Films (Definition of “British Film”) Order 2015

Thursday 22nd January 2015 Grand Committee

Motion to Consider

17:30

Moved by

[Lord Gardiner of Kimble]

That the Grand Committee do consider the Films (Definition of “British Film”) Order 2015.

Relevant document: 17th Report from the Joint Committee on Statutory Instruments

[Lord Gardiner of Kimble (Con)]

My Lords, as may have been seen from this month’s BAFTA nominations, the British film industry is thriving. Alongside such critical success, the UK film industry has a turnover of £7.3 billion and is worth more than £1.4 billion to the economy, employing more than 66,000 people. Production spend on films made in the UK exceeded £1 billion in 2013.

This is very much as a result of film tax relief. Since its inception in 2007—I know the noble Lord, Lord Stevenson, has a long interest and connection with this concept—film tax relief has supported 1,680 films, with total production expenditure of £7.8 billion, of which 72% was incurred in the United Kingdom. The Government are committed to building on this and safeguarding it for the future.

The order updates the statutory test that is used to assess whether a film is a British production and eligible to apply for film tax relief. Certification as such is a requirement for film production companies to claim tax relief on production costs. The revised test aims to benefit particular areas of film production, such as visual effects and post-production, in which the United Kingdom excels.

In the Budget of 2013, the Chancellor announced that the Government would consult on tax options to support visual effects industries, and that was launched in May 2013. The United Kingdom has historically been a leader in visual effects production and is currently home to a number of world-renowned and award-winning visual effects houses making a significant contribution to British culture and creativity. Recent successes include the Oscar-winning film “Gravity” and “Paddington”, and work is currently under way on the latest “Star Wars” film.

Nevertheless, the sector has been adversely affected by rapid changes in the global industry, and there have been reports that activity may be moving overseas. Evidence suggests that the UK’s visual effects industry saw a 23% decrease in employment during the three years to 2013. There has also been a proliferation of incentives available in non-European jurisdictions. This has been a significant contributing factor in more films undertaking their visual effects outside the UK and Europe. Without further support, British visual effects houses may be forced to reduce headcount and investment in infrastructure, resulting in a decrease in the sector’s economic contribution and ultimately fewer British films being made.

The Government have responded in two interrelated ways. First, the Government have made the UK’s film corporation tax relief regime more attractive. The rate of tax relief for films with a qualifying budget of £20 million or more has been increased from 20% to 25% on the first £20 million of UK expenditure, with any excess UK expenditure still receiving the existing 20% tax credit. The minimum spend threshold in the UK has been reduced from 25% to 10% of a film’s overall budget. It is anticipated that this will encourage more films to carry out their visual effects and post-production work in the UK. These measures are now in force, having been introduced via the Finance Act 2014.

The second action is to modernise the statutory test used to assess whether a film is a British production. This is the purpose of the draft order before the Committee. This points-based test, often referred to by the industry as the cultural test for film, ensures that relief is targeted towards qualifying British productions. These changes are straightforward and mirror elements from the existing cultural tests for high-end television, video games and animation programmes. The amendments increase the points available if certain percentages of a film’s production work, including visual effects, take place in the UK. They also increase the points awarded for the language spoken in the film. For example, if more than 75% of a film is in the English language, it will now score six points rather than four. Finally, points that are awarded for a film’s British setting, subject matter, characters and language will now equally be awarded for other European Economic Area states. These measures are designed to encourage co-operation with European film industries while still ensuring that activity takes place in the United Kingdom. The effect of these changes is that the number of points available increases from 31 to 35. The pass mark is accordingly raised from 16 to 18 points.

These measures have the strong support of the film industry, including the British Film Institute, which is the Government’s lead agency for film, the British Film Commission, which works to attract inward investment to the UK, the major film studios and the leading visual effects houses. The Government believe that this order is essential to encourage further film production work in the UK while ensuring that tax relief benefits only productions that carry out work in the UK and enrich our cultural perspective. In combination with the changes to the corporation tax relief regime, these measures will further growth and ensure that the UK remains at the forefront of a very competitive global film production industry. That will in turn increase the opportunities for British artists and help ensure that the British film industry remains a world leader and continues to provide so much pleasure to us all. I beg to move.

