Clause 35 - Relief for television production and video games development

Finance Bill – in a Public Bill Committee am 10:45 am ar 4 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of David Crausby David Crausby Llafur, Bolton North East

With this it will be convenient to discuss the following:

That schedule 15 be the Fifteenth schedule to the Bill.

Government amendments 39 to 45.

That schedule 16 be the Sixteenth schedule to the Bill.

Government amendments 46 to 49.

That schedule 17 be the Seventeenth schedule to the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 35 and schedules 15 to 17 introduce the new corporation tax reliefs for companies producing animation, high-end television and video games. The tax reliefs will play an important role in enabling companies in those creative industries to continue to make their valuable economic and cultural contributions to the UK as part of a dynamic and diversified economy.

Before I set out the detail of the clause and schedules, I shall provide hon. Members with some background to the Government’s decision to introduce such tax reliefs. The UK is a world leader in these industries, with a strong reputation for high-quality work and for the talent and skill of its work force. We are taking steps to ensure that remains the case in the future.

These are highly skilled, innovative and export-oriented sectors, but they are also highly mobile. Without Government intervention, there is a risk that under-investment in these industries will result in valuable productions moving overseas or not being made at all. It is also the case that, in contrast to a growing number of countries who offer targeted incentives, the UK can be seen as uncompetitive by companies operating in these industries. We intend to address that.

Clause 35 and schedules 15 to 17 will enable existing animation, high-end television and video games production to remain in the United Kingdom, and will also encourage inward investment. The changes made by clause 35 and schedules 15 to 17 will benefit hundreds of UK companies involved in producing animation, high-end television and video games. They will benefit companies across the UK, from video games developers in Dundee and east London to animators and television producers in Bristol, Manchester and Northern Ireland. These new  reliefs are forecast to provide over £100 million of support for these industries by the end of the scorecard period in 2017-18.

Let me explain how these tax reliefs will work. These new creative sector tax reliefs are modelled on the existing film tax relief, which provided more than £200 million of support to 320 British films in 2011-12. The new reliefs will benefit companies involved directly in the making of qualifying animated or high-end television programmes or video games. Companies will be eligible for a payable tax credit worth up to 25% of qualifying production expenditure, which equates to an effective 20% rate across the total production budget. That will ensure that they are competitive with incentives available elsewhere in the world.

Like the film tax relief, productions will need to be certified as culturally British by passing a cultural test or be made under an official co-production treaty in order to be eligible for relief. The cultural test application is straightforward for companies, and will be administered by the British Film Institute, which already administers the film tax relief cultural test on behalf of the Department for Culture, Media and Sport.

Like the film tax relief, these new creative sector tax reliefs require state aid approval from the European Commission before they can be implemented. The animation and high-end television tax reliefs were cleared at the end of March. They will commence as planned on 1 April 2013.

As confirmed at Budget 2013, the video games tax relief will be introduced following state aid approval. Since then the Commission has taken the decision to open a formal investigation into the scheme. The process for, and duration of, the Commission’s investigation are determined by the Commission itself. Nevertheless, the Government are working closely with industry to provide the Commission with the evidence it needs to conclude its investigation as quickly as possible.

Photo of James Duddridge James Duddridge Chair, Regulatory Reform Committee, Chair, Regulatory Reform Committee

I thank the Minister for providing the draft statutory instruments. Perhaps this will go straight on to the Department for Culture, Media and Sport, but what consideration have the Government given to reviewing and simplifying for animation the template that is used for films? I have read through the proposed statutory instrument, and it is almost a satirical farce. Points are awarded if three characters are from the UK; if the lead character is from the UK there is one extra point. It is almost as if it is a political satire. I appreciate that this is not about tax treatment, but perhaps there is an opportunity to review some of the historical, cultural tests for films as well as for animation.

Photo of David Gauke David Gauke The Exchequer Secretary

I fully appreciate the concern that my hon. Friend raised. We should always seek to simplify matters as much as possible. To a large extent, we are constrained by having to ensure that the rules satisfy the constraints on state aid, which means that there is a need to take into account cultural tests. It is also fair to say that the revised film tax relief system, as opposed to its earliest form, appears to have been successful. It is widely used and has contributed to a thriving film industry.

Truth be told, minimising complexity and ensuring straightforward compliance was a central consideration in designing these reliefs. That is why we are basing the new reliefs on the existing regime that applies for film tax credits, which is successful and well understood. We have worked closely with industry in determining the design of the reliefs, to ensure that they work for their specific working practices. Officials continue to engage with industry by, for example, attending events to help and advise in the run-up to companies making claims. Ultimately, detailed guidance will be published on the HMRC and British Film Institute websites, to ensure that companies get the support that they need.

