As producers begin to grapple in earnest with the UK tax incentives, the local industry is eyeing the new system with a mix of anticipation and trepidation. Most acknowledge the credits will not compensate for the investment lost to the UK film industry following the scrapping of Section 48 and Section 42 tax relief but they also see new opportunities.

'In some shape or form, there is approximately 20% of the budget of the movie that is there,' says James Richardson, of the UK's Vertigo Films. 'That is a fantastic thing to have. It's a wonderful opportunity. That 20% can be leveraged to attract other equity producers.'

There are already examples of some big-budget movies setting up shop elsewhere as the industry waits to see how the new tax credit system will work in practice. For example, Universal looked at bringing Timur Bekmambetov's Wanted, to which James McAvoy, Angelina Jolie and Morgan Freeman are attached, to Pinewood. However, it now appears the film will shoot entirely outside the UK in Prague and the US.

The new 'cultural test' that films must pass to access the credit has provoked intense debate. Some have argued its terms are too restrictive.

'The new tax credit system is a narrow doorway through which films have to pass,' says producer Iain Smith, who is working on Wanted. 'That is unfortunate in that it will naturally therefore inhibit the number of films that are going to come into Britain.'

On the other hand, the tax credits are culturally specific. The intention is to ensure more UK films are made, something local producers broadly welcome.

'Sale-and-leaseback volte face restored some confidence'
In early March, there was consternation over the government's sudden closure of the so-called Gaap funds. It briefly looked as if films using the old sale-and-leaseback schemes were also going to be punished. After frantic lobbying, sale-and-leaseback was exempted from the tax clampdown.

'The volte-face (over sale-and-leaseback) was very good because it restored some confidence,' says Smith. 'There is no doubt that when it comes to the public purse, there has to be a huge responsibility that overrides the interests and concerns of the film industry. But in this global (economy) of ours, the confidence a government gives to people coming in with inward investment is terribly, terribly important.

'The studios and the big independent companies that would bring product into Britain to be made would always be careful now. They don't know whether they're applying rules that might suddenly change.'

The financial year 2006-07 was a transitional one for UK producers. In theory, the credits should have been available by April 2006, at the start of the tax year. In practice, the new system only received European state aid approval in November and the credits were not legal until January.

This meant that interim arrangements had to be made. Certain financiers offered to cash-flow the tax credits in the expectation that they would become law.

Sometimes producers did this themselves. Vertigo, for example, used the tax credits (or put up money against them) on such titles as Waz and Outlaw. '[The tax credits] had not been ratified and the interim changes had not been agreed and so it was a risk for us. But we thought it would go our way and it has,' says Vertigo's Richardson.

'Itwill take time to get used to it, as with sale-and-leaseback'
Producer Andrew Eaton, of Revolution Films, is preparing to use the tax credit for the first time on Michael Winterbottom's feature Genova. The project, a ghost story set in Italy, is set to shoot later this year.

'The film we just did with Paramount (A Mighty Heart) would have had it but when the cultural test was changed, it was easier for us to go under the old Section 42 transitional relief,' Eaton explains.

On first experience, Eaton suggests, the tax credits seem user friendly. 'Touch wood, it's so far, so good. It is much simpler for everyone to see how the credit works in a finance plan. But it will take time to get used to it, just as it did with sale-and-leaseback.'