[Baroness Bonham-Carter of Yarnbury (LD)]

My Lords, I echo what the Minister said in congratulating the previous Government on introducing tax breaks for British films. Of course, since then the coalition Government have extended that to animation, high-end TV, video games and, most recently, regional theatre and live-action children’s TV, all of which have contributed enormously to the creative industries and their success. Tax breaks for the British film industry have paved the way and brought huge inward investment into the industry: millions of pounds of private funds to the independent sector and, from the private sector, millions more pounds spent on infrastructure. I am told that next week’s British film industry figures will be very positive, so the industry is happy.

We obviously support this order, particularly the extra points for production activity undertaken in the UK as that gives even greater incentive to bring work into the country. I have what is not really a question but more an observation. It is something I have picked up from talking to people in the industry: things are working well. The Minister has probably answered this already, but too many tweaks and changes should on the whole be avoided. I think I am right in saying that there is another order in the pipeline. The observation is to leave things that are working so well as they are.

[Lord Grantchester (Lab)]

My Lords, I enjoyed the Minister’s explanation of the order before us today. If a film that has been supported by the Government and the taxpayer in this way should be very successful—he mentioned “Paddington”—and especially profitable, is some element of the profits returned to the pot, if that is the right expression, for further use by British films to encourage the British film industry or does it escape from the system? Is it in some way self-fulfilling that the profits of a publicly supported film go back into making more British films?

[Lord Stevenson of Balmacara (Lab)]

My Lords, I am very pleased to respond in this debate. First, I declare my interest as a former director of the British Film Institute. I thank the Minister for his kind words about my contribution in that time.

I have spent many happy hours over the last few years debating issues that come up on the DCMS brief with the Minister. I have usually been able to, I think, in his own words, “trip him up” on something and cause him difficulty. I am normally rewarded, because is it often a delight to have a two or three-page letter—indeed, the last one almost ran to four pages—in which he finally gives me the answers that I have asked for, usually to my complete satisfaction and sometimes even far beyond that.

Today is different. I have consulted widely with my remaining friends and colleagues in the industry and have sought comments from FACT and the British Film Institute. Nobody has a word of doubt about this order. They are delighted with it, and it seems otiose for me to stand here and even question the Minister about it, so I shall give the Committee one anecdote and ask three very small questions. I do not expect a letter.

When I was director of the British Film Institute, which I was for nearly nine years, I spent most of my time trying to argue with officials and Ministers in what was then a Conservative Government that we needed a better definition of a British film. It is therefore somewhat ironic to be considering an order which not only deals with that but improves the current definition and brings it forward. There is a little irony within that irony, which is that the order does not define a British film at all; it defines a film as British if it is made in the EEA, which must have come as a bit of a shock to those who perhaps take a view different from mine about the benefits that flow from the European Community, but let us pass over that.

The reason for the anecdote is that part of the work I was doing at the British Film Institute developing a public policy issue around this stemmed from work that was initiated by the late Prime Minister Mrs Thatcher, who held a very high-profile summit in Downing Street in 1990, from which most of the policy that we are now concerned with started. Indeed, other Members of your Lordships’ House were at that meeting and could talk about it as well. It was the beginning of government interest in film, but it constantly worried us because of something within the idea that more people should be going to see films, which was Mrs Thatcher’s view. She recalled her time in Grantham when the whole village used to go to the village cinema twice a week to catch the latest films, which were, of course, largely British. In the early 1990s, it was feast or famine. There were occasional rushes of successful British films that were invested in by American studios, but that tended to fade away and we were back to the usual diet. The main diet in British cinemas at the time we went to see her was films that were often made by British people, or had British expertise in them, but were financed, often produced and almost certainly made outside Britain, and we wanted to resolve that. It has taken a very long time, but the situation is now transformed. As the Minister said, between 150 and 200 British films a year benefit. It is an extraordinary transformation of the arrangements.

