the strongest aspects of the UK film industry; our visual and special effects industry is one of the most successful in the world. Encouraging film makers to use those facilities is desirable.

My principal concern is the same as that which I raised during deliberation on another part of the Bill: is the EU state aid regime the principal concern motivating clause 40? Or did the Government form the view that we need a test of Britishness?

Edward Balls (Labour, Normanton)

As the clause makes clear, and as I think that we discussed on Tuesday, in order to be eligible for film tax relief, a film is required to be British and to be certified as such by the Secretary of State for Culture, Media and Sport under schedule 1 to the Films Act 1985. That was the previous requirement for film tax reliefs. However, my right hon. Friend has developed and introduced a new film tax regime designed to be simpler to operate and more geared towards a film’s British cultural status.

I had the pleasure to serve on the Committee that debated the details of that cultural test. Certainly, the conditions set out are extensive, but it will not surprise the Committee that that is the responsibility of my right hon. Friend, not the Treasury. Obviously, it would be inappropriate for a Treasury Minister to comment on any matters outside the direct purview of the Treasury, so that is really a matter for my right hon. Friend’s Department.

On European Commission state aids, we discussed the procedure for state aids clearance during consideration of the clauses on tax reform. The state aids rules require that support be directed towards films that are cultural products, which is why the Department for Culture, Media and Sport has been in dialogue with the Commission over compatibility with the state aids rules and its responsibilities. That Department, like the Treasury, has notified the Commission of the test, but that is for it to pursue.

I can reassure the hon. Member for Chipping Barnet that this is not being done because of a requirement from the Commission, but because we want a test of Britishness that will allow us to say with hand on heart that we are supporting the production of British films.

Schedule 5

Theresa Villiers (Conservative, Chipping Barnet)

I beg to move amendment No. 54, in page 170, line 5 [Vol I], after ‘pay' insert

‘within 90 days of the claim being made, subject to sub-paragraphs (3) and (4) below,'.

Amendment No. 54 would insert an obligation on the Treasury to pay the film tax credit within 90 days of the claim, for the following reason. Considerable concern has been expressed about the timing of the Revenue’s payment of tax credits. As we are all aware, payments of tax credits have been subject to severe administrative problems.

Dawn Primarolo (Labour, Bristol South)

If the hon. Lady considers the operation of the research and development tax credit, on which the film tax credit is modelled, she will find no such delay or problems. Perhaps she would like to make a direct comparison instead of hitting away into areas that are not connected to the issue.

Theresa Villiers (Conservative, Chipping Barnet)

I appreciate the right hon. Lady’s comments. The reason why I referred to tax credits is that many of my constituents have extreme difficulties with the working families tax credit system, which has had problems. I acknowledge that the example that we are talking about is different from the tax credit systems whose problems have been most serious, but it is reasonable to refer to problems in other areas with a view to ensuring that such problems do not recur.

Dawn Primarolo (Labour, Bristol South)

If we are to have a serious debate, will the hon. Lady draw the parallels between a payable tax credit to families, which is based on integration of the tax and benefit systems, and payable tax credits for research and development in the tax system, on which the film tax credit is modelled? Their names are the only similarity.

Theresa Villiers (Conservative, Chipping Barnet)

I acknowledge that the two systems are different. I am saying only that we do not want the problems that have arisen in one area to arise in another.

Uncertainty about the time scale for the payment of film tax credits will drive up the cost of funding a film because of the increased risk involved in delays. I hope that the Government will consider accepting amendment No. 54 to inject a welcome degree of certainty into the measures. It would also be useful if the Economic Secretary indicated how long the Government expect that it will take, on average, to pay out a tax credit. Are they doing any research on the matter?

Rob Marris (Labour, Wolverhampton South West)

The hon. Lady would like the payments to be made within 90 days of a claim. Would that not be unworkable, as the time would run from when a claim was made and not from when a valid claim was made, fully supported by appropriate documentation and evidence?

Theresa Villiers (Conservative, Chipping Barnet)

That is the point of the amendment—to ensure a clear timetable for getting the claim sorted out and paid.

Philip Dunne (Conservative, Ludlow)

To help my hon. Friend, I shall illustrate the point. For an example of a Government agency that seems incapable of providing payments for validated claims, we need look only to the Rural Payments Agency, which was debated today on the Floor of the House. It illustrates the extent of the problem and the reason why so many sectors of the economy are concerned about exceptionally complex Government innovation introducing a new relief, subsidy or tax credit that the relevant Government agency will be incapable of delivering according to its own schedule and statutory procedures. That is why the amendment is seeking to direct confidence back into the system. That is its purpose.

Theresa Villiers (Conservative, Chipping Barnet)

My hon. Friend makes his point well.

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Lady give way?

Theresa Villiers (Conservative, Chipping Barnet)

No, I shall conclude my remarks.

Julia Goldsworthyrose—

Theresa Villiers (Conservative, Chipping Barnet)

No, I will now conclude. Government amendment No. 24 seems like a straightforward tidying up exercise, to which the Opposition has no objection in principle.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I will make a couple of short remarks. The hon. Member for Wolverhampton, South-West makes a valid point. However, it would have been appropriate to have an amendment to paragraph 9(1)(b) to ensure that the claim was valid. As for the amendment introduced by the hon. Member for Chipping Barnet, if the Minister is confident that the payment will be delivered within an appropriate time scale, clearly she will have no problem in accepting the amendment.

Rob Marris (Labour, Wolverhampton South West)

The hon. Member for Falmouth and Camborne (Julia Goldsworthy) has made a good point. However, I think that the hon. Member for Chipping Barnet misunderstood my intervention. I will therefore repeat it, perhaps more fully. The effect of the amendment, were it to be accepted, would be that if a film production company put in a claim showing that it was entitled to a tax credit, it would be entitled to have it paid out within 90 days even if it was not actually entitled to the tax credit because it had not put in the right documentation. The company could argue, statutorily, that it had to be paid because the 90 days was up as per the Act of Parliament. With respect to the hon. Lady, it would be a complete nonsense if a company were to be entitled to receive a payment when it had not produced proper evidence. All members of the Committee would recognise that companies should provide proper evidence to validate claims to receive tax credits.

Edward Balls (Labour, Normanton)

It is obviously important that we implement the film tax credit as efficiently and professionally as we can. As my right hon. Friend the Paymaster General said, there is much that we can learn from the tried and tested model of the research and development tax credit, which has been successful in its impact and administration.

It is important to say that we are talking about a tax credit. Therefore, it depends on the company’s tax position and that is why the claim needs to be in the company’s return and why repayment will depend on the broader complexity of those tax arrangements.

John Hemming (Liberal Democrat, Birmingham, Yardley)

I am having difficulty in working out the circumstances under which a payment would be made. As far as I can see, a payment would be made only when a film was expected to make a loss over its whole lifetime, and on that basis one would not even make the film. So I find the provision a bit odd.

Edward Balls (Labour, Normanton)

The hon. Gentleman may have missed some of the detail of earlier debates—in particular, that this is a payable tax credit. It can either be taken as a credit against tax take, or as a direct cash payment in the event that the film makes a loss. It operates in a similar way to the research and development tax credit, which is why it is called a payable tax credit.

John Hemming (Liberal Democrat, Birmingham, Yardley)

The difference between the film tax credit and the research and development tax credit is that in this instance we are calculating the liability to corporation tax on the basis of the averaged-out income against the expenditure, whereas with research and development the same assumption is not being made.

Edward Balls (Labour, Normanton)

It is also the case that we are paying out this tax credit on the basis of making a British film, rather than for research and development. They are clearly not analogous; they are different. One is about making a film, which has a particular tax treatment set out in schedule 4; the other is about research and development. So I would not say that they are identical, but the general model has similarities, and one similarity is the fact that the film tax credit is payable. If over the lifetime of the film the company is making a loss year by year, it can claim the enhanced relief as a credit.

I make the point to the hon. Member for Chipping Barnet that it is helpful and constructive to have amendments that are designed to ensure that the tax system is operated in an effective and efficient way, but if one is going to table such amendments, and do so in a pointed and sharp political way, it is important to get them right. The problem with the amendment is not the wider political shenanigans surrounding its introduction but the fact that it is badly drafted and flawed and does not achieve what the hon. Lady intends.

