(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules) - Clause 35 - Relief for television production and video games development

Finance Bill – in a Public Bill Committee am 2:00 pm ar 4 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question (this day) again proposed, That the clause stand part of the Bill.

Photo of David Crausby David Crausby Llafur, Bolton North East

I remind the Committee that with this we are considering:

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 Steven Baker Steven Baker Ceidwadwyr, Wycombe

As I was saying before we went for lunch, there is a danger that we could return in future to the television production and video games development industries and discover that they are larger than they might otherwise have been because of the special privileges they have been granted.

My hon. Friend the Exchequer Secretary will remember that long before I got to this place I worked in a specialist company developing XBRL solutions. A firm such as that, working on electronic financial reporting, with a worldwide reputation, might well wonder why it was suffering a tax disadvantage in order to promote TV production or, more relevantly, video games development.

The clause is very timely because we are in the middle of a lobbying crisis. It is just this kind of special privilege that leads to lobbying, because not only has a privilege been obtained, it is bound to inspire other groups to lobby to obtain similar privileges. It has also created some special interest groups that will lobby in order to retain privileges.

My hon. Friend mentioned the definition of video games. Under paragraph 1 of schedule 15, proposed new subsection 1216AA includes a definition of television programmes. It is thought necessary to say that a television programme

“means any programme (with or without sounds) which…is produced to be seen on television, and…consists of moving or still images or of legible text or of a combination of those things,” and that television includes the internet.

However, moving forward to paragraph 1 of schedule 16, proposed new subsection 1217AA does not tell us what a video game is. It says that a video game

“does not include…anything produced for advertising or promotional purposes, or…anything produced for the purposes of gambling.”

When I look at that lack of definition on the one hand and the excruciatingly detailed definition on the other, I am inclined to think that it can have been constructed only to meet state aid rules. That leads me to wonder what we are doing.

The hon. Member for Kilmarnock and Loudoun talked earlier about reasonableness. In the 48 pages of these schedules there is a vast amount of detail, a lot of which we have not scrutinised. For example, the excluded programmes under schedule 15 paragraph 1, proposed new subsection 1216AD, are advertisements, current affairs, entertainment shows, competitions, live performances and training programmes.

People in the production industry might well ask why they are to suffer a disadvantage under tax compared with people producing drama and comedy. I have observed that a number of advertisements have been strung together into a number of comedy programmes over time. Have the Government considered whether that might be done again?

With regard to video games, proposed new subsection 1217AD on core expenditure says that

“the following descriptions of expenditure are not to be regarded as core expenditure for the purposes of this Part…any expenditure incurred in debugging a completed video game or carrying out any maintenance in connection with such a video game.”

As a software engineer, I would observe that software is never bug-free. It is also necessary to ask when it is completed. There is an enormous amount of subjectivity in the provision, which could lead to a great degree of fruitless discussion.

The clause seeks honourably enough to support industries in which we have a comparative advantage, but I worry that we are creating special privileges that will have unintended consequences that will be paid for by industries that are doing less well. It will promote lobbying, not just by the affected firms but by others, for example those producing advertising, until everybody has a special tax privilege.

Some would argue that it would make us terribly unpopular to say that these privileges should be taken away, but if we lowered tax rates for everybody and took away the special privileges, I think they would all be rather happier.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I am listening with great interest to the hon. Gentleman, who speaks with the benefit of considerable knowledge of the industry. Given the questions he is raising, does he intend to vote for the provisions to stand part of the Bill?

Photo of Steven Baker Steven Baker Ceidwadwyr, Wycombe

I get the feeling that Opposition Members do not intend to press the matter to a Division, so I suppose we will have to see what they do. My hon. Friends on the Front Bench know that I never shy away from sticking to my principles on such matters, but I do not intend to force a Division. I am happy to tell the hon. Lady that I foresaw her question during lunch, so I am delighted that she asked. In conclusion—

Photo of Ian Mearns Ian Mearns Llafur, Gateshead

Will the hon. Gentleman reflect on the fact that all the other sectors he has talked about that might like such a tax break would not automatically have competition in the international context, but would have such tax breaks locally?

Photo of Steven Baker Steven Baker Ceidwadwyr, Wycombe

I am grateful to the hon. Gentleman for reminding me of a point that I wanted to discuss at some length, so as I conclude my opening remarks, I should say that when I hear the argument that international competition justifies some state-imposed benefit, it reminds me of all the old debates about protectionism and free trade. I co-founded the Cobden Centre to argue in various ways for free trade.

