UK Film Investment (Tax Relief)

Tim Farron Excerpts

Tuesday 16th December 2014 Westminster Hall

[Sir Nick Harvey]

I entirely agree with what the hon. Gentleman says. I think that this policy was a success and that one can visibly judge the tangible uplift in small film producing in Britain during the period that the tax relief existed. I think that the then Chancellor was right in March 2004 when he observed—this is widely recognised—that a minority of partnerships were abusing the tax relief, but they were a minority. This is the point: it is completely inexplicable and totally unacceptable that 10 years later, HMRC is treating the whole lot of them as though they were crooks, and when the Prime Minister gets up to respond at Prime Minister’s questions, he has in his folder a brief that says that all those involved were involved in abuse, and that they knew at the time that they were engaged in it. That is completely different from the experience of the Movision partners to whom I have talked and of my own constituent on whose behalf I have taken an interest in the subject.

[Tim Farron (Westmorland and Lonsdale) (LD)]

Does my hon. Friend agree that the important thing is to consider the future of the film industry and particularly the young people who are involved in it? Whatever is the case, it is certainly not the fault of young people looking for a future in the film industry. I spoke to a young man—a Kendal college film student—called Emilio Methven on Friday. He did a survey of his fellow students over the weekend, and they want investment in the film industry going forward and more apprenticeships. They want the UK Government to demonstrate that in backing the UK film industry, they are going to back UK film students. They do not want a sense of there being a retrospective potential attack on the film industry that makes their future much harder to establish.

[Sir Nick Harvey]

My hon. Friend makes a series of very good points. These small films are something that Britain is good at. We have an international reputation in it and the developing creative industries in this country are something that we should celebrate, and yet investment in film is an inherently precarious thing to do. If it had not been, it would not have been necessary to contemplate these sorts of tax reliefs in the first place. The reality is that this scheme was almost too much of a success. It ended up costing more in tax reliefs than had been anticipated at the outset. However, as my hon. Friend says, young people up and down the country are engaged as students and as workers in the early stages of careers in the creative industries, and it would be a very backward step if the UK Government, the Treasury and HMRC were seen to be having a crusade against this industry at the very time when we should be encouraging it further and trying to ensure that more jobs are created in this area in years to come.

Anyone who has looked at this matter will understand that a minority of those involved had, arguably, been seeking to avoid tax rather than to invest in film. There are companies—for example, Icebreaker and Eclipse 35—that have been ruled to have abused the reliefs. Rulings have been made and money has been clawed back. However, I believe that the majority, including Movision, acted in good faith, and they are now being tarred with the same brush in the eyes of HMRC, which is refusing to give them the reliefs and challenging the availability of them to those that claimed them.

HMRC’s current position is that all compliant Movision partners who entered into investment in terms of their tax returns are under inquiry for all years ending from 5 April 2003 onwards. Hon. Members will be aware of how rarely retrospective legislation is passed, yet in effect that is what HMRC is doing by applying regulations in such a way that they are having a retrospective impact on these genuine film partnerships, as they were formed and invested in before 2007, and the abolition of section 42 and 48 relief. However, the sticking point is that HMRC will not engage with the partnerships either to discuss the rationale behind its position or to engage in any meaningful settlement talks. Many of its actions could even be viewed as obstructive. HMRC’s inquiries into Movision have been going on for 10 years—since 2004. When HMRC asked Movision how it incurred 100% production expenditure on films, Movision responded in detail on 11 December 2006. HMRC did not respond to that until June 2013—more than six years later. That is completely unacceptable.

It subsequently transpired that HMRC had had a resolution discussion embargo in place from 2010 to 2013, but had chosen not to inform anyone about that; none of the partnerships was aware of it. Why was that? What was the purpose of the embargo? What benefit did it afford to HMRC or the taxpayer?

In 2013, HMRC trialled an alternative dispute resolution and found it to be successful. Following that, it offered a 55% settlement to all partners. Many phoned back and at first were told that HMRC would get back to them after 10 days. Those who phoned later were told six weeks and then two months, and those who rang after that were told that the settlement team had been disbanded—with no explanation.

Movision has made two settlement offers to HMRC: one for £2.4 million and another for £3.95 million. It was told by HMRC that its offers were unsatisfactory, but not why, which obviously makes it very difficult for it to negotiate. The latest development, in the last fortnight, is that HMRC has issued a new embargo on discussions with film partnerships if the partnership has investment in films via anything similar to sale and leaseback. Sale and leaseback is a perfectly conventional method of generating financing whereby the owner of an asset sells the asset but then leases the asset back from the inquirer, thus freeing up some capital. It is commonly used in financing films, and HMRC recognises it in its own business manuals. It is unclear why the embargo has been issued, but it will certainly delay even further any meaningful discussions.

As I said at the outset, there remains a misapprehension about film tax relief. I fully understand the importance and, indeed, the necessity of putting a stop to tax avoidance. That is more pressing than ever in the current financial climate. It is clear that a light needs to be shone on these partnerships. HMRC needs to take immediate steps to identify those who were genuine investors as opposed to those who cynically abused the tax system. The Treasury must be clear that film partnerships that applied the correct legal procedures before 2007 are and remain eligible for the tax reliefs that they were promised by Her Majesty’s Government. With 65,000 cases of tax avoidance identified and a record 27,000 tax disputes waiting to be heard at tribunal, it seems clear that HMRC should be either prosecuting or moving towards a settlement with partnerships.

As I said, for the 500 partners involved in the Movision scheme, the average individual subscription was just £50,000. We are not talking about the super-rich; we are not talking about pop stars and footballers, who are advised on how to seek opportunities for aggressive tax avoidance. With every year that passes, the impact on some of the partners, with the HMRC sword of Damocles hanging over them, will worsen. Many have already become ill, suffering nervous breakdowns and stress-induced illnesses, and have seen marriages and businesses fail. That is a very high price to pay for responding to the call of “Cool Britannia”. Furthermore, it will no doubt make investors less likely to make use of current tax reliefs to invest in industries that the Government want to grow, of the sort that the hon. Member for Huddersfield (Mr Sheerman) suggested, and let us not forget that that is how this whole business started.

HMRC should stop prevaricating and engage with the film partnerships to resolve the inquiries. That should include the aim of either settling or prosecuting within two years, because this has already gone on long enough. I hope that the Minister will consider the steps needed to bring clarity out of the current chaos and rectify unfairness caused to genuine partnerships and investors.