I got the impression from the hon. Lady’s speech that she expects the clock to start ticking on the 90-day entitlement when the claim is made; from her speech, one would have assumed that the claimant would be forgiven for thinking that the clock started ticking at that point. But in the amendment the clock starts ticking not when the claim is made but when the entitlement is established. I should have thought from my experience of HMRC policy that 90 days is a generous or rather too long a period if the clock starts from the point when the entitlement is established, and the amendment appears to be drafted on that basis. We would hope to get payments out much quicker than 90 days once the entitlement has been established.

The entitlement needs to be established promptly, without impediment, but the time that that process takes depends on the broader issue of the tax return and its complexity, and the time that it would take to establish that it is not some sort of complex trade that is being abused for tax-avoidance purposes. HMRC will take the time that it needs to establish that it is not tax avoidance and its officials will want to do that as expeditiously as possible. That is part of their job; they will also ensure that they do it properly and they will take time to establish the entitlement. From the point that the entitlement is established, 90 days is too long a period, but that is what the amendment refers to. The proposal is flawed; it misunderstands what it is trying to achieve and therefore lets the Revenue off the hook rather than tying it down.

My advice to the hon. Lady is that if she wants to criticise the Government on the matter of administration it is important to get the facts right before tabling an amendment. Being more generous, I would say that one of the great advantages of this debate is that we can discuss these matters in a friendly, co-operative way, knowing that we agree on the general objective, which is to ensure that British films are subsidised in Britain. If only we had the same unanimity on our goals to reduce child poverty through the tax credit system; maybe in that respect there might be a bit more consensus than there has been so far.

Theresa Villiers (Conservative, Chipping Barnet)

I shall start by reassuring the hon. Member for Wolverhampton, South-West that the amendment does not seek to entitle a film production company to the film tax credit automatically, regardless of whether a valid claim is made, because it is inserted in the last line of paragraph 9. The preceding two paragraphs make it clear that a valid claim must be established before the last line kicks in.

I welcome the Economic Secretary’s indication that the Revenue is convinced that 90 days would indeed be too long, and that it would anticipate paying out on the film tax credit much more quickly than that. My point is sufficiently made with that indication from the hon. Gentleman, which I welcome, so I beg to ask leave to withdraw the amendment.

Edward Balls (Labour, Normanton)

I beg to move amendment No. 24, in page 173, line 33 [Vol I], leave out ‘that Chapter' and insert

‘Chapter 3 of Part 3 of the Finance Act 2006'.

This small amendment addresses a slight drafting defect in the Bill, which we want to set straight. Part 2 of schedule 5, paragraphs 14 to 25, makes changes to schedule 1 of the Films Act 1985. Schedule 1 sets out the rules for certification of films as British. The new tax relief requires a number of changes to those rules and some of those changes require references back to chapter 3 of part 3 of the Finance (No. 2) Bill or, as I trust it will eventually become, the Finance Act 2006. The amendment simply inserts a full reference to chapter 3 of the forthcoming Act, instead of the phrase “that chapter”, which is not otherwise defined.

John Hemming (Liberal Democrat, Birmingham, Yardley)

This comes back to the previous point. I am trying to assess how this relief gets paid. I accept the point about the research and development tax credit which is funded right at the start of the project, but there are two issues here. First, there is a massive nuisance in that to qualify for this relief one has to take the tail end income and count that at the start of the project. One does not have the cash, but one must account for a profit that will be made on income that will be received in perhaps a couple of years’ time and one must account for it as soon as one starts spending money on the project. That is a real burden.

The question is, what is the benefit? The benefit is the availability of a tax credit where there is a surrenderable loss. With various complications, which are not as complicated as those surrounding capital gains tax and so on but are still quite complicated, one will possibly get between 16 and 20 per cent. of the surrenderable loss at the best of times. The real question is how in the real world we will have a situation where someone will be paid a tax credit. If the calculation is on the basis of a loss, it must be a loss over the whole of the project on the basis of the initial calculation as to the estimated income, unless there is something else within the entity that is losing money. That is the issue that interests me.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I simply wanted to ask a question in the absence of the hon. Member for Dundee, East (Stewart Hosie). I am sure that he would have asked it if he were here. It relates to paragraph 25, particularly subparagraphs (5) and (6), which deal with the agencies that are entitled to conduct a prosecution for the wrongful disclosure of information related to Revenue and Customs. It is clear which agencies prosecute in England and Wales and in Northern Ireland, but which agency would do so in Scotland?

Edward Balls (Labour, Normanton)

I will reflect on that and try to find an answer in due course. First I shall make some remarks about the schedule and the loss rules which I hope will help to clarify matters. The schedule is in four parts. The first sets out how the relief is calculated. The second part amends schedule 1 to the Films Act 1985, which deals with the certification of films in Britain. The third part provides claims machinery for the relief. The fourth part deals with claims for relief made before a film is completed. Finally, to answer the hon. Member for Rugby and Kenilworth (Jeremy Wright), in Scotland prosecutions under the schedule would be taken forward by the procurator fiscal.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I am impressed by the speed at which the Minister can get these answers. But why is it not in the schedule?

Edward Balls (Labour, Normanton)

That is an interesting question.

Rob Marris (Labour, Wolverhampton South West)

rose—

John Butterfill (Conservative, Bournemouth West)

Order. The hon. Gentleman cannot intervene while the Minister is still attempting to answer the question. When the Minister has finished answering it, the hon. Gentleman may be at liberty to intervene again.

Edward Balls (Labour, Normanton)

I apologise, Sir John. It is helpful to be set straight on that point of procedure. I was about to say that if that issue had occurred earlier to the hon. Member for Rugby and Kenilworth, I presume that he would have tabled an amendment to clarify this schedule to the Bill. Obviously, that thought did not occur to him until a much later stage.

Mark Francois (Conservative, Rayleigh)

Or, indeed, to the Minister.

Rob Marris (Labour, Wolverhampton South West)

Will my hon. Friend the Economic Secretary give way on that point?

Edward Balls (Labour, Normanton)

No. I am told that, in Scotland, the Procurator Fiscal Service is not only an authority that may deal with these matters but the only one that may do so. Therefore, it might be thought to be overburdening the schedule to state the obvious within it. However, we will reflect on the drafting advice of the hon. Member for Rugby and Kenilworth for future occasions.

Rob Marris (Labour, Wolverhampton South West)

My hon. Friend has partially answered this, but just to clarify: I did not put in an amendment because the words on line 42 are, “England and Wales only”. Paragraph 25(5) narrows down the possibilities as to who might bring a prosecution and so on; no such narrowing down was required in Scotland for the very reason that my hon. Friend has given.

Edward Balls (Labour, Normanton)

I am grateful to my hon. Friend and, referring back to earlier comments in response to the intervention by the hon. Member for Rayleigh (Mr. Francois), the Committee should be reassured to know that my hon. Friend the Member for Wolverhampton, South-West is scrutinising our proceedings with such care. In an analogy with the Bank of England, where a decision not to raise interest rates is as important as the decision to do so, knowing that my hon. Friend considered whether an amendment was necessary and decided not to table it provides me with a similar degree of reassurance as if he had. Therefore we can move on, comfortable in the knowledge that he is keeping a close eye on proceedings, from whichever Bench.

I turn to the other matters of substance in hand.

Mark Francois (Conservative, Rayleigh)

Returning for a moment to film.

Edward Balls (Labour, Normanton)

Returning for a moment to film, I turn to part 1 to set out some more detail which I hope will help all hon. Members, particularly the hon. Member for Birmingham, Yardley (John Hemming). He is asking the same series of questions and I fear that I am giving the same answer, so if I put the answer in a broader context that may help the Committee to understand both my answers and his interventions.

Part 1 implements our announcement in the pre-Budget report that a British film starting principal photography on or after 1 April 2006 and meeting the conditions that we set out, is entitled to film tax relief, which is given as an additional deduction in computing its profits—the amount of which deduction, as debated earlier, is defined in paragraph 4—and possibly as a payable tax credit as set out in paragraphs 6 and 7. The amount of the deduction is based on the actual UK spending subject to a cap of 80 per cent. of the production company’s spending. That cap, as we have discussed, is needed to meet European Commission state aid rules requiring that it must be possible to spend at least 20 per cent. of the film’s budget elsewhere in the EU without loss of relief. As also discussed, we reduced that requirement from 40 per cent. at an early stage.

