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Films (Definition of “British Film”) (No. 2) Order 2006

Volume 687: debated on Thursday 7 December 2006

rose to move, That the draft order laid before the House on 28 November be approved. Third Report from the Statutory Instruments Committee.

The noble Lord said: My Lords, the Government wish to present the modifications to the definition of a British film contained in Schedule 1 to the Films Act 1985 made by this draft order. These modifications have come as a result of discussions with the European Commission, and it is essential that they are made to ensure that aid given to film through the new tax reliefs is compatible with European law on state aid. That is the purpose of the order.

As we stated in March of this year when the House approved the original cultural test, it remains our aim to promote the sustainable production of culturally British films, ensuring that films continue to play an important role in British life, representing and reflecting British culture in its most diverse sense. To do this, the Chancellor confirmed in yesterday’s Pre-Budget Report a generous new tax relief, available to those films certified as British by the Department for Culture, Media and Sport, against the criteria I will outline today.

The original cultural test, introduced in April 2006, contained three categories for assessing the cultural benefit of a film: the cultural content, hubs and practitioners—in other words, what the film is about, what facilities were used in making it and the personnel who made it. The revised test we are debating adds a fourth category of cultural contribution. This category ensures that films which contribute to British culture in its widest sense will be able to be awarded points under the test. The revised test also shifts the weighting of the sections towards cultural content, rather than focusing on film-making elements. These modifications will ensure that the aid given is compatible with the rules on state aid. The revised test will not impose any extra burden on the film industry or the Civil Service. In fact, it should be less time-consuming and burdensome for film-makers to complete.

The department carried out a full 12-week consultation on the existing cultural test in 2005, and developed and published the guidance on it in response to views expressed in that exercise. In drafting this order to implement the revised cultural test, we consulted HM Treasury, HM Revenue and Customs and the UK Film Council.

To pass the revised cultural test, a film will require 16 points out of a possible 31. There are four sections to the test. The first section assesses whether the content of the film is British against the following criteria. Up to four points will be awarded depending on how much of the film is set in the UK or a representation of the UK. Up to four points will be awarded depending on the number of lead characters who are British. Four points will be awarded if the subject matter or the underlying material is British. Finally, up to four points will be awarded depending on how much of the film is in English, or in a recognised regional or minority language.

In the second section, up to four points may be awarded in respect of the contribution to British culture made by the film. This section was introduced to give the test flexibility to reward contributions that a film may make by reflecting or representing British culture in its widest sense. This section will assess films under the following three headings: creativity, cultural heritage and cultural diversity.

Up to three points will be awarded in the third section, cultural hubs, depending on the amount of film-making work that takes place in the UK. Finally, up to eight points will be awarded in the fourth section—cultural practitioners—depending on whether the personnel involved in making the film are British nationals or residents, or nationals or residents of the member states of the European Economic Area.

There is one exception to the 16-point pass mark. Where a film scores all four points for being in English, and all available points in the cultural hubs and cultural practitioners sections—that is a total of 15 points—it must then score at least two points in one of the remaining parts of the cultural content section. This exception arose to address the European Commission’s concern that a film that achieved these 15 points, which do not reflect the purely cultural content aspects of film-making, could qualify with a minimal amount of British cultural content.

Noble Lords will be interested to learn whether some of the most iconic films would have passed such a test. A whole raft of undeniably British films such as “Charlie and the Chocolate Factory” and “The Constant Gardener” would do so because of their relevance to British culture.

We will offer a system of interim approval for films applying under the test. The film industry is particularly keen on this, because it will offer more certainty to film-makers and help them to secure financing for their films. DCMS officials will also offer advice and assistance to film-makers when filling out the application form.

The revised test will come into force on 1 January 2007. All films which commence principal photography after this date will be required to pass the test to be eligible for new film tax relief. In addition, the Treasury will make regulations under the Finance Act 2006 to provide that any film which commences principal photography before 1 January and is completed after this date, and passes the revised cultural test, will also be eligible for the new tax relief. I commend the order to the House. I beg to move.

Moved, That the draft order laid before the House on 28 November be approved. Third Report from the Statutory Instruments Committee.—(Lord Evans of Temple Guiting.)

My Lords, I thank the Minister for his speedy introduction to the order. I welcome the confirmation in yesterday’s Pre-Budget Report of the commencement of the film tax credit on 1 January. I am sure that that will be welcomed by the film industry.

It has not been an altogether happy situation during the past few years, with one tax relief being terminated two years ago and a new one only now being put into place. We have had considerable uncertainty during that period, partly as a result of delay in agreeing the new culture test with the European Commission.

We know that the test which was originally put forward earlier this year was not acceptable. One of the real issues is defining British culture. I suppose that that has required energy and time. The Minister set out the various categories of the British culture test.

