Chancellor of the Exchequer Gordon Brown yesterday announced a new net rate of tax relief of 16% for larger-budget films and 20% for lower-budget films.
Both rates will apply only to the UK spend portion of a film's budget, not the entire budget as was possible under the old tax laws.
In a letter to UK Film Council chairman Stewart Till, Brown noted that the reforms announced today "signal a decisive move away from a system that has been the object of considerable abuse.
The measure puts Britain "back in business" for big international feature films, according to UK Film Council chief executive John Woodward.
"Until today there was real uncertainty of whether the infrastructure of the British film industry was sustainable, but what the Chancellor has done is unequivocably secured the long term future of the infrastructure."
Woodward called the Chancellor's announcement "the best news the British film industry has received for five years."
During the consultation process, the UK Film Council's had recommended relief in the 14-15% range.
"I think that politicians more than film-makers understand the gesture of the symbolic act," Woodward told ScreenDaily.com. "What Gordon Brown is doing here is saying, 'I want to support the film industry and I'm giving you more than you asked for to make a point."
According to the Pre-Budget Report, the new tax credit will offer an "enhanced deduction of 100% of qualifying production costs with a payable cash element of 25%" on smaller films with budgets under £20m, with a deduction of 80% and a payable cash element of 20% on larger films with budgets over £20m.
The new tax credit will be in effect from April 1, 2006, replacing the current Section 42 and 48 schemes.
Tim Willis, director of film at UK producers organization Pact, said: "We are pleased following the extensive consultation period between the Treasury and the film production sector that the Government has delivered both on its original commitment to provide a generous net benefit of 20% to producers, and to deliver a level of benefit to large budget films that should encourage them to keep coming to the UK."
The Treasury said the film tax credit would be available to the film production company responsible for the principal photography and post-production status of the film, not to middlemen.
"The clear intention is to direct the tax relief to companies in the film business, not for companies just providing finance," Woodward said.
The Treasury noted that smaller-budget films, including co-productions, with a UK spend of at least 40% will be able to claim a minimum benefit of 10%.
The UK Film Council welcomed "a more flexible system allowing producers to phase tax credits taking them either at the start of production, or later when they are receiving profits from the film."