Paragraph 4(3) would allow the Treasury to amend the 80 per cent. limit so that any future changes in state aid rules could be accommodated, but at this stage we do not envisage complications in state aid clearance. The additional deduction is defined in paragraph 4 as the result of that threshold multiplied by the appropriate rate—100 per cent. for a limited-budget film and 80 per cent. for a large-budget film. That additional deduction will alter the overall profit or loss previously calculated according to schedule 4, which we debated earlier. If the results of the calculation place a company in loss, paragraph 6 will allow some of the loss to be surrendered for a payable tax credit. The amount that can be surrendered is capped at the same threshold amount as I mentioned a few moments ago—the actual UK spend up to 80 per cent. of the total spend. It is not limited to the amount of the additional deduction. That is the position in the first period of account, which in the case of most films will be the only period.

It is unusual for a film to take several years to make, although it does happen. In later periods, if there are any, the rules are slightly more complicated and examine cumulative spending, but the principle is the same. In calculating the additional deduction for and the amount of loss that can be surrendered in such later periods, paragraphs 4(2) and 6(4) take account of the amounts in previous periods so that the Commission’s 20 per cent. rule is met over the film’s overall production period. That measure is necessary because the new film tax relief may be claimed by companies period-by-period as a film is made, whereas the previous reliefs under section 42 of the Finance (No. 2) Act 1992 and section 48 of the Finance (No. 2) Act 1997 could be claimed only on completion of the film, which was much simpler because all the facts were known and final positions could be determined.

Once the amount of loss to be surrendered has been determined—a company need not surrender the maximum amount but can instead retain losses to set against future income from the film, which might be more advantageous—it is multiplied by the appropriate credit rate as set out in paragraph 8 to determine the actual payable credit. Again the credit is higher for a limited-budget film than for a large-budget film. Were the losses instead to be retained and set against film incomes, taxed at 30 per cent., the losses would of course be worth slightly more. Whether to do that is of course a company’s choice. Once the amount of payable credit has been determined and a claim made, paragraph 9 requires Her Majesty’s Revenue and Customs to pay it to the company, although there are protective provisions in that paragraph to deal with circumstances where the company owes money to HMRC or its tax return is being inquired into.

Paragraph 10 makes it clear that the payment of tax credit is not itself taxable. Paragraphs 12 and 13 are aimed at preventing the inflation of film tax relief. Paragraph 12 addresses circumstances where a payment is deferred. While we accept that deferred payments are a legitimate practice in the film industry, we do not accept that the film tax relief should be based on payments that have not yet been made. When they are made they can be included. Paragraph 13 is a more general measure aimed at attempts to inflate the amount of film tax relief. It is along the same lines as other rules, such as those on the R and D tax credit in paragraph 21 of schedule 20 to the Finance Act 2000, and targets arrangements the sole or main purpose of which is to obtain or inflate the amount of film tax credit. That does not include ordinary transactions that would in any case be undertaken in making a film, such as establishing a film production company in the first place. We do not want to get in the way of such transactions, but as we have said, we will not accept amendments that abuse the new system.

I hope that that detail makes things clearer to the hon. Member for Birmingham, Yardley. As I said, a film is typically made by a film production company under a contract. If that contract results in the film production company making a loss, the tax credit may be payable, but the film may be profitable to whoever commissioned it.

Clause 45

Theresa Villiers (Conservative, Chipping Barnet)

I beg to move amendment No. 36, in page 33, line 21 [Vol I], leave out ‘qualifying'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following amendments: No. 37, in page 33, line 26 [Vol I], leave out ‘qualifying'.

No. 38, in page 33, line 32 [Vol I], leave out first ‘qualifying'.

No. 39, in page 34, line 6 [Vol I], leave out from ‘Schedule 4' to end of line 8.

Theresa Villiers (Conservative, Chipping Barnet)

The clause concerns terminal losses. When a film production company making a film that qualifies for tax relief ceases trading, the clause will allow its losses to be transferred to another, similar trade of the same company or within the same group. At present, clause 45 relief for terminal losses on the cessation of activity on a film is limited to films qualifying for the enhanced tax credit. Amendments Nos. 36 to 39 would remove that restriction. They are probing amendments so that we can discover the Government’s motivation for providing relief only for certain films. Will the Minister outline his reasons for the proposed restrictions? The amendments would provide that terminal loss relief could be claimed on all films, not only those that qualify for enhanced tax credit. I can see no good reason for the Bill to restrict terminal loss in such a way.

My second point relates to the losses generated by enhanced deductions when they can be surrendered intra-group when the film is completed or has been abandoned. The possibility of surrendering them intra-group is welcome. It is an important part of the clause. My worry relates to subsection (1)(a), which requires that a company

“ceases to carry on a trade in relation to a qualifying film”

before the losses can be passed on. I should welcome the Economic Secretary’s view on the situation in which receipts continue to come in over months or years afterwards. As we have discussed, some of the income that falls within schedule 4 may come in at much later stages, unexpectedly. It would be useful to have a point at which the terminal loss regime can kick in, despite the outside possibility that revenue may be received for the film in an unexpected way in the future. Will the possibility of delayed receipts preclude the possibility of the loss being passed on? I welcome the Minister’s clarification.

Edward Balls (Labour, Normanton)

I shall explain the purpose of clause 45, and then discuss the amendments. The clause allows the unrealised losses that will be available to a qualifying film in one trade to be handed to another qualifying film, when it is no longer possible to utilise them in relation to the original film. It will encourage films to be made and rights held together in a company or within a group. If a film production company chooses not to surrender losses for film tax credits, it will make use of the film tax relief by setting the losses created by the additional deductions against income from other films that it produces, reducing the tax that it has to pay on real profits.

If, and when, the trade ceases because the film is sold or is no longer capable of exploitation, it is possible that there will be unrealised film tax relief. If nothing were to be done, those reliefs would be stranded or lost for ever. One purpose of this chapter is to ensure that we not only support individual British films, but encourage individual British film makers to make slates of films: to implement a strategy for a series of films over time—even avante-garde films—and to use their losses appropriately.

One of the aims of the relief is to encourage films to be held as a slate, where risk and reward is pooled by producing and holding films at different stages, so that films that make losses can be balanced against those that are profitable. Under clause 45, when a qualifying film produced by a film production company is sold or ceases to be exploitable—that is, when the trade cases—and there are losses that could have been carried forward, they can be passed on. But it is important that the losses that would otherwise be stranded are passed on only in a way that recognises the purpose of the chapter, which is to support British films and thus meet our sustainability objective.

The terminal losses can be passed to another trade within the company, or to another company in the group only if that company is making another qualifying British film. It will not be enough to buy in rights to provide income against which to set the losses or to make any old film that will make a profit. In their original setting, the losses could only be set against the income of a British film so, in the trade that acquires them, the losses are similarly restricted in their use.

Although the drafting of amendments Nos. 36 to 38 is not quite right in that it would remove a reference to schedule 4 at the end of clause 45(6), it is clear that the intent of those amendments is to remove the requirement that, for terminal loss relief to apply, a film must be qualifying film. It should be clear to the Committee, on the basis of my remarks so far, that that is not acceptable to us. The terminal loss relief is part of a balanced package designed to encourage the British cinema and film industry. That is why it is restricted to films that qualify for the new relief in schedule 5.

On that basis, I urge the Committee to reject the amendment.

Theresa Villiers (Conservative, Chipping Barnet)

I am grateful for the Economic Secretary’s comments. I am disappointed that he was not sympathetic to the amendments. However, as I do not feel that it would be productive to press it to a vote, I beg to ask leave to withdraw the amendment.

Clause 46

Theresa Villiers (Conservative, Chipping Barnet)

I shall not move amendments Nos. 48 to 52, because they are consequential to an amendment that has already been discussed and withdrawn, so it would not be productive for the Committee to consider these matters again.

Clause 54

Paul Goodman (Conservative, Wycombe)

I beg to move amendment No. 77, in page 38, line 34 [Vol I], at end insert

‘at a rate that is less than an arm's length rate'.

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss the following: Amendment No. 78, in page 38, line 35 [Vol I], at end insert

‘at a rate that is less than an arm's length rate'.

Amendment No. 79, in page 38, line 36 [Vol I], at end insert

‘at a rate that is less than an arm's length rate'.

Amendment No. 80, in page 38, line 37 [Vol I], at end insert

‘at a rate that is less than an arm's length rate'.

Amendment No. 81, in page 38, line 39 [Vol I], at end insert

‘at a value that differs from market value so that the charity is disadvantaged by the transaction'.

Amendment No. 82, in page 39, line 3 [Vol I], after ‘investment', insert

‘other than a Qualifying Investment for the purposes of Schedule 20 of ICTA 1988'.