We should not say, “Actually, everybody else will have to pay with a tax disadvantage to prop up a couple of industries that we favour.” People should compete freely with one another, wherever they are. I should like, at this point, to insert all the arguments in favour of free trade.

With that, I apologise to the Minister for possibly making his life a little bit more complicated than he was anticipating. I look forward to the day when we have lowered taxes and ceased to grant such special privileges.

Photo of Stephen Williams Stephen Williams Democratiaid Rhyddfrydol, Bristol West

I want to make a few remarks, not so much about high-end television, although this morning the hon. Member for Cardiff South and Penarth mentioned Dr Who. The hon. Gentleman caught me on a visit to his constituency at the start of recess, dressed in casual gear. A visit to the Dr Who shop in his constituency was enjoyed and I recommend it to all Committee members.

On the animation industry, the hon. Member for Wycombe said that the genesis of the changes was heavy lobbying. I am one of the people who did that heavy lobbying, as did our coalition colleague the hon. Member for Cities of London and Westminster (Mark Field), whom I mention as he is not a member of the Committee. Bristol and the Cities of London and Westminster are the two major concentrations of the animation industry in the United Kingdom. My constituency will be known primarily for Aardman Animations, the makers of “Wallace and Gromit”. As a free market liberal, I generally agree with the hon. Member for Wycombe that subsidies are not something that the Government should dole out. Government should not pick winners; doing so would replicate the mistakes of the 1970s.

Aardman Animations and all the other animation businesses in the UK are incredibly successful in their own right. Their owners, who are usually the people who made the creative content in the first place, are incredibly innovative. The staff they work with in the UK are highly skilled and trained by our universities. We have the competitive advantage in brain power, but we are losing out on the fiscal international aspect. None of the businesses wants this subsidy from the Treasury. They would rather succeed in their own way, making their own profits from their own intellectual capital. The sad fact is that other countries are awarding subsidies to attract our brain power—our British innovation—to relocate abroad.

There is a cultural aspect, as well as an international tax competition aspect. Many children’s programmes are now being made by overseas cartoon producers,  even though they originally had British characters, and this trend will continue if the provisions are not included. I am not a parent—some Committee members are—so I cannot name any of the current cartoons that young people watch. I am of the age of “The Wombles”, “The Clangers”, “Paddington Bear”, and so on. If Committee members imagine “The Wombles” being narrated by a Dutchman or Ivor the Engine speaking with a Canadian accent, that is the cultural danger that we might end up with if the provisions are not included. There are good, British cultural reasons why the tax incentive needs to be introduced. It will ensure that we keep animators and producers of high-quality children’s programming on-shore in the United Kingdom, and that it is a worldwide success. I commend the clause to the Committee.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

It is a pleasure to be back in the Committee this afternoon, and to follow the interesting contributions of Government Members. Perhaps the most interesting snippet we learned during the course of the morning is that the Minister seems destined for a future career either on the Select Committee on Scottish Affairs or as the new Doctor Who. He found himself unable to choose which would be the most exciting. I leave that for him to ponder, although I am one of those who thinks that it is time for a woman to be the next Doctor Who. Perhaps we will have some more of that campaign. [ Interruption. ]

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I gather I said something extremely controversial. I apologise, Mr Crausby, but we ought to get back to the important and serious business of clause 35, schedules 15 to 17 and Government amendments 39 to 49.

As the Minister said, schedule 15 introduces new tax reliefs for animation and high-end television production, schedule 16 introduces a new relief for video games development, and schedule 17 provides the necessary consequential amendments to existing legislation. All the measures set out separate but targeted corporation tax reliefs for the animation, high-end TV and video games industries to be introduced from April 2013. Both the additional deduction and the payable credit proposed in the measures 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. For all three new reliefs, the credit is based on the company’s qualifying expenditure on the production of a qualifying animation, high-end TV programme or video game, of which at least 25% must be on goods or services used or consumed in the UK. We have heard about potential difficulties with some of those definitions. It has been helpful that we have seen the draft regulations. I raised some questions with the Minister earlier about them, and I am sure that there will further finessing and refinement.

