Finance Bill 2002
New Clause 21 Report
Mr Chancellor of the Exchequer
To move the following clause:-
'(1) Relief under the following provisions is available only for a film that is genuinely intended for theatrical release-
(a) section 40D of the Finance (No.2) Act 1992 (c.48) (election to claim capital allowances for production or acquisition expenditure);
(b) section 41 of that Act (relief for pre-production expenditure);
(c) section 42 of that Act ( three year write-off for production or acquisition expenditure);
(d) section 48 of the Finance (No.2) Act 1997 (c.58) (relief for expenditure on production or acquisition of film with total production expenditure of £15 million or less).
(2) For the purposes of subsection (1) -
(a) the relevant intention is the intention at the time the film is completed of the person then entitled to determine how the film is to be exploited;
(b) "theatrical release" means exhibition to the paying public at the commercial cinema; and
(c) a film is not regarded as genuinely intended for theatrical release unless it is intended that a significant proportion of the earnings from the film should be obtained by such exhibition.
(3) Subject to the following provisions, this section applies to any film-
(a) completed on or after 17th April 2002, or
(b) completed before 1st January 2002 but not certified by the Secretary of State before 17th April 2002,
unless an application for certification was received by the Secretary of State before 17th April 2002.
References in this subsection to certification are to certification of the master version of the film under Schedule 1 to the Films Act 1985 (c.21) as a qualifying film, tape or disc.
(4) This section does not apply to any film completed on or after 17th April 2002 if-
(a) it is a drama with an average production expenditure per hour of running time of the completed film greater than £500,000, and
(b) it was commissioned on or before 17th April 2002 and the first day of principal photography was on or before 30th June 2002.
(5) For the purposes of subsection (4) "drama" does not include-
(a) anything in the nature of -
(i) an advertisement or promotional film,
(ii) a discussion programme, news or current affairs programme, quiz show, panel show, variety show or similar entertainment, or
(iii) a training film, or(b) a film of a live event or of a theatrical or artistic performance given otherwise than for the purpose of being filmed;
but it includes a documentary involving the dramatic reconstruction of events if the dramatic content forms 50% or more of the running time.
(6) For the purposes of this section-
(a) a film is completed at the time when it is first in a form in which it can reasonably be regarded as ready for copies of it to be made and distributed for presentation to the general public;
(b) the production expenditure on a film means the total of all expenditure on the production of the film, whenever incurred and whether or not incurred by the person claiming relief; and
(c) subsections (6A) and (7) of section 48 of the Finance (No.2) Act 1997 (c.58) (production expenditure: exclusion of deferments and treatment of transactions not at arm's length) apply as they apply for the purposes of that section.'.
EXPLANATORY NOTE
SUMMARY
1. The purpose of this clause is to restrict the reliefs for expenditure on the production or acquisition of "British qualifying films" to films that are genuinely intended for theatrical release in the commercial cinema.
DETAILS OF THE CLAUSE
2. Subsection (1) restricts the reliefs for British qualifying films to films that are genuinely intended for theatrical release. It identifies the four extant provisions relieving expenditure on the production or acquisition of a film, the master of which, or the master tape or disc of which, is certified by the Secretary of State for Culture Media and Sport as a British qualifying film.
3. Subsection (2) provides that for the film to qualify for relief as genuinely intended for theatrical release, at the time the film is completed the person entitled to determine how the film is to be exploited must intend that a significant proportion of the earnings of the film should be obtained from exhibition of the film to the paying public at the commercial cinema.
4. Subsection (3) provides that, subject to the following sub-sections, the changes will commence for films completed on or after 17 April 2002 and for films completed before 1 January 2002, but not certified by the Secretary of State before 17 April 2002. However, it makes an exception if an application to certify the film was received by the Secretary of State before 17 April 2002.
5. Subsection (4) provides that the restriction will not apply to films completed on or after 17 April 2002 if the film is a drama with a production expenditure greater than £500,000 per hour, commissioned on or before 17th April 2002, on which principal photography commenced on or before 30 June 2002. The purpose of this subsection is to protect the position of drama in, or near to commencing, production on 17 April 2002 where the producers would have anticipated accessing the tax relief when the drama was completed.
6. Subsection (5) provides an illustrative list of the type of programmes that do not constitute "drama". It provides that a film of a live event or performance shall not qualify as a "drama" unless the performance is specifically given for the purpose of being filmed. It also provides that "drama" does include a dramatised documentary where the dramatic content forms 50% or more of the running time. "Drama" includes animated drama.
7. Subsection (6) provides rules governing the time when a film is deemed to be completed and what constitutes the total production expenditure on a film.
BACKGROUND NOTE
8. This new clause replaces Clause 99 of the Bill. The main change is that the new clause provides a transitional relief for drama with a production expenditure of more than £500,000 an hour, on which shooting began on or before 30 June 2002. It also clarifies whose intention is relevant for the purpose of determining whether a film is intended for theatrical release.
9. Under the general scheme for computing business profits, expenditure on the production or purchase of a master copy of a film would normally be classified as capital, not revenue, expenditure. As such, expenditure on the production or acquisition of a film master would qualify for a 25% capital allowance. The taxpayer would write-off 25% of the cost each year on a reducing balance basis (i.e. allowance for year 2 = 25% of 75% of the initial cost).
10. The special provisions for film :
- specify that expenditure on the production or purchase of a film master copy is to be treated as if it were revenue expenditure; and
- provide detailed rules for the time over which that expenditure will be written off.
11. The main special provisions are:
- Sections 40A to D, Finance (No.2) Act 1992. These reliefs were first introduced in 1982 and modified in 1984. They are not restricted to British qualifying films and allow write-off of expenditure on the production or acquisition of a film master by two methods, broadly in line with accounting treatment. Section 40D provides for an election to be made so that British qualifying films may be opted out of these reliefs in favour of capital allowances;
- Section 41, Finance (No.2) Act 1992 allows for the write-off of pre-production expenditure on British qualifying films;
- Section 42 Finance (No.2) Act 1992 allows write -off of expenditure on the production or acquisition of British qualifying films over a three year period following completion; and
- Section 48 Finance (No.2 Act) 1997 ("Section 48 relief") allows expenditure on the production or acquisition of British qualifying films with budgets of £15million or less to be written off fully on completion. This relief was originally for expenditure incurred before 2 July 2000, but that has subsequently been extended, most recently by section 72 FA 2001, to 2 July 2005.
12. The relief most heavily used is Section 48 relief. The relief was introduced in 1997 for the purpose of stimulating the production of films in the UK and to promote growth, employment, investment and opportunities in the British film industry. It was based upon a recommendation of the Middleton Report on Film Finance.
13. British qualifying films are certified by the Secretary of State for Culture, Media and Sport under Schedule 1 of the Films Act 1985 and are defined in that Schedule. The definition of "film" used in the Act is broad, essentially any record of a sequence of moving images, being a record capable of showing that sequence as a moving picture.
14. The effect of that definition was that the tax reliefs for film could be accessed by a wide range of product, not intended for theatrical exhibition in the commercial cinema, including TV programmes, both drama and non-drama, and films intended for the Internet.
15. The Government's intention is to restrict the reliefs to films that are made with the genuine intention of being screened in the commercial cinema.