Amendment No. 83, in page 39 [Vol I], leave out lines 15 to 17.

Amendment No. 84, in page 39 [Vol I], leave out lines 18 to 23.

Amendment No. 85, in page 39, line 26 [Vol I], after ‘remuneration', insert

‘unless it is paid either under a contract of employment at a rate not exceeding an arm's length rate or'.

Amendment No. 86, in page 39 [Vol I], leave out lines 37 and 38.

Amendment No. 87, in page 40, line 9 [Vol I], leave out

‘on a recognised stock exchange'

and insert

‘or admitted to trading on any market which from time to time appears on the most-recently updated list of regulated markets as published by the European Commission under Acticle 16 of Directive 93/22/EEC (OJL 141, 11.6.1993) or Article 47 of Directive 2004/39/EC (OJL 145, 30.4.2004) together with securities admitted to trading on the Alternative Investment Market of the London Stock Exchange PLC; or is a Qualifying Investment for the purposes of Schedule 20 of ICTA 1988'.

Government amendment No. 62.

Amendment No. 88, in page 40, line 23 [Vol I], leave out ‘which is wholly' and insert

‘of which 50 per cent. or more of the shares is'.

Government amendment No. 63.

Amendment No. 89, in page 41 [Vol I], leave out lines 1 to 6 and insert—

‘(4) Subsection 3 of section 506A shall not apply to any transaction to which subsection 4 applies.'.

Amendment No. 90, in page 41, line 28 [Vol I], at end insert—

‘(10) Where a person who considers that subsection 3 or 4 of Section 506A above may apply to any transaction or proposed transaction, supplies to the inspector to whom he makes his return of income written particulars of the transaction or proposed transaction—

(a) the inspector shall, within 30 days from his receipt of the particulars, notify that person whether or not he is satisfied that, in the circumstances as described in the particulars, the transaction would not be chargeable to tax on that person under this section; and

(b) if the inspector notifies that person that he is so satisfied, the transaction shall not be chargeable on that person under this section.

(11) If the particulars given under this section with respect to the transaction are not such as to make full and accurate disclosure of all facts and considerations relating thereto which are material to be known to the inspector, any notification given by the inspector under subsection (10) above shall be void.'.

Amendment No. 91, in page 41, line 31 [Vol I], leave out

‘by reference to gifts made at any time'

and insert

‘only by reference to gifts made on or after that date'.

Paul Goodman (Conservative, Wycombe)

It is a pleasure, Sir John, to see you in the Chair. If I make the mistake of moving an amendment when I am debating it, I know that you will pull me up at once and put me right. I think that I am moving amendment No. 77 and speaking to amendments Nos. 78 to 87 and amendments Nos. 88 to 91. I do not know if the Economic Secretary will be dealing with this chapter—I think that he will not, from the way that he is moving with his files—so I might not have the opportunity to congratulate him on his appointment, which I have not yet had the chance to do even though it has been recorded that I have done so.

John Butterfill (Conservative, Bournemouth West)

Order. May I just make it clear, for the benefit of all Committee members, that in relation to each of the amendments that I have introduced, this will be the only opportunity for them to be debated, although it will not be the only opportunity for them to be voted on?

Paul Goodman (Conservative, Wycombe)

I am grateful for your guidance, Sir John. Because no Minister has had the opportunity to speak to clause 54, we are in the correct but slightly difficult situation of having to explain a little about the clause in order to make sense of the amendments. Without pre-empting the clause stand part debate, I want to outline the context, which is that the measures set out in clauses 54 to 58 aim to prevent the exploitation of charity tax reliefs. No doubt, in due course, the Paymaster General will make the case for them. To make part of her case for her, the measures have been welcomed by the Institute of Fundraising, the National Council for Voluntary Organisations and the charity finance directors group.

We understand the Government’s concern about such exploitation, and support in principle efforts to prevent it from taking place, as do other organisations that have commented on the clauses, such as the Charities Tax Reform Group, The Law Commission and the Chartered Institute of Taxation. However, and in such matters there is nearly always a “however”, those latter organisations are concerned about the clauses both because some innocent transactions might inadvertently be caught by them and because they will add unnecessary complexity to the tax system. In addition, they fear that those two factors could cause a reduction in charitable activity, which I am sure is not the Government’s intention. In short, we might have another example of the law of unintended consequences.

It is worth noting that Ministers do not claim that the clauses are incapable of improvement, given that they have tabled two amendments—Government amendments Nos. 62 and 63—that seek to plug the gaps in the proposed clauses. Government amendment No. 63, in relation to housing associations, is particularly important in that regard. Our amendments are essentially probing amendments. They seek to lessen the risk of innocent transactions being caught by the clauses and to reduce complexity.

Brooks Newmark (Conservative, Braintree)

I understand that the Charities Tax Reform Group has had discussions with Ministers to express concerns about the very issues that my hon. Friend raises. It would be interesting to know the results of those discussions as they relate to my hon. Friend’s concerns.

Paul Goodman (Conservative, Wycombe)

Indeed. As my hon. Friend appreciates, I was not present at those discussions, nor, I believe, were any of my hon. Friends. I am sure that the Paymaster General will want to comment on them in due course and in a moment I shall raise some of the concerns that were voiced. Our intention is to prevent innocent transactions from being caught by anti-avoidance measures that are quite proper in their intent, and we will listen carefully to what the Paymaster General says before deciding whether to press the amendments to a vote.

Amendments Nos. 77 to 80 aim to clarify that the sale or letting of property to a charity by a substantial donor at market value—that is, as part of a normal business transaction in which there is no special deal or arrangement between the substantial donor and the charity—would not be caught by the clause.

Amendment No. 81, has a similar aim—to clarify that an exchange of property between a charity and a substantial donor at market value will not be caught by the clause.

Amendment No. 82 aims to ensure that otherwise unexceptionable transactions by a charity are not caught by the legislation. One example of an unexceptionable transaction is when a charity buys a property from a substantial donor at full arm’s length value, whether or not the charity intends to use it for charitable purposes.

To illustrate the example, let us suppose that a private landowner owning 5 acres of farmland next to a school donates 1 acre of that land, worth £200,000, to the school for use as a playing field. The next year, he decides to sell the remaining 4 acres on the open market, of which the school buys another acre to build a new science block. If the school bought the same property at the same price from a non-donor, the expenditure would be treated as charitable expenditure. However, it is claimed that under proposed new section 506A(3) of the Income and Corporation Taxes Act 1988, the school would be caught and would have a tax liability of £60,000 in respect of purchase if it was a corporate charity and £80,000 if it was a trust.

Another example of an unexceptionable transaction is when a charity purchases property from a substantial donor as an investment that qualifies under any of the provisions of schedule 20 to the Income and Corporation Taxes Act 1988 except paragraph 5. To illustrate the example, let us suppose that a charity buys a house from a private householder as an investment. Under the same section of the Bill, it would have a tax liability of up to 40 per cent. of the value of the house if the householder was a substantial donor.

A third example is when a charity makes an investment in unquoted shares that qualify under paragraph 9 of our old friend schedule 20 of ICTA 1998. To illustrate, let us suppose that a charity enters into a joint venture agreement with a commercial company. For example, a health care charity might use its consultancy expertise to provide private health care services through such a joint venture. The charity holds 50 per cent. of the shares in the joint venture company and receives regular and substantial payments of gift aid from the company. The 50 per cent. subsidiary therefore becomes a substantial donor and, although the investment is a qualifying investment, tax will be charged on the amount of any share or loan capital invested by the charity in the associated company.

I turn to another example. The National Trust is concerned that the measures are drawn very widely and could catch many innocent transactions in which the trust has a relationship with substantial donors. It says:

“For example, the following situations could trigger a tax change in our circumstances: a donor family, living in a National Trust mansion free of charge or at a below-market rent under a historic agreement entered into at the time the mansion was donated to the Trust, who now make a substantial donation to the Trust”

to fund a restoration project at the mansion, for example. The National Trust believes that it would be caught by the clause.

Another example is when a trust purchasing land from a substantial donor needs to pay more for the land than its market value—for instance, when the trust makes a private offer to secure conservation land as an incentive to the vendor not to sell it on the open market or at auction. Those concerns were raised with me during the past few days, after I had prepared my initial remarks.

