Films (Definition of “British Film”) Order 2015

Lord Gardiner of Kimble Excerpts

Thursday 22nd January 2015 Grand Committee

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.

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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.