17:44

This is a good-news story. There was a sense that we had a natural talent here and that there was something in the water that made our people very good at film-making. The expertise and skills which were originally developed in the great studios on a ring around London, of which there are only two or three left, have now transferred into fantastic computer-based skills. The people with those skills are operating largely out of Soho. This was originally the place where all the costumes were made for the films made in Britain but it is now where, 24 hours a day, people are working on creating characters and animations, and making things happen that drive the world’s film industry. Long may that continue.

In my experience—I think it is still true—just about every Government in the world support the film industry in a way. I repeat: every Government, including that of the United States of America. The US system of support for film exports has been the envy of the world and it is something that we may want to come back to at some future date. It provides a guarantee against loss for those who export their films from America and, as a result, that puts the American distributor who takes films abroad in a very strong competitive position. We do not have as much support here, although that is changing. I use that as a means to simply say that there is nothing unusual about using the tax system to try to help films.

Film-making first got a tax break in the 1994 Budget. It was then changed in 1999 and again in 2005 or 2006. Since then, the situation has been transformed, and I think that these changes will help. The irony, as I mentioned, is the fact that it is now a pleasure to read about the way in which films can qualify as being British—not just in terms of whether they are made here, which was the original definition, but now in terms of set-dressing, the talent, the writing, the audio-visual work and the post-production work, which are all part of this extraordinary industry. It is a collaborative industry beyond all collaborative industries, yet it relies on individual skills of the high order that we have in Britain today. That is my anecdote in terms of what I have experienced, and I have pleasure in seeing this measure before us.

I have three questions. In the Minister’s introduction—and I see it in some of the background notes—there was a suggestion that the reason for this order, as is said in the paper Modernising Film Tax Relief, which was originally from the Treasury, was in some senses to improve the way in which a film receives its tranche of money and, to avoid a step-change between low-budget and high-budget material. I think that that is right but I am anxious to check that I am reading it correctly. A paper that accompanies the order says that the reason for doing this is to try to make sure that the film is more culturally British—or, as truth is, that it comes from the EEA states—in order to better qualify for the state aid regulations that operate in relation to this issue. I would be interested to hear the Minister’s response to that. What is driving this? Is this about better and more efficient use of the tax break or is it something that has come from outside and is there a need to make sure that we do not fall foul of the European regulatory concerns?

My second point is not unrelated to that. The cultural test for film, which is the subject of the order, is said to be aligned to the other three cultural tests relating to animation, programming, high-end television and video games; of course there is also drama as well. That is not mentioned in the order but presumably it is in the background. When the Minister comes to respond, perhaps he could sketch out how close the alignment is. Are they exactly the same or are there differences in what they do? Many of the considerations applying to film will certainly also apply to high-end drama in terms of post-production, talent, location and shooting. Indeed, that was the subject of a number of debates on the recent success of “Wolf Hall”, the television production which has just started.

My third point is about the money, given that 150 to 200 films a year benefit from film tax relief, and given that the Explanatory Memorandum says that one of the things that it is hoped will happen as a result of this is that there will be,

“greater investment within the UK from overseas and in international co-productions, resulting in higher levels of economic contributions from the sector, more stability for a highly skilled workforce, and the creation of culturally important products”.

I have to confess that when we tried to persuade Mrs Thatcher that it would be quite a good thing to finance the film industry with tax support in order to get more co-productions, she gave one of her handbag expressions and we soon dropped that. It did not go down very well: she did not seem to like the idea of British taxpayers’ money going on some foreign films. The truth is that European sensibility will be useful to the British film industry and that most films have to be made in English if they are going to be successful at all in the export market, so I think it is a self-solving problem.