It may help if I outline the extensive, productive consultation on the design of the tax reliefs. The Government’s main consultation on the design of the new tax reliefs took place over summer last year. There were 54 responses from interested parties. The Department for Culture, Media and Sport also conducted a shorter, separate consultation, during October, on the design of the cultural test. There has been constructive, positive engagement with businesses of all sizes during the consultations, including significant input from industry representative bodies and professional groups. That has ensured that the reliefs are designed to work effectively in a way that fits with the specific working practices of each industry, meaning that our final proposals have been widely welcomed. Furthermore, as a direct result of concerns being expressed by interested parties during the consultation, the Government have taken steps to ensure that sufficient investment is made in skills development in the sectors, covered by the creative sector tax reliefs.

Photo of Jim Shannon Jim Shannon Shadow DUP Spokesperson (Health), Shadow DUP Spokesperson (Transport), Shadow DUP Spokesperson (Human Rights) 11:00, 4 Mehefin 2013

The Minister has mentioned the advantages for all Administrations, including the Northern Ireland Assembly, the Scottish Parliament and the Welsh Assembly. What discussions have the Government had with the Northern Ireland Assembly, for example, in relation to the creative industries and the film industry in particular? In Northern Ireland we have a growth industry. Lots of jobs have been created and there have been lots of opportunities. Money has been spent and investment has gone in from private enterprises as well. I am keen to ensure that the Northern Ireland Assembly Administration has input into Government policy and works together with the Government.

Photo of David Gauke David Gauke The Exchequer Secretary

There has been an extensive consultation programme. I know, from personal experience, that the First Minister and Deputy First Minister have a close interest in this area. I am not sure that I can provide the hon. Gentleman with details of the correspondence at this point, but I have no reason to believe that there has not been proper engagement with the devolved Administrations. I am well aware that the Northern Ireland Administration have taken a close interest in this area. We have certainly been engaged with them. Representatives of the devolved Administrations have been in touch with Treasury and HMRC officials. There was Northern Irish involvement in the working group that has participated in the process. I hope that that provides the hon. Gentleman with some reassurance.

We have reflected and responded to representations that we have received. In the autumn statement last year we announced £6 million match funding for skills development in these sectors over the next two years. That was extended to £16 million in the recent Budget. In addition, the Government are keen to explore options to provide further support for the visual effects industry through the tax system; a public consultation on the subject was launched in April.

Schedule 15 introduces new tax reliefs for animation and high-end television production. It enables qualifying companies engaged in the production of animation and high-end television programmes intended for release to the general public to claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, to surrender those losses for a payable tax credit.

Photo of Stephen Doughty Stephen Doughty Llafur, De Caerdydd a Phenarth

The Minister will be aware of my interest in such matters given that, although we do not know who the next Doctor will be, we can be pretty sure that he will regenerate in Cardiff bay. What does the Minister mean by “high-end television”? I certainly consider “Doctor Who” and other Cardiff-based productions to be in that category, and I have noted the many exemptions listed in the Bill for what is not covered by tax relief. Will he give us a bit more detail on what is meant by “high-end” and what productions would benefit from such relief?

Photo of David Gauke David Gauke The Exchequer Secretary

I am grateful to the hon. Gentleman for raising his constituency issue, which is closely supported by the Gauke household, where there is great interest in who the next Doctor Who may be.

Photo of David Gauke David Gauke The Exchequer Secretary

Who would want to miss out on the excitement of Finance Bills in order to deal with Daleks, Cybermen and what have you? Perhaps I should not explore that point—[ Laughter. ] To answer the question, the definition of high-end television is based on the cost-per-hour of production, which deals with the more expensive television productions. I am not able to confirm whether “Doctor Who” falls within that category, but I suspect that it probably does. The measure should be helpful to the creative sector, and the hon. Gentleman is right to suggest that it would be significant for Cardiff.

Both the additional deduction and the payable credit are calculated on the basis of UK core expenditure up to a maximum of 80% of the total core expenditure by the qualifying company. The additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. The credit is based on the company’s qualifying expenditure on the production of a qualifying animation or high-end television programme, of which at least 25% of the qualifying expenditure must be on goods or services used or consumed in the UK. The animation or high-end television programme must be certified as a culturally British product to qualify for the tax credit.

Schedule 16 introduces a new video games development relief. As with schedule 15, it will enable eligible companies engaged in the production of qualifying video games intended for supply to the general public to claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, to surrender those losses for a payable tax credit.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

This may be a naive question, but I could not find a definition of “video game” in the provisions. Are we just talking about games for the Xbox or similar or will an app on an iPad or iPhone count?