Amendment No. 83 seeks to remove subsection (3) from the Bill. The Charities Tax Reform Group argues that the subsection is drawn too widely and that in any case it is unnecessary because subsection (4), which catches all transactions on non-arm’s length rate terms, fulfils the same function. I would be interested to hear the Paymaster General’s response to that.

Amendment No. 84 seeks to remove subsection (4) from the Bill. The Charities Tax Reform Group argues that it can be difficult for a charity to establish what an arm’s length rate might be for the purposes of a transaction, and claims, with some force, that most charities do not have the resources to pay consultants in order to establish a market rate for every transaction. For instance, the market rate for the use of a charity’s name and logo in an advertising campaign varies from charity to charity. There is one main concern about the substantial donor clauses: a substantial donor to a small charity might be a very important donor whereas a substantial donor to a larger charity might not be so important. Perhaps that is illustrated by the point about the logos.

Will the Paymaster General tell the Committee what steps charities will be required to take to determine whether a transaction is at a market rate and what evidence they will have to retain? The Charities Tax Reform Group argues that unless subsection (4) is removed, charities will incur substantial compliance costs. However, if the subsection must be retained, and of course amendment No. 83, which I proposed, presumed that it would be retained—[Interruption.] I was waiting for some alert person—possibly the hon. Member for Wolverhampton, South-West—to get to his feet and ask why the Charities Tax Reform Group proposed to delete one subsection relying on another, and then to remove that other subsection. The Charities Tax Reform Group argues that if it must be retained—I am confident that the Paymaster General will say that it will be—there should be a de minimis amount beneath which Her Majesty’s Revenue and Customs would not dispute the amounts charged by or to a charity. I would be grateful to hear her comments.

Amendment No. 85 seeks to insert on page 39, line 26, after “remuneration”:

“unless it is paid either under a contract of employment at a rate not exceeding an arm’s length rate or”

for services as a trustee. The amendment aims to ensure that employees of a charity can be substantial donors to that charity. As it is, the subsection apparently means that if an employee of a charity who is not a trustee makes substantial donations to that charity, either under gift aid or as a deduction from payroll, that employee’s salary is to be treated as a non-charitable expense.

If the Paymaster General is unwilling to accept the amendment, she might at least make it clear that the subsection should apply only when an employee is paid more than another employee doing a similar job who is not a donor, and that it should be clarified that remuneration to an employee who is not a trustee does not need to be approved by the Charity Commission. I would be grateful for her comments.

Rob Marris (Labour, Wolverhampton South West)

I should now like to see whether we are alert; I had picked up on the point to which the hon. Gentleman referred about subsections (3) and (4). If I read amendment No. 85 correctly and if it were inserted, subsection (5) would read extremely oddly, to say the least. Is the hon. Gentleman aware of that?

Paul Goodman (Conservative, Wycombe)

What the hon. Gentleman thinks may read oddly is not necessarily what I think reads oddly. I should be happy for him to enlarge on that point.

Rob Marris (Labour, Wolverhampton South West)

Although I may be misreading it, under the amendment, subsection (5) would read that

“for the purposes of section 505 as non-charitable expenditure unless it is remuneration unless it is paid either under a contract of employment at a rate not exceeding an arm's length rate or for services as a trustee”.

If I have read that correctly, and I concede that I may have not, it is because the word “unless” is used twice within four words.

Paul Goodman (Conservative, Wycombe)

I think that the hon. Gentleman is using the term “odd” to describe something “inelegant”. I am willing to concede that it may not be elegant drafting, but I am sure that, legally speaking—although I am not a lawyer—it is effective or surely the amendment would not have been accepted for debate.

Perhaps I can move on to amendment No. 86, ready as I always am to be picked up by the hon. Gentleman for stylistic inelegance or, indeed, for any other matter. Amendment No. 86 would leave out lines 37 and 38 on page 39. Subsection (1)(a) of the proposed new section 68B provides an exemption where a transaction is undertaken as part of the donor’s business. As paragraph (b) deals with arm’s length terms, the Charities Tax Reform Group argues that there is no need for paragraph (a) and asks what difference it makes whether the transaction is a business transaction for the donor.

Amendment No. 87 returns us to the country explored in amendment No. 82 and would insert the words

“or is a Qualifying Investment for the purposes of Schedule 20 of ICTA 1988”.

Committee members will note that the amendment attempts in some detail to draw a more watertight definition of the words “recognised stock exchange.” The amendment would enable charities to continue to benefit from any investment by the charity that is a qualifying investment under schedule 20 to the Income and Corporation Taxes Act 1988. There appears to be no reason why charities dealing with substantial donors should be prevented from making qualifying investments that should surely be unexceptionable.

Amendment No. 88 would leave out the words “which is wholly” on page 40, line 23 and insert

“of which 50 per cent. or more of the shares is”.

Subsection (8) exempts transactions with trading subsidiaries from the new legislation. That exemption is arguably too narrowly drawn and should be extended to companies where the charity owns 50 per cent. or more of the company’s shares. Again, however, I should be interested to hear the Paymaster General’s view.

Amendment No. 89 would delete lines 1 to 6 on page 41 and insert

“(4) Subsection 3 of section 506A shall not apply to any transaction to which subsection 4 applies.’.”

The Charities Tax Reform Group believes that the amendment will “restrict the damage” that would otherwise be caused by subsection (3) of proposed section 506A if the Government will not accept amendment No. 83, which proposes to accept subsection (3). Committee members will recall, if they are exceptionally alert, the argument made a moment ago that subsection (3) is widely drawn.

Amendment No. 90 would insert a procedure that would provide an advance clearance procedure for charities, so that they can check whether potential transactions comply with new requirements of the legislation. If the Paymaster General is unwilling to accept the amendment, it would be helpful if she were able to give an assurance that charities seeking advance clearance on transactions would, in practice, be able to obtain advice from the HRMC. I imagine that she will be able to do so.

Rob Marris (Labour, Wolverhampton South West)

Before the hon. Gentleman deals with amendment No. 91, which is, in a sense, separate from amendment No. 90 and some connected amendments, can he tell me his preferred batting order if the Government were to accept these contradictory amendments? I think that he would accept that they are contradictory, or could not all be accepted, especially those dealing with subsections (3) and (4) of proposed section 506A. His amendments could not all be incorporated in an Act that made sense, because some of them delete bits to which others refer.

Paul Goodman (Conservative, Wycombe)

If I may quote the Economic Secretary earlier, that is a very interesting question. I cannot answer it until I hear what the Paymaster General says. I accept that the amendments do not all lead in the same direction. They are probing amendments designed to draw a response from the Paymaster General. I am unwilling in principle to press them to a Division, but I first want to hear what she says before I make it absolutely clear that I shall not.

The hon. Gentleman said that I was about to explain amendment No. 91, which would delete the words:

‘by reference to gifts made at any time’,

and insert

‘only by reference to gifts made on or after that date’.

As it stands, under the proposed section, the new provision should have effect on transactions occurring on or after 22 March 2006. In other words, it has a retrospective element. However, charities will not have time to upgrade their record-keeping requirements. They may not be aware that they are entering into transactions with people who qualify as substantial donors. The amendment would ensure that the rules apply only to transactions with donors who become substantial donors by reference to gifts made on or after 22 March, so that the charities can implement new systems of record keeping.

John Butterfill (Conservative, Bournemouth West)

I should perhaps state at this stage that I am advised that I may continue to chair the proceedings on these amendments, despite the fact that I am a trustee of three national charities and one substantial local charity. However, I have taken advice and I hope that the Committee will be happy with that.

Philip Dunne (Conservative, Ludlow)

I am grateful, Sir John. I should also declare that I am a trustee of, I suspect, less august charitable organisations than your good self.

I support in particular amendment No.91, which covers the retrospective nature of the proposals. I have no difficulty with the intent of the Government’s proposals to tighten up the provision to avoid potential abuse. However, they need to consider the practical nature of the definition of substantial donations, which goes back more than sixyears.

I will illustrate my argument from my experience as a former trustee of the Juvenile Diabetes Research Foundation, which is a worthy charity raising hundreds of millions of pounds globally each year. In the UK, it raises at least a couple of million pounds each year mostly from annual walks, which take place in cities throughout the country.