Government amendments 39 to 44 and 46 to 49 substitute the commencement date for the relief with a specified day to allow for the delay in commencement due to the European Commission investigation into video games. Government amendment 45 allows for a  future order to be made by the Treasury amending the schedules to include any conditions imposed on the relief as a result of that investigation.

Hon. Members will be aware that Labour has been supportive of the UK’s creative industries. We recognise the wider cultural and economic benefits that a thriving creative industry can bring to our country and economy. I am glad that the Government recognise the role that Labour in government played in supporting the creative industries. The impact note states that all three reliefs are based on Labour’s successful film tax relief, noting that

“Since its introduction in January 2007, the FTR has supported £5.5 billion of investment into 825 British films which have received approximately £800 million in relief.”

We pledged in our 2010 manifesto to introduce a video games tax credit, as well. I am glad to see that, notwithstanding the difficulties that we have talked about and that were raised during the Scottish Affairs Committee inquiry into the issue, the Government are now being supportive and giving some equivalence to the reliefs that are available in other parts of the creative industries. That is important. A strong argument has certainly been made by various hon. Members, so we welcome the proposed measures.

We can all talk about our own favourite animation programmes. I was filled with horror when the hon. Member for Bristol West described what might have happened if “The Wombles” had been narrated in a different way. My son has reached the age where he is no longer watching such programmes as “Thomas the Tank Engine”, which seemed to be his all-time favourite, whereas for many of my nieces and nephews it was “Bob the Builder”. It is important to recognise that we have produced some extremely—[Interruption.] I think I hear the Soup Dragon being mentioned from a sedentary position behind me. I did not want to admit that I remember that programme. On that point, it is a good time to give way.

Photo of Steven Baker Steven Baker Ceidwadwyr, Wycombe 2:15, 4 Mehefin 2013

I wonder whether the hon. Lady will move the relevant amendments to the schedules on Report in order to list her preferred targets for subsidy.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I should perhaps have anticipated that question following my earlier point about whether the hon. Gentleman was going to vote with the Government on this issue.

To go back to more serious points, the reliefs are important, because times are tough for the creative industries in exactly the same way as for other industries. Numerous international subsidies have made it difficult for high-end TV and animation companies to compete in the international market, and in recent years there have been concerns about production being moved abroad as a result. I hope that the introduction of the targeted relief will help to reverse that trend and ensure the continued global success of UK high-end TV and animation for many years to come. The impact of the film tax relief shows us the potential of such measures to attract productions and to boost jobs and growth not only in  the creative industries but, through the knock-on effect, in the wider economy. I will not go into all the statistics, but figures from the British Film Institute show that in 2008 some 23,000 people were working in film and video production, and by 2011 that number had increased to 39,000. That shows the potential of the proposed measures. Many people who work in the industry have not only campaigned for but made very positive comments about the proposals.

Although it is good news that the high-end TV and animation reliefs have received EC state aid approval, so that they can get to work on building those industries, supporting the jobs and getting the boost that we need from them, there are still issues around the video games tax relief, which the Minister mentioned. When I was a member of the Scottish Affairs Committee, we looked at that industry and we visited Dundee, where my hon. Friend the Member for Dundee East (Stewart Hosie) was involved in trying to ensure that we completely understood the breadth, scale and potential of the video games industry. One of my most striking recollections is of the technical expertise required—describing them as video games is something of a misnomer, and people lack understanding of what is involved. Some of the work that we were shown had had a knock-on effect in areas such as software development and other technology, as well as the wider creative industries. That is very important, so it is good that the Government are introducing this boost for the games industry. The estimate that about 300 video games companies will be eligible shows why it is important to continue that effort.

The Minister talked about the European Commission investigation, but can he outline the state of play with that? Has he recently made any representations to ensure that the investigation is brought to a conclusion? Does he have any idea of the time scale in which that may be done? Do he and the Government plan to do anything else to make the case for the relief? What assessment has he made of the number of jobs that the relief for the video games industry could bring to the UK? We have already heard about the importance of job creation possibilities in the film and television industry. Returning to the points made earlier about definitions, there has been some movement on the draft legislation and the guidance after discussions with industry representatives. Although everything has to be ratified through the European Commission process, is the industry now satisfied that the regulations are shaped in a way that will give it the clarity it requires to take advantage of the relief?

