Operations ofthe UK tax finance industry today (Jan 10) suffered a major blow when theInland Revenue (the UK's tax authority) closed down the burgeoning equityfunds sub-sector.

Some 17production partnerships managed by financiers such as Grosvenor Park andIngenious' Inside Track that use "Generally Agreed AccountingPrincipals" are understood to have been affected.

The Revenueclosed a loophole in legislation that permitted trading losses incurred withinpartnerships to attract tax losses. "These schemes exploit tax reliefsthat are intended for people who risk their own money in running genuinebusinesses, but the schemes manipulate tax relief to create claims for lossesin excess of the capital at risk," said the Inland Revenue in astatement.

The loophole wasclosed with immediate effect. Sale and leaseback systems are unaffected by theruling, although separately the government is currently examining proposals forrevision of sale and leasebacks set up under Section 48 rules.

Films now inproduction using money from these funds are almost certainly unaffected as thatwould create legal precedent and will not be stopped. But films that had hopedto tap into these funds before the end of the current 2003-2004 tax year willhave to find new finance.

Parts of thefilm industry believe that they have been unfairly hit by the changes intendedto address problems in other business sectors.

John Woodward, chief executive of the UK Film Council said:"The repercussions of the changes announced today will be felt across arange of different industries as well as film, but we are now scheduling ameeting with the Inland Revenue to discuss the possibility of introducingtransitional arrangements to protect films currently going into productionwhere complex co-financing arrangements have been put into place in good faithby bona fide industry investors."

Fund managers were not entirely despondent. Some saw theattack on the equity partnership schemes as a sign that the government has nowseen the wisdom of maintaining Section 48. They argue that sale and leasebackhas a neutral long-term impact for tax revenues and now that TV has been takenout of the scheme, the tax leakage is cut from £2bn a year to about£600m.

Woodward arguesthat the latest Inland Revenue moves and the proposed abolition of Section 48demonstrate that the UK film industry needs to have its own specific taxrelief, as part of an agreed policy to assist the film industry.