There are several examples of teams put together by individuals or families, often connected with diabetes, which raise several thousand pounds each year from sponsored donations and contributions. Many could qualify, on a cumulative basis, as substantial donors. However, it would be a difficult challenge for the charity to unravel the records of the many thousands of donations of what are currently sub-£1,000 amounts. Although the Paymaster General may respond by saying that the provision applies only to donations of £100,000 and that most charities will have records adequate to pick up large donations, I am not convinced that charities such as that which I gave as an example will have good enough record keeping to enable them to make that aggregation. A simple solution to the problem would be to accept my hon. Friend’s amendment, so that the legislation would take effect from the date of the Budget without requiring many charities to go to a great deal of time-consuming effort for no benefit to themselves and potentially very little to the Exchequer.

David Gauke (Conservative, South West Hertfordshire)

I, too, should like to speak to amendment No. 91. I have a particular concern that I hope the Paymaster General will address. As the Bill stands, how far back would charities need to look through their records? My hon. Friend the Member for Ludlow (Mr. Dunne) referred to six years, but I am concerned that it might be necessary for them to look back 11 years. I say that because the wording of new section 506A, subsection (2)(b)—[Interruption.] It has clearly caused a reaction somewhere, either in this world or another.

There is reference to £100,000 over a six-year period, and then to the following five chargeable periods. If donations were made between 1 January 1995 and, for argument’s sake, 1997, the six-year period in which the £100,000 would fall would run until 1 January 2001. At that point, we should apply the following “five chargeable periods”—that is the following five years—which takes us to 11 years after 1995. To amplify the point that my hon. Friend just made about the need for charities to look back, the way I interpret the clause is that the need for amendment No. 91 seems to be all the more significant. I shall be grateful for clarification from the Paymaster General.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I shall be brief. The clause seeks to deal with the abuse of charity tax reliefs, and we support the Government’s efforts to tackle that. It could prove to be an effective defence for charities that are trying to resist donors who want to attach strings to their gifts, and that is very important. As the intricacies of the Bill and the amendments show, relationships between charities and their donors can be very complicated, as the political parties are learning at the moment. What is the extent of the abuse that the clause seeks to overcome, and will it create further difficulties? Will it catch charities and donors inadvertently? I think in particular of the examples that have been given of charities that will have to look back at their records of regular donors to see at what point they might have become significant donors. I shall be grateful for clarification from the Paymaster General.

Dawn Primarolo (Labour, Bristol South)

Good afternoon, Sir John. I compliment the hon. Member for Wycombe (Mr. Goodman). This is a complex set of amendments, and he advanced his arguments very clearly. He made it clear that they are probing amendments, and acknowledged that there are issues to be dealt with, as did the hon. Member for Falmouth and Camborne.

I should like to start by answering the hon. Gentleman’s questions about the National Trust. He looked perplexed as he was making his statements and I was startled. There were two points. The first concerned a charity that pays more than the market rate. I have to say that any charity that did that would be in breach of charity law; such a situation has nothing to do with the Bill. If he wishes to make the point differently after the debate, I would be happy for him to write to me. As I am sure Members would all agree, however, 99.9 per cent. of charities do not undertake that type of planning, and they comply with the generous reliefs that apply. Secondly, he asked about tenants in historical premises. My understanding on that point is that contractual arrangements will not be caught by the new rules—that is clear.

The two points made by the hon. Gentleman go to the heart of the difficulties with the clauses and to the substantive debate on them, so I should like to remind Committee members why the provisions are necessary. I assume that the hon. Member for Falmouth and Camborne wants to know how much abuse there is already. Substantial donors either make payments or transfer assets to charities, and then receive back money, shares or property. Reliefs in the form of gift aid payments or share relief payments are then triggered depending on which of those applies. Having obtained the relief, the donor then gets back a loan that may, for example, carry no repayment schedule with it—in fact, the charity may not want to be paid back at all. So the substantial donor status is used as a money box to attract more reliefs, which is clearly not a charitable function. I think that that is scandalous and despicable.

In its reaction to the proposed provisions the charity sector has made it clear that it takes the same view. I agree with the Charity Finance Directors Group when it said:

“It is essential that the charity brand is protected and not tainted by association with tax avoidance schemes.”

Furthermore, the Charity Reform Group said that it

“strongly welcomes the introduction of measures to prevent the exploitation of tax reliefs for charities by substantial donors for their own benefit”

—rather than that of the charity. I could go on with a long list of important organisations that have commented.

I shall deal in turn with each of the hon. Gentleman’s substantive points on the amendments and explain why the Government regard them as unnecessary, because it seems to me that the amendments are based on a misunderstanding of what the clauses seek to achieve. There was some recent unfavourable coverage in the magazine Charity Finance, but I do not believe that the fears that have driven the drafting of the amendments will materialise.

The trigger comes not when the substantial donor makes a payment or transfers property to a charity. The trigger comes if there is then a relationship between the charity and the substantial donor, whereby something comes out of the charity. That is what starts the clock. The terms are not unfavourable for the charity, but they are most definitely favourable for the substantial donor, and that is not the point of the charity reliefs and their support.

The point of the charitable reliefs is to assist people in charitable giving and to enable that to happen, not to allow wealthy individuals to find ways of getting reliefs to which they are not entitled and damaging the process or, as the hon. Member for Falmouth and Camborne said, attempting to apply undue pressure on charities in order to get that advantage.

Brooks Newmark (Conservative, Braintree)

Although I cannot but agree with the Paymaster General and support her substantive point, the use of slightly selective quotes concerns me. Yes, the Charity Finance Directors Group was complimentary about the measure, and so was the Charities Tax Reform Group, to which the Minister referred, which said:

“While CTRG strongly supports measures to prevent the tax reliefs for charities being abused, we are concerned that it will become a responsibility on the charity to police transactions entered into with substantial donors and it will be the charity that could face a tax liability where it fails to do so even if innocently.”

It is the “innocent” matter that my hon. Friend the Member for Wycombe and the Charities Tax Reform Group raised.

Dawn Primarolo (Labour, Bristol South)

I shall come to those points, and the amendments, in a moment. I shall be careful here because our debates have an important audience that we want to reassure.

I say to the hon. Gentleman, first, that charities understand their obligations under charity law and they ensure that the transactions that they undertake are in the best interests of the charity. Those organisations are equally able to understand—although they may be subject to pressure, on which I cannot comment—when they are making what is in effect an unrelievable transaction or one that is clearly not to the benefit of the charity. That is what is at the heart of the proposal.

Brooks Newmark (Conservative, Braintree)

Will the hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

If the hon. Gentleman will let me make progress on the amendments he will see that his fears about whether innocent transactions will be caught or about the requirement for more record-taking and so on are unfounded, and I will try to reassure him.

In terms of possible loss, it is very difficult to give a precise figure because much of it would not necessarily be reported to HMRC, but on the basis of the information that HMRC currently has, £60 million of reliefs are finding their way to being used in that avoidance mechanism. It is in the best interests of charities and of taxpayers that that loss of revenue is not seen either to increase or to close off the opportunities, as the amendments propose.

Quite the reverse of the points that have been made in the debate, the measure protects charities because it makes it clearer under what circumstances they can make transactions. Those transactions that fall outside those circumstances are not therefore relievable, although they are not supposed to undertake any transactions as charities that are not in pursuit of their charitable aims, so there is a little mixing of the pot.

As an experienced Chairman of our Committees, Sir John, and of the charities on behalf of which you are very active, you will know that charities are extremely careful to ensure that they comply with charitable law, in the best interests of their objectives, unlike individuals who may just want extra money from the taxpayer to which they are not entitled.

Amendments Nos. 77 and 79 deal with the sale or letting of property or the provision of services by a charity to a substantial donor. There is no exception for the provision of property and only a limited one for services provided by a charity as part of its primary charitable purposes. However, a charge would only arise on a charity under proposed section 506A(4) where the terms of the transaction are less beneficial to the charity than would be expected in an arm’s length transaction—and then, only the difference in terms. So, this is saying to a charity that it should make sure it does not make transactions that are actually less beneficial to it. Amendments Nos. 77 and 79 replicate that effect, so they are unnecessary, as provision has already been made.

Amendments Nos. 78 and 80 deal, as the hon. Member for Wycombe said, with the sale or letting of property, or the provision of services, by a substantial donor to a charity. Expenditure by a charity on such transactions is treated as non-charitable expenditure by virtue of proposed section 506A(3) and will result in a restriction of the charity’s tax exemptions. An exception removes the charity from such treatment where it is purchasing property or services from a substantial donor’s business—we are not saying that there is no relationship—on terms that are no less beneficial to the charity than the arm’s length terms; that is, the same as everybody else. The intention is to ensure that most commercial transactions between a charity and a substantial donor are not caught.