In the impact assessments for each of the reliefs, the Government state:

“Additional resource will have to come out of existing departmental budgets, which may impact on resource allocation elsewhere” in order for DCMS to administer the necessary cultural test for those reliefs. Can the Minister tell us a little more about that? Where might resources have to be readjusted or recast within DCMS to provide for that work?

Photo of John Pugh John Pugh Democratiaid Rhyddfrydol, Southport

I have a few observations to make. I am not a great fan of video games, because I think life is too short to engage with them seriously, but I do have constituents who develop them. My feeling is that we were a world leader in this area, because we had a generation of school children who used BBC Micro  and Acorn computers before they got into simply working Microsoft applications. In the future, we may no longer be a world leader precisely because IT education has not been spot on over the past few years. We are talking about giving a fiscal incentive—I am very much in favour of what the Government are proposing—but I recollect that we had a fiscal incentive at the start of the coalition period and got rid of it quite quickly, apparently because it opened up the possibility of tax avoidance.

A philosophical objection has been expressed to interfering in the free market. When the hon. Member for Wycombe was speaking about a purist and non-pragmatic view of the free market, I was reminded of the earlier observations about the British motor car industry. I do not want to sing the praises of the Austin Allegro, and clearly any attempt by the British Government to interfere in that industry has been wholly unsuccessful, but if we think that the Japanese did not interfere in their market to great success, we are seriously misleading ourselves. There is scope for Government to encourage the right sort of things through an effective industrial policy.

The philosophical arguments were not the main ones used for rowing back from the progress initially made by the previous Government. Rather, the view was that the incentives would not work or were not needed. The industry protested at the time, suggesting that they were needed and that people would evacuate to Canada unless they were there. I do not know quite what has happened, but there were fears for the industry and expectations of the Government. One thing that we do not do well in Committee or in Parliament in general is recall previous Sessions and the fears expressed about tax legislation and fiscal measures, as well as the hopes that were realised. If there was a drift towards Canada, as seems to have been clocked, a false policy step was taken early on, and a good step is being made now. I cannot help but think that some of the ways we have handled the industry are a consequence of the adversarial tradition of Parliament, where every incoming Government have to change existing policies; in contrast, what industries want is certainty and continuity—something that will be obvious when we vote on renewables later this afternoon.

The Minister might be able to reassure me, but what we need to do with tax reliefs is not only announce them and explain their effects, but undertake research on them to find out what will come to pass many years down the line, after we have all said our piece.

Photo of Ben Gummer Ben Gummer Ceidwadwyr, Ipswich

I do not doubt the wisdom of the Government’s intentions in the clause, but I have an observation to add to those of my hon. Friend the Member for Wycombe. I accept that high-tech industries are slightly different from those that we are discussing, but there are examples throughout the world of their being developed quickly as a result not of targeted tax subsidies, but of a general low-tax approach and because Government interventions were directed at encouraging venture investment and were not a matter of picking up one particular sector or another. I understand why the Government want to promote the television and games industry, but I hope that that is a sign of their intent to bring all corporate taxation down to the level that they propose in the clause, and a sign of their bravery in seeking lower taxation rates for the years to come.

Photo of David Gauke David Gauke The Exchequer Secretary

I shall respond briefly to this interesting and at times entertaining debate. I was disappointed that my hon. Friend the Member for Southport did not confirm or deny the rumour that two of his uncles were members of the Trumpton fire brigade.

I turn first to the philosophical points made by my hon. Friend the Member for Wycombe, who asked whether the policy was too interventionist and a step away from the approach of allowing resources to be allocated on the basis of the market and so on. He made the case for lower taxes across the board, as did my hon. Friend the Member for Ipswich. It would be fair to say that in what the Government have done in tax reform, the major thrust has been towards lowering rates across the board—for example, a dramatic reduction in corporation tax rates from 28% to 20% by 2015. However, we must acknowledge the existence of specific areas where competition is particularly great and where there is much mobility, as well as other tax regimes that offer competitive rates. Were we to do nothing, we may well see a number of successful UK businesses leave—the hon. Member for Bristol West referred to Aardman Animations, which might have found it impossible to continue to operate in the UK given the other options that were available.

We are ensuring that creative industries continue to make a valuable economic and cultural contribution to the UK, and that the reliefs for animation, high-end television and video games set out under the Bill are targeted and represent good value for money. The film tax relief shows the positive economic effects that such targeted support can have by incentivising greater investment in the industry, which in turn creates jobs and produces revenue for the Exchequer. In 2011-12, the film tax relief supported almost £1.5 billion of investment into more than 300 British films. Since its introduction in 2007, direct employment in the film sector has risen by almost 70%.