Photo of David Gauke David Gauke The Exchequer Secretary

It is a question of meeting certain requirements, rather than a game necessarily having to be on the Xbox.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

Other consoles are available.

Photo of David Gauke David Gauke The Exchequer Secretary

Indeed. All platforms are covered, which includes whether a game is boxed, online or an app. I hope that that provides some clarification.

Photo of Fiona O'Donnell Fiona O'Donnell Llafur, East Lothian

I wonder whether the Minister would take this opportunity to say whether he regrets that the Government did not act sooner to support the sector and to take forward the commitment that was in the Labour party’s manifesto. Not doing so has damaged the sector in cities such as Dundee.

Photo of David Gauke David Gauke The Exchequer Secretary

We did look closely at the evidence and, if truth be told, the evidence for a video games tax relief has grown stronger over the course of this Parliament. We looked at the evidence and decided to proceed with video games tax relief. That will be of particular benefit to Dundee, which is strong in the sector, and we hope that it will go from strength to strength. If I remember correctly, the Scottish Affairs Committee looked at the issue in 2011 and did not actually recommend going forward with a video games tax relief. I am sure that the hon. Lady will correct me if I am wrong, because she was a member of that Committee at the time.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead

I have an interest inasmuch as in my constituency, Gateshead, there is a video games company called Eutechnyx, which is thriving, but could be doing even better. It is very much involved in the international market. The video games industry is not unique, but it is certainly niche in that it generates international competition that is easily moveable. I really think that the Minister should think again about the issue because the market in which companies are operating is so fluid.

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman underlines why we want to proceed with video games tax relief. He is right that there is international competition—for example, Canada has a very generous tax regime for the sector. There is a risk that UK business could be lost. That is why we have introduced schedule 16, within which the additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. The credit is based on the company’s qualifying expenditure on the production of a qualifying video game, for which at least 25% of qualifying expenditure must be on  goods or services used or consumed in the UK. The game must be certified as a culturally British product to qualify for the tax credits.

Photo of Fiona O'Donnell Fiona O'Donnell Llafur, East Lothian

I apologise to the Minister that I was unable to get to my feet to respond sooner. As the hon. Member for Warrington South—who passed the Minister a note—well remembers, because he was also a member of the Scottish Affairs Committee, I voiced concerns at the time about the recommendations of that Committee report, and I think that the Scottish Affairs Committee would now agree that on that occasion it got it wrong.

Photo of David Gauke David Gauke The Exchequer Secretary

I stand corrected. I am not a member of the Scottish Affairs Committee; that is something that I aspire to almost as much as becoming the next Doctor Who—[ Laughter. ] If the hon. Lady is telling me that the Committee recommended against a video games tax relief but she was in favour, I will take that.

Photo of Fiona O'Donnell Fiona O'Donnell Llafur, East Lothian

Given that time travel back to the time of that report is not quite possible for the Minister—yet—I was saying that he got it right about the Committee’s report, but that the Committee got its recommendations wrong.

Photo of David Gauke David Gauke The Exchequer Secretary

I take that. She is right to detect that my hon. Friend the Member for Warrington South, who had the privilege of being a member of that Committee at the time, was suggesting that that was the case. I do not think that there were any minority reports or divisions on the matter. I am not sure where the Scottish Affairs Committee finally stood on the issue, but I note her points.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 11:15, 4 Mehefin 2013

I do not wish to return to the Scottish Affairs Committee, although I was also a member of that Committee at that time. I want to return to the Minister’s point on the draft regulations and the cultural test. The draft regulations state:

“The cultural tests do not stipulate content, location of production, or selection of practitioners, but the tests do ask for a reasonable amount of production activity”.

I worry when we have terms like “a reasonable amount”. Will the Minister give some indication of what is “a reasonable amount” of production activity taking place in the UK for something to qualify as British?

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Lady will be aware that we need to ensure that we comply with the requirements on state aid. There are cultural tests within that that we need to comply with. It is worth pointing out that the film tax relief requires a production to pass a cultural test to be eligible, and that has not stopped an effective scheme from operating. We do not expect that the cultural tests will stop the schemes being effective with the new creative sector tax reliefs.

As for the specific requirements for how much activity should occur within the UK, it would be fair to say that it is difficult to nail down a definition of “reasonable amount” for these purposes. The game must be certified as a culturally British product to qualify for the tax  credit, and part of that relates to activity in the UK. I am not sure that we can be too specific about that at this point.

Schedule 17 introduces consequential amendments to other parts of the Tax Acts relating to the introduction of the new reliefs.