Amendments Nos. 78 and 80 have the opposite effect. As we discussed, their effect is entirely contradictory by ensuring that clause 54 catches only transactions that are more beneficial to the charity than the arm’s length terms, and lets out the very transactions that the clauses are designed to stop—namely, those that are on terms detrimental to the charity. I think the hon. Gentleman acknowledged that that may have been down to a drafting error when he made the point that he was really seeking clarification, as we go through the various subsections of proposed section 506A, on what exactly happens there.

Amendment No. 81 seeks to prevent exchanges of property between a substantial donor and a charity from being caught by the rules. As with amendments Nos. 77 and 79, it is unnecessary as a charge will arise under proposed section 506A(4) only in relation to an exchange of property where the terms of the transaction are less beneficial to the charity than the arm’s length terms.

Amendment No. 82 seeks to ensure that any transaction involving investments would qualify for relief under schedule 20 of the Income and Corporation Taxes Act 1988 and will not be caught by the new rules. I am afraid that I could not support such a change. Schedule 20 provides charities with a list of qualifying investments and loans that are acceptable for charity investment. While that works well for most charities, it is at times open to abuse by controlled charities. Clause 54 imposes additional protection, trying to ensure that such abuse cannot occur.

Amendments Nos. 83 and 84 seek to remove entirely the charging provisions from the legislation. Hon. Members will not be surprised to hear that I am not at all attracted to that idea. It would leave legislation that would have no effect. I am trying to convey to the Committee how important it is as a matter of principle for charities and for the continuation of security that those who give to charities believe that they will have.

Amendment No. 83 removes section 506A(3). That is the principal charging mechanism in clause 54. If I accepted the amendment, which I will not, HMRC would be unable to restrict a charity’s tax exemption where it entered into a transaction with a substantial donor that is not otherwise accepted. Instead HMRC would be forced to rely on the application of section 506A(4) to penalise such behaviour. However, amendment No. 84 also calls for the removal of section 506A(4), which is the secondary charging provision. The legislation would be effectively gutted. I have tried to make it clear why clause 54 is necessary to prevent the abuse of the charity reliefs.

Amendment No. 85 is intended to ensure that employees of a charity are able to donate large sums to the charity without being designated as substantial donors. I cannot accept the amendment. An extension of the rule that prevents a payment of remuneration for services as a trustee is on the face of it reasonable, but the rules are targeted at those who abuse the reliefs. Providing for the payment of employees not to be caught would enable artificial employments to be created by those still seeking to abuse the charitable relief.

Charitable workers are not always the most well-paid people. It is almost a vocation. The individuals concerned are making a huge contribution. In looking across the work of charities and how much they pay and whom they employ I do not see that the problem could arise and so it increases my anxiety that ghost employment might be created here in order to create a category of employees.

Paul Goodman (Conservative, Wycombe)

The Paymaster General said that she was minded not to accept amendment No. 85. She said that the rules are targeted at those who abuse the reliefs. But will the proposed changes also catch those who do not abuse the reliefs? If so, what justification is there for that?

Dawn Primarolo (Labour, Bristol South)

I was going to come to the point about those who do not abuse the reliefs. I touched on it in my opening remarks. If the charities are behaving according to charity law and are acting in the best interests of their charitable objectives, they cannot innocently have been in a transaction of this type because they would have noticed that they were paying or transferring value to a substantial donor that would not have been in the best interests of the charity. That comes back to the point about record keeping. Charities know well enough what they are doing. The overwhelming majority will have no concerns about the clauses. Although it is unfortunate, it sometimes happens—thus the requirement on HMRC.

There are some who, to put it politely, have the wrong end of the stick about what is happening. They have raised a number of questions in the amendments. I can understand why charities would be fearful if such concerns were well founded, but they are not. Those who have moved the amendments are mistaken. That is why I am taking as much care as I can in responding to give assurance that the fears underpinning the amendments—more record-keeping, taxation of innocent transactions, restriction of charities—are ill-founded. The hon. Member for Falmouth and Camborne hit the nail on the head when she said that the legislation will actually stop the pressure that might be applied to charities by those who might seek to achieve an advantage for themselves.

Since 1997, the Government have given great care to such questions. I have a long list of all the legislation, changes in tax and work that we have done with the charitable and voluntary sector. I shall not read it out, but it cannot be disputed that we have done everything possible at every point to assist charities and charitable giving.

Amendment No. 86 aims to ensure that when a substantial donor sells or leases property or provides services to a charity, such transactions will be excepted where the transaction takes place at arm’s length. Again, I cannot accept the amendment. As I mentioned in relation to an earlier amendment, proposed new section 506B(1) contains an exception that will ensure that the sale or letting of property or the provision of services by a substantial donor will not be caught by the rules where they are provided in the course of the substantial donor’s business on terms that are no less official to the charity than the arm’s length terms. The overwhelming majority of such transactions will take place in the course of a donor’s business. The exception in section 506B(1) strikes the balance between eliminating the avoidance risk and ensuring that innocent commercial transactions entered into by charities are not caught. We are trying to do precisely what the hon. Member for Wycombe suggested.

Amendment No. 87 seeks to extend the investments that a charity can make in a donor’s business to include shares and securities listed on a market recognised by the European Union, securities admitted to trading on the alternative investment market and any investment that is a qualified investment for the purposes of schedule 20 to the Income and Corporation Taxes Act 1988.

The existing exemption in section 506B(4) prevents investments in shares or securities listed on recognised stock exchanges from being caught by the new laws. Such an exception is drafted widely enough to prevent the most common charity investments from being caught. Although extending the list of investments to include those in the European Union list sounds desirable, I do not believe that there is a material difference between the lists of exchanges maintained by the European Union and those on the list of recognised stock exchanges.

Helen Goodman (Labour, Bishop Auckland)

I am not clear about how that will work in practice. It would be usual for a charity to hand over its investment responsibilities to a bank. It would agree an overall strategy but, having handed matters over to a bank, would not be involved in detailed decision making on individual investments. However, the managing bank might invest in a portfolio that included someone who had made an donation. Will my right hon. Friend clarify that that situation will not be caught by the clause?

Dawn Primarolo (Labour, Bristol South)

That would not be caught because such matters would be part of the charity’s usual business when pursuing its objectives. We thought that the particular abuse in a small number of cases had been made clear to the charitable sector in respect of the relationship between the substantial donor and the charity in the sense of money shares, property going in and benefit coming directly out to the individual.

I was trying not to jump around in respect of the amendments, but the donation could have made to the charity by a substantial donor and the benefits be yet to be acquired. The provision would make sure that those benefits could not be acquired, though substantial donors had still given money to the charity that had received the necessary relief. We should applaud the donors for that, but they will not be receiving benefit as a result of the provision. Confusion arises under amendment No. 91 about whether the action is retrospective. I am sure that members of the Committee are not suggesting that, when someone has already arranged for a completely unacceptable use of charitable reliefs, we should allow it to continue. As I said, that is triggered by what happens to what comes out of the charity—hence, the period of six years.

Mr. Gaukerose—

Mr. Dunnerose—

Dawn Primarolo (Labour, Bristol South)

I have got out of order. I am happy to go straight to amendment No. 91. The issue is about what happens in the case of the charity with an interest or property that it invests in an individual’s company at a high rate, but receives a poor rate of return, and it is absolutely transparent to everyone that that is the case. That is not really something that we expect charities to feel it necessary to do in pursuit of their charitable objectives, nor should they.

David Gauke (Conservative, South West Hertfordshire)

I wanted to intervene in case the Paymaster General was about to conclude her remarks.

Dawn Primarolo (Labour, Bristol South)

Good grief, no.

David Gauke (Conservative, South West Hertfordshire)

That comes as a relief to us all. I wanted merely to question the point about whether the time was five, six or 11 years. The worry that some of us have is about the bureaucratic burden that may fall on charities to check previous donations to ensure how far back they need to go to be confident that they will not be caught under clause 54.

Dawn Primarolo (Labour, Bristol South)

I do not know whether the hon. Gentleman is struggling with the idea that somehow a charity does not know that it is about to invest in a company that has been triggered. The charity might choose that company because it is wholly owned by a substantial donor or is receiving a substantial loan with no repayment details and an understanding that the loan will be struck out. I cannot believe that a charity will not know clearly the relationship between the substantial donor and the proposed transaction.