However, my real point is that the Exchequer impact study for this—I do not think there is a separate one for the measure before us—suggests that the impact on the Exchequer will be a loss of £10 million in 2014-15; £20 million in 2015-16; and then nothing, nothing and nothing from 2016 to 19. That does not quite square: if more external productions are going to come to Britain to be made here and if there are going to be more co-productions—I hope there will be—then surely there will be a continuing drain, or is something else going on here? I would be grateful if the Minister could respond to that point.

Other than that, I want to stress again that this is a terrific move. It is going in the right direction by giving more credit to some of the things that need to be recognised. The skills we have in post-production are terrific, and the overall scheme requiring just over 50% of the points, I think, for the film to be allowed to qualify as British or, as we say, European in content is the right way to go forward. It will be a boost and a further step in fuelling the success that we have seen in the recent awards ceremonies, with hopefully more to come in the Oscars.

[Lord Gardiner of Kimble]

My Lords, with this cast list we have had a very agreeable debate. I am very pleased, and acknowledge the support that has come from your Lordships on this matter because it is something that is clearly in the interests of the British film industry. I would like to place on record the Government’s thanks to the British Film Institute and the industry for their assistance in developing this policy. That is the reason we are here today. It is a prime example of an industry and government working together to secure the best that we could possibly achieve.

My noble friend Lady Bonham-Carter referred to support, but also raised an element of concern for some that there are too many changes. My understanding is that no further changes are envisaged. Perhaps I should say that the cultural test has been amended on three occasions, in 1999 and twice in 2006. On each occasion, this was to update the test to reflect changes in policy as to what should qualify a film as a British production. Like today, those changes were all designed to ensure that we were ahead of the game and in no way disadvantaged.

The noble Lord, Lord Grantchester, asked about use of profits and the profit-returning element. Of course, although there are profit reliefs, a hugely successful film will make a contribution to the Exchequer. We obviously want to ensure that the more films we have with tax relief, the more will come into the Exchequer. Interestingly, the Government are investing £47 million of lottery funding and more than £23 million of Treasury funding to support film and audiences in the UK. The total public funding for film in 2011-12, for instance, was £366 million. From all angles, on the point that the noble Lord was making, the Exchequer gets a good return on very successful films.

The noble Lord, Lord Stevenson, continues to look very well on the handbagging he may have received from the late Lady Thatcher. There is no doubt about it: she was interested in concepts of this sort. Perhaps with someone with the reputation that she has, when one gets down to how she was in practice, she was rather different from the persona that has some currency.

The noble Lord, Lord Stevenson, asked a number of questions, which I shall endeavour to answer. If the answers are not fully sufficient—it is a Thursday—he might like a letter from me. The noble Lord alluded to a point about the changes and approval by the European Commission. Yes, these changes, along with the changes to the rates and qualifying expenditure for film tax relief made in the Finance Act 2014, were approved by the European Commission in a state aid notification on 17 March last year. I hope that that is also satisfactory.

As to what was driving the change, and whether it was because of the requirement of approval or to remove a tax cliff et cetera, this was very much designed to encourage more production in the UK by taking a broader definition of what qualifies as a British production. We obviously wanted to ensure that we retained the talent and skills in certain areas of production, particularly, as I emphasised in my earlier remarks, in the visual effects and post-production houses, where we excel but where we were concerned that quite a lot was going abroad. Again, that was important.

On the alignment of all the tests, the ambition is to align the cultural tests for the creative sector tax reliefs as far as possible. Given the slightly different nature of the activities, there may be an element of that, but we would certainly wish to align all of them wherever we can. The Government will be consulting on the alignment of the high-end TV cultural test with the film test shortly, so that will be work in progress.

As to the expected cost to the Exchequer, and the possibility of a decrease from 2015 onwards, this exercise is about the cultural test, but I should write to the noble Lord on this one. This may be a more intricate issue, but I promise that I will not write four pages and I hope that there will be clarity. On that basis, and following this good Thursday debate, I commend the order to the Committee.

Motion agreed.

Committee adjourned at 5.57 pm.