As for the future changes, an animation, high-end television programme or video game must be certified as culturally British to be eligible for tax relief. Schedules 15 and 16 include a power to introduce points-based cultural tests for each new relief. Those tests will help determine whether a programme or video game may be certified as culturally British by the Secretary of State for Culture, Media and Sport. A statutory instrument will be introduced through the negative procedure immediately after the Bill receives Royal Assent. As we have already heard from my hon. Friend the Member for Rochford and Southend East, who, as ever, is assiduous, a draft of the statutory instrument has been provided to the House. We will keep the new relief under review alongside other measures in the Government’s package of corporate tax reforms to ensure that businesses are benefiting in the way we intended and that the new regimes are not being exploited for tax avoidance or fraudulent purposes.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

I have a quick question about the definition of video games, which excludes anything produced for advertising or promotional purposes. The Minister may not be aware that some downloaded games are free, but occasionally have an advert popping up. I guess that that is how they make the revenue to justify the game, but will that mean that the game does not qualify for the relief? Is it a balance of things? If the whole game is not designed as an advert for one person from the start, but has a series of small and occasional adverts, would that be okay? It would be helpful to have clarity on how the rules will be interpreted.

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend makes a detailed point. I may address that particular concern before I sit down or perhaps later in these proceedings. No, let us not beat about the bush; I shall turn to this important issue. I say to him that the game itself will qualify, but the expenditure on the adverts themselves will not qualify. I hope that that provides clarity on that question.

Returning to Government amendments 39 to 49, in light of the ongoing Commission investigation, the amendment that we are discussing now provides the Government with limited powers to update schedule 16 of clause 35 to reflect any changes needed to ensure that video games tax relief is compliant with state aid rules. It will also ensure that the Government are in a position to legislate on changes at the earliest opportunity. Without it, businesses and investors would need to wait for legislation to progress through the next Finance Bill. It will therefore prevent any such uncertainty, and it underlines the Government’s commitment to introduce the relief as quickly as possible.

In conclusion, the new creative sector tax reliefs will help to maintain the UK’s position as a world leader in producing animation, high-end television and video games, encouraging investment and promoting long-term sustainability within those industries. I hope that the clause and schedules can stand part of the Bill.

Photo of Stephen Doughty Stephen Doughty Llafur, De Caerdydd a Phenarth

I just want to ask the Minister one final question. I am a member of the Performance Alliance here in Parliament and I attended a reception that it organised before Christmas. There were many representatives there from the video games industry. They will undoubtedly welcome the support for the industry that is being proposed here. However, one of their concerns was the very low rates of pay, particularly for some of the contributors to video games, especially those in composing and other activities, who are often asked to work for free. Does he hope that the expansion of this industry in the UK will also see an expansion in the compensation provided to the contributors to the industry?

Photo of David Gauke David Gauke The Exchequer Secretary

What I would say in response to that question is that, as I mentioned earlier, we are also providing match funding to improve skills and so on, and the purpose behind these tax reliefs is to ensure that we have thriving industries. As we have heard, these creative industries can be very mobile industries, they rely on skilled individuals and these are sectors that could potentially become much larger; they are already significant, but they could become much larger during the years ahead.

Indeed, the UK already has a strong reputation in all of these sectors, including animation; I am minded to repeat the line about Wallace and Gromit that the Chancellor used in the Budget 2012 speech. However, whether it be the video games industry—we have already heard about the strength of that industry in Dundee and elsewhere—or the high-end television sector—the hon. Gentleman has provided an example from his own constituency about that sector—these are important  sectors and we want them to flourish. Of course, that would benefit those individuals working in those sectors, resulting in stronger pay and a thriving sector.

I hope that the clause and these schedules can stand part of the Bill.

Photo of Steven Baker Steven Baker Ceidwadwyr, Wycombe

This clause will stand for ever as a magnificent rebuff to all those in Opposition who have said that this is a laissez-faire, liberal Government. [ Laughter. ] At the beginning of this Parliament, a number of Opposition Members described the Government as Hooverite. I might say that this clause is Hooverite, but only in so far as Opposition Members have misunderstood Hoover’s legacy; he was an interventionist to whom—of course—FDR attributed many of his own policies.

The reason why I bring that up is that this clause seems to be a product of industrial policy, whereby we pick sectors to subsidise, in particular those sectors that seem to have a comparative advantage, and we then give them a tax break to help them along. However, we have to ask who pays? It seems that if we subsidise all those industries with a comparative advantage, those who pay will be those firms that are struggling. It is important to remember that the art of economics is not just to see the short-run consequences of any particular policy on one group but to see the long-run consequences on any group. I find myself wondering if, in due course, we will return to the video games industry and—

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.