The issue that the hon. Gentleman raised was about innocents being affected. The transactions in question may be acceptable in the best interests of the charity if they trigger reliefs in pursuit of charitable objectives and in the course of the substantial donor’s “normal business,” or if the charity might have had the same relationship with any other company without a substantial donor. I am trying to be clear and reassure the Committee that the aim is to target mischief, not to prevent charities from working. The question of the time involved is difficult. In exceptional circumstances, the HMRC has seen that, in such schemes, there might be quite a long gap between resources going in and benefit coming out.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I understand that the target of the regulations is charities that are consciously exploiting loopholes and seeking to benefit a major donor. Will the Paymaster General accept that there are charities with substantial major donors that are acting perfectly within the law but will now have to take on an additional burden of compliance?

Dawn Primarolo (Labour, Bristol South)

No, I cannot accept that. We are discussing a very narrow set of circumstances. If a charity is complying with charity law and the requirements of its charitable status, all its transactions should comply with them. That is true particularly if the charity is accessing reliefs that are specifically for charitable purposes.

We are discussing whether the transactions in question should enable access to reliefs. If hon. Members can give me specific examples—it does not have to be done today—I will certainly consider the issues raised. If examples cannot be provided, with an explanation of why the people involved should not be covered by the measure or should be because they are committing the abuse that we are trying to deal with, I cannot address the more general matter of whether innocents will be caught. I say to the Committee and those who listen to our proceedings that if they have more information than they have provided us with to date, they should come forward with it. Our current information is not detailed enough.

Philip Dunne (Conservative, Ludlow)

I seek to give such an example. My concern relates solely to subsection (1)(d) in proposed new section 506A on

“the provision of services to a charity and a substantial donor”.

There might be individuals who are not substantial donors, but who are providing services to a charity, such as their own time for lay review on a charity’s medical committee. Individuals whose donations differ from year to year may suddenly become beneficiaries of a windfall, have substantial funds to make available to a charity and then make a substantial donation. As a result, their relationship might be caught under the provisions in clause 54.

Under proposed new section 506B(1), it will be for the HMRC to determine whether a transaction is caught by those provisions. I am concerned about record keeping, as is the hon. Member for Falmouth and Camborne. For reasons with which all Members will sympathise, we are placing an obligation on charities that extends way beyond what is necessary to restrict dubious transactions, which the Paymaster General is rightly seeking to do.

The Paymaster General might say that my example is not relevant and that such relief will not apply because it will be caught by the exemptions. Surely, however, that does not obviate the need for the charities to continue to keep records of individuals who might become substantial donors. I do not have a problem with that going forward, but there is a problem if charities have to look back through the records for anybody who might subsequently be caught under the clause.

Dawn Primarolo (Labour, Bristol South)

I disagree with the hon. Gentleman entirely. Fundraising charities know who their major donors are; that is good fundraising practice. They keep such records and invest a great deal of time and effort into securing their revenue, or future increases in it.

Proposed new section 506B(1) ensures that the

“sale or letting of property”,

or

“the provision of services...by a substantial donor”

will not be caught by the rules when provided in the course of the substantial donor’s business

“on terms which are no less beneficial to the charity than...a transaction at arm’s length”.

That draws the distinction in the relationship with a substantial donor with which we are trying to deal.

Helen Goodman (Labour, Bishop Auckland)

Does my right hon. Friend agree that there will not be a burden on charities of increased record keeping? Every year they submit their reporting accounts to Companies House, at the back of which must be an annexe listing all donors, including donors substantially below the level set out here. Furthermore, they are required to keep copies of those accounts going back either seven or 10 years—I cannot remember which. Certainly, that covers the proposals in the clause.

Dawn Primarolo (Labour, Bristol South)

I agree with my hon. Friend. In my experience, charities are very thorough about knowing who their substantial donors are and about ensuring the best possible outcome in the interest of their charitable objectives. That matter is being confused here. The issue is not whether they have a relationship with substantial donors for the provision of businesses or services, but that that is conducted in a transparent way. I know of no charity that does not drive a hard bargain in seeking to get services, provisions or support in the best possible circumstances for that charity and its purposes. They are excellent at it, and a jolly good job too. That is part of making sure that their resources are efficiently used.

David Gauke (Conservative, South West Hertfordshire)

I come back to this question of timing. The Paymaster General may be pleased to know that I will approach this from a slightly different tack and for argument’s sake I fully accept her point that clause 54 relates only to dubious transactions that should be picked up. If the donations were made in 1996, 1997 or 1998 and then the payment under subsection (3) or the transaction at less than arm’s length value in subsection (4) occurs in 2006, will the clause be effective in dealing with that? In other words, will it deal with mischief going back 11 years or does it go back only five or six years?

Dawn Primarolo (Labour, Bristol South)

In all truthfulness it is feasible that there could be limited circumstances in which it could go back 11 years. The hon. Gentleman suggests that the abuse has gone on for a much longer period of time and is much more widespread than HMRC believes. HMRC’s view will be based on information and knowledge that it collects in running the tax system on our behalf. I cannot give the hon. Gentleman an absolute assurance that there might not be exceptional circumstances and some charities might be in that position. In those circumstances, they would need intensive support and clear guidance from HMRC, but that happens in the tax system in exceptional circumstances.

David Gauke (Conservative, South West Hertfordshire)

My point was merely a question of interpretation as to what the clause is saying. I think that the Paymaster General has clarified that. Because of the £100,000 over six years, it may be possible to look back 11 years. That is a point that charities will need to bear in mind, whether they are acting mischievously or otherwise.

Dawn Primarolo (Labour, Bristol South)

The best way to avoid that is not to engage in those arrangements from now on. Charities will then not have to look back, so the issues that the hon. Gentleman raises will not need to be addressed. This rather flexible use, perhaps unintentionally, of retrospection came in because it is the second part of the transaction when that is triggered.

I shall not speak to the Government amendments. The hon. Gentleman and others have welcomed them and it was necessary for the Government to make them. I hope that I have assured the Committee—

George Young (Conservative, North West Hampshire)

On Government amendment No. 63, which as the Paymaster General said is welcomed by registered social landlords, can she confirm that the Treasury cleared it with the Housing Corporation and that those transactions that will now be exempted by the Treasury will not be caught by the Housing Corporation objecting to substantial donations being made by a housing association to a charity that it set up?

Dawn Primarolo (Labour, Bristol South)

I apologise to the right hon. Gentleman. I cannot answer that detailed question. It is an important point and I wish that I had thought of it. I will write to the right hon. Gentleman and give every Committee member a copy of the letter. I shall keep my fingers crossed that that is all in order, as it was precisely because of the interaction with controls and regulations that it was felt that these changes could be made. I do not quite have the confidence to give the right hon. Gentleman a straight yes answer this minute. [Interruption.] With the elapsing of 30 seconds, I am apparently able to answer yes, but I should still like to consider the matter and write to the right hon. Gentleman, because it is an important point.

In conclusion, I hope that I have been able to convey to the Committee that the Government took great care with this legislation and did their best to obtain the correct balance between trying to stop the abuse of the reliefs and ensuring as much as possible that the law-abiding charities were not affected by these changes. I hope, therefore, that the hon. Member for Wycombe, in the spirit that he moved the amendment, will not press the amendments today, even if he wants to reserve his position on some of the answers I have given. I hope that he is reassured on a number of points.

Helen Goodman (Labour, Bishop Auckland)

I am grateful to the Paymaster General for the way in which she responded in her marathon speech that would otherwise have been the responsibility of the Economic Secretary. She suggested, at the start of her response, that some of the objections by the Charities Tax Reform Group may have come rather late and may work contrary to the general welcomes of other organisations, which I mentioned on moving my amendment.

Reservations have been expressed by others, including the Law Commission and the Chartered Institute of Taxation, as I said, but generally the Paymaster General sought, having listened to concerns about innocent transactions being caught, to say either, “Innocent transactions won’t be caught and I give guarantees and assurances”—which were welcome—or that some of the examples given should be exceptionable transactions. My hon. Friends and I still have some reservations about her response, particularly to amendment No. 91 on substantial donors. She argued that charities know who their substantial donors are. However, there may be a donor who is a substantial donor, who later, for one reason or another, stops being one, or there may be a donor who was not a substantial donor, who later becomes one. That takes us back to issues about bookkeeping and how far back charities will have to look.

We will not press the amendment to a vote. We heard the Paymaster General’s reassurances, but there may be some matters to which we will wish to return in due course. I beg to ask leave to withdraw the amendment.