One key concern is the considerable switch that has been made from a number of economic tests towards a more cultural test. The key to the tax credit being proposed by the Government must surely be to ensure a viable, vibrant and creative UK film industry, with facilities being provided in this country. A huge number of companies are affected, as the RIA states, and there is a question whether we may not have swung the balance too far towards a pure cultural test and away from the benefits gained by the previous test.

The impact of the new test is interesting. The cultural content is considerably increased, but the cultural hubs have been reduced to three points in this new system. The location of principal photography, editing and so on has become much less important in the new test. The weight placed on cultural practitioners—that is, on the personnel making the film—is less. Then there is the whole issue of the new cultural contribution, which is included. I am exercised by the fact that the noble Lord, Lord Davies of Oldham, when he introduced the previous order which had the previous British film test in it, said:

“The fact that 15 of the points are allocated to where the film is made is a response to the overwhelming view from consultation respondees that greater weight should be given to this section than to the others, so as to incentivise the use of UK talent and facilities and to build a sustainable British infrastructure for film making. Visual effects, in particular, are eligible for more points, as this is the biggest below-the-line spend for large budget feature films, and the UK's facilities are world leading and need to be incentivised to meet increasing competition from overseas”.—[Official Report, 30/3/06; cols. 925-26.]

I do not necessarily have the answers to this, but that was a clear statement by the Minister on the benefits of the previous test, which are not included in this test, which is the one that the Government have effectively negotiated with the European Commission. Are we potentially undermining our film industry by giving too much emphasis to the current system—the current culture points—and too little to where the film is made? There is also the question of how the new system interacts with the expenditure test and how it will work when the culture test is administered by the DCMS and the expenditure test is carried out by the Treasury. The Explanatory Memorandum tries to reassure us that it will be a seamless process, but could the Minister give some indication of how it would work?

Many of those in the industry have welcomed the pre-certification arrangements, which is very helpful, and the post-implementation review will also be welcome. Who will carry that out when the time comes in two years from 1 January 2007?

We are always reasonable when dealing with Brussels and, no doubt, these negotiations have been fairly tough but amicable, but how do our incentives actually compare to those in other EU countries? Did the Government actually undertake a comparative study? The acid test is whether our film industry will be incentivised and supported by the new credits. The Minister mentioned a couple of films that would still go ahead, and it is helpful to get that sort of indication; but in practice it is important to see whether certain films fall into those categories. Will “Harry Potter and the Goblet of Fire” or “The English Patient” fall within the culture test? The answer is probably, in the first case, and perhaps, in the second case. What about “Death in Venice”? Looking back, the answer to whether that would be included is probably not. This will boil down to what happens in practice, but I very much hope that the Government will carry out their post-implementation review rigorously. I also hope that it is carried out in co-ordination with the film industry, which has a great deal at stake with regard to the new order. These Benches wish it well.

My Lords, I am most grateful to the noble Lord, Lord Clement-Jones, for his questions and comments. I was a governor of the British Film Institute for 12 years. I have discussed the measure with film-makers. Obviously, the Film Council has been consulted. Nobody in the film industry with whom we have spoken shares the worries expressed by the noble Lord, Lord Clement-Jones, which are legitimate.

As I said, the order was introduced to make the new tax reliefs compatible with European law on state aid. There is little room for manoeuvre or negotiation; we are through that stage. However, the underlying message is that, as far as we can tell, practitioners in the British film industry are happy with the order. If that were otherwise, the Film Council—a body that I know very well—would certainly tell us.

The section on cultural hubs has been considerably reduced because the Commission felt that it was not overtly cultural and that its economic focus had the potential to distort competition between member states. Points will be awarded if at least 50 per cent of the work in any one of the categories is carried out in the UK. The new tax relief based on UK spend will continue to incentivise the use of UK facilities.

Which films made recently will qualify? Films such as Harry Potter, to which the noble Lord referred, “Vera Drake”, “The Queen”, “Children of Men” and Narnia, many of which were shown at the London Film Festival, will all pass the new cultural test. We are confident that films such as James Bond will do well under the new cultural test due to their British characters, underlying material, English language and the fact that, typically, some of their stories are set in the UK.

Films that are not set in the UK also fare well under the test. “The Constant Gardener” has been mentioned, but “The Last King of Scotland”, which is about Idi Amin and is just about to open, could well pass the new test.

The noble Lord asked about the interaction between the cultural test and the expenditure test, which involve different departments. The two departments have a history of co-operating. The whole scheme is designed with input from both departments and will ensure that burdens on film-makers are minimised.

I hope that I have answered the noble Lord’s questions. If I have missed any, I shall write to him. I stress that the purpose of the order is to get agreement with the commissioners.

My Lords, I was a little baffled by the points system; it is rather like the Eurovision Song Contest. However, I ask the noble Lord a straight question: why are these tax breaks for movies not available to theatre?

My Lords, the straight answer to the noble Lord’s straight question is that I do not know.

On Question, Motion agreed to.