Anyone looking for the next Germany should consider the UK. A $2.5bn (£1.6 bn) avalanche of financing is pouring into the film sector as changes in last April's budget start to kick in. But tax financing is in such flux that, like Germany, the boom could suddenly turn sour.

With TV titles recently barred from accessing production tax breaks, film producers are struggling to deliver enough product to feed investor demand.

Financiers, having relied on TV for an estimated 70% of the $2.5bn which was sheltered last year, are having to offer ever more competitive deals to attract producers. Schemes once offered less than 10% of budgets through sale and leaseback deals, where producers sell films to investors and then lease them back. Although many of not yet secured investors, tax-based production schemes now promise up to 50% of budgets in equity up front.

"There is not enough product," says Michael Henry, the media lawyer behind Monument, the latest fund to go to market. "If you take out Bond and Tomb Raider 2, the UK production sector is going to be worth $550m-$625m (£350m-£400m) this year. Last year, $2.5bn was sheltered."

Films must qualify as British, but spend in the UK can still be as little as 10%. Tax-based financier Visionview committed to provide 25% of budgets on Danish powerhouse Zentropa's horror label, Zentropa Zhillers. RAI Cinema's The Best Day Of My Life shot in Italy, in Italian, with an Italian cast, but still qualified.

The real problems are whether financing companies will attract enough product to survive and whether they will secure enough cash when they are asking investors to shoulder more risk.

"There is going to be disappointment on both sides," says Stephen Margolis, managing director of leading tax financier, Future Film Group. "Some schemes won't find the product; some producers will suddenly find their schemes have no money."

The sector has seen more than its fair share of white elephants. As well as banning TV production, the budget clamped down on tax relief for deferrals, which companies such as Evolution Films put at three times the cash budget of their films.

Feature Film House was a much-vaunted scheme that boasted as advisors former Columbia TriStar international distribution president Duncan Clarke and Evolution founder Andrew Tate - but it has failed to materialise. Last month, it emerged that the Government had refused to grant relief to Peakviewing: $219m (£140m) was handed back to investors.

The hope is that some of the new financing operations will evolve into permanent fixtures. One leading UK producer is pulling together a group of filmmakers and sales agents who will ask investors to take a stake in the company as a way of contributing to film overheads. Monument encompasses a company which will own rights to its films and which it aims to float or sell, while Matrix offered FilmFour chief Paul Webster backing.

Meanwhile, tax-based funding is providing a valuable boost for filmmaking: Visionview recently helped prop up Oliver Cromwell story To Kill A King when funding failed to materialise though IAC Film.

But the sector is jittery about how the Government will react to the increasingly aggressive schemes. Confusion over so-called double dipping jeopardised Bright Young Things last week. Nerves are further frayed by producers delaying committing in order to play the field. The doomsday scenario is that the Government will not renew breaks in 2005.

"The popularity of the film schemes amongst investors is set to remain high," said Martin Churchill, editor of the influential Tax Efficient Review. "Yet the market is in turmoil."

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