Photo of Steven Baker Steven Baker Ceidwadwyr, Wycombe 2:30, 4 Mehefin 2013

Notwithstanding my hon. Friend’s remarks—I of course understand the pragmatic point about the world that we live in—I wanted to observe that the dominant ideology around the world during this country’s greatest period of industrialisation was once known as liberalism. It was at that time that the Liberal party actually defended liberalism like it meant it.

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend draws me into dangerous waters; I will refrain from going there. Like him, I share a strong belief in the benefits of free trade, which is an approach shared throughout most of our politics in this country.

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

Does the Minister agree that the hon. Member for Wycombe is perhaps just a bit of a grumpy old Hector, and that his is just an ideological aversion to any kind of intervention by the state?

Photo of David Gauke David Gauke The Exchequer Secretary

I think that my hon. Friend is perfectly entitled to ask such questions, and he raises a perfectly reasonable point. By and large, it is best to take a broad-based approach towards our tax system, but  there are particular areas that I would argue require a degree of flexibility because of the mobility and therefore because of the competition. We are looking at one of those areas.

I would like to deal with some of the other questions that have been raised. My hon. Friend the Member for Wycombe asked about the definitions contained in the schedules. The definitions of television and video games are determined by the Office of Parliamentary Counsel; they are not driven so much by state aid, but rather developed to target types of production at risk of moving overseas, about which we have received evidence. Any subjectivity will be clarified in guidance published in September.

With regard to the questions raised by the hon. Member for Kilmarnock and Loudoun about the industry’s response to the legislation and regulations, the industry has been consulted throughout the process and is happy with the current form. Her Majesty’s Revenue and Customs is currently developing guidance with the industry to ensure that it is fit for purpose and easy to understand. My understanding is that the arrangement has been fruitful and constructive.

I was asked about the delay in the commencement of the video games tax relief and the date that it will start. The Government notified the European Commission about video games tax relief in January. The Commission has now decided to open a formal investigation into the new relief. The process for and duration of the Commission’s investigation are determined by the Commission itself. Nevertheless, the Government are working closely with the industry to provide the Commission with the evidence that it needs to conclude its investigation as quickly as possible. Last week, the Government sent a response to the Commission investigation opening letter. Third parties now have until the end of June to submit representations. Details on how to do so are available on the Commission website.

We expect video games tax relief to have a positive impact on job creation and estimate that around 300 companies will benefit from the relief. I point again to the film tax relief to demonstrate the significant potential of such reliefs to create jobs.

Regarding resources in the Department for Culture, Media and Sport and funding for the cultural test administration, we fully intend the administration of the reliefs to be as straightforward and easy as possible for business to operate. The same process as that for the film tax relief, which is well used and liked by users, will be available. Discussions with DCMS with regard to spending are not something that we can necessarily get into great detail here, particularly in the run-up to the spending review, but as I said, the matter is relatively straightforward to administer.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

Has the Minister looked in detail at part 4 of the draft regulations, which are about video games? They do not appear to me to be straightforward to administer. People have to accrue a number of points in order to go through the games process analogy and to be able to take advantage of the relief; it takes some degree of reading. What support will be available to the industry to ensure that people understand the policy? In  trying to reduce a creative product to something that scores 15 out of 16 points, one may not be using the same mindset that is used in the creative industry.

Photo of David Gauke David Gauke The Exchequer Secretary

I have complete confidence in DCMS to administer the policy. Regarding the rules that will apply to businesses seeking to use the reliefs, as I said, HMRC will publish guidance, which should make the process much easier.

I think that I have covered all the points that I wanted to in response to the debate. I am grateful for the questions and for the probing that the reliefs have received. I believe that they will further strengthen the UK as a place in which to do business. It might be helpful if I end by quoting the president of HBO programming:

“The new financial incentive,”— for high-end television—

“coupled with UK’s existing reputation for excellence in television production, makes the UK among the most compelling production locations in the global marketplace.”

We believe that that is a prize worth attaining and that the reliefs will play an important role.

Question put and agreed to.

Clause 35 accordingly ordered to stand part of the Bill.

Schedule 15 agreed to.