Even as the UK’s tax production funds are failing to attract enough investors to match their lofty ambitions, a new breed of internationally-oriented schemes are starting to emerge.

While funds such Monument, which set out to provide 50% of budgets, have failed to materialise, tax specialists predict the growth of a middle ground with funds such as Fusion and Microfusion, the latest vehicles from Future Filmgroup chief Tim Levy.

Levy, a veteran of the UK tax financing sector, aims for the funds to offer producers up to 35% of budgets, far higher than the 13% accessed via standard sale and leaseback deals. But he wants to attract investors by keeping their risk significantly lower than more aggressive production funds, most of which have fallen far short of their investment targets.

“It was just wrong-headed to conclude that investors who had happily taken a no risk deferral under the sale and leaseback schemes would happily take on risk,” he said.

“There is a middle ground opening up,” says Martin Churchill, editor of investment journal the Tax Efficient Review. “There is some form of production financing but there is some floor to stop any sliding back for investors and there is a limited upside. I expect to see more of these funds.”

Another recently-launched production fund, Ingenious’ Inside Track, also offers 35% of budgets and is already bankrolling a trio of films with Pathe including Girl With A Pearl Earring. Given the current dearth in pre-sales, the film’s producer Andy Paterson argues that such funds are crucial.

“Pre-sales are non-existent,” he said. “Without these equity funds at this time there would be no production.”

Funds are also pushing into the distribution sector. One leading tax financing figure is assembling a tax-driven p&a fund with a studio.

Like the p&a fund, Levy’s Fusion is aimed at US studio productions. Fusion aims to cover up to 35% of the direct cost of British qualifying films using UK tax-driven financing under section 42, which has no cap on budgets. Microfusion is a similar vehicle for independent films, offering producers up to 25% of budgets under sections 48 and section 42.

In return, the schemes asks for up to 5% of first dollar grosses, increasing to 7.5% if films reach 250% of costs. Levy has not finalised a fund for his schemes yet; he aims to secure films first, then go to investors.

The two deals also include a sale and leaseback arrangement, with each scheme accessing two partnerships of investors, one providing production money, the other a sale and leaseback deal. Although Levy is reluctant to reveal details to competitors, he insists that his schemes avoid falling foul of so-called double-dipping, a potential issue with the government if films use both a sale and leaseback deal and an up-front production deal.

“Double dipping does not apply to our structure,” Levy said. “We have found a different way of structuring it.”

Nevertheless, offering a timely reminder of the tax financing sector’s risks, Levy confirmed that the Inland Revenue has just settled its three year inquiry into his earlier Voyager scheme. The scheme, which raised more than £200m in investment under the aegis of Levy’s company Factor Eight, came under government scrutiny because investors could take a tax reduction and then sell on to a corporate entity with only a limited liability.

While investors are understood to have taken a limited hit at worst from the recent settlement, those who stayed in the partnership are still dependent on how the scheme’s 55 films perform. Levy said that none of the films, which include Grey Owl, The Luzhin Defence, The General and Simon Magus, “have done outstandingly well”.

“Some have done okay,” he said. “8-10 might have repaid their loans, 8-10 have done nothing, and the rest are in between.”

As investors’ liability is joint and several, if one partner does not pay any outstanding money to Levy’s Factor Eight, another becomes liable. “We made it clear to partners that if they did not exit they might owe us a large sum of money,” Levy said.

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