A report prepared by Oxford Economics and commissioned by the UK Film Council (UKFC) has warned that the tax credit system makes co-productions unattractive to film-makers.

The report's completion coincided with an event run by the Festival of German Film earlier this week. The event focussed on strategies and business models for structuring co-productions with Germany.

Considering the timing of both events, the irony will not be lost on producers who are aware that co-productions have struggled under the current tax credit system.

The findings of the Oxford Economics report are borne out by figures from the UKFC.

Speaking to Screen, a UKFC spokesperson said 'The level of UK film co-production has dropped in the last part of this year with only four films going into production spending £4.2m.'

In 2007, the number of UK co-productions dropped 44% to 28 from 53 in 2006, with spend down to $144m (£73.8m) from $219m (£112m).

UK producers have to balance the benefits offered under co-production treaties against any losses they stand to make should their film fail to qualify for the tax credit. And there are questions about whether the full value of co-production treaties are being maximised.

Chris Curling of Zephyr Films is very much in favour of co-production treaties, such as the one with Morocco, which is due to come into effect next year. However he takes the view that 'they are no longer as valuable as they used to be.'

The research by Oxford Economics forms part of the work that the UKFC is doing to keep the Government informed about how the tax credit is working in practice. The report has now been passed to the Department of Culture, Media and Sport.

It is widely acknowledged that the tax credit system works well for UK films, set in the UK, which pass the cultural tests. Overall the level of film production in the UK has remained steady for British films thanks to the efficient working of the tax credit, public funding and the success of British filmmakers.

Rebecca O'Brien of Sixteen Films, Ken Loach's longtime producer, recognises the benefit of the new tax credit for British films. 'It's a good thing and seen by us all in the industry as a good thing.'

However, British producers are finding that the tax arrangements introduced in early 2007 have made it unattractive to use UK talent and crews when producing films abroad.

The effect of the legislation is such that where British crews and actors are working abroad but being paid in the UK, the tax credit will not apply.

O'Brien drew on a personal example to highlight the negative impact the tax credit system has had on co-productions. She referred to The Wind That Shakes The Barley, the film she produced before the legislation came into force.

'Under the current system we couldn't have made it. It was shot entirely in Ireland.'

She also acknowledges the difficulty of keeping everyone happy. 'We can't have a subsidiary that gives everybody everything.'

Mike Downey, a producer with Film & Music Entertainment has found co-production work much more difficult since the introduction of the tax credit system. 'We used to be able to have a very nice mixed portfolio using the former scheme. That's gone, any kind of flexibility has gone with it.'

In the past year and a half, F&ME has been concentrating on in-house films rather than co-productions. 'The economics don't work to do co-productions.'

Downey is concerned about the volume of business that is being lost to the UK by a lack of support. He believes the tax credit system needs to be looked at again but given all the issues facing the treasury he doesn't think the Government will be too quick to resolve the problem. 'We should be supported here in the UK but it's such a micro piece of legislation.'

O' Brien said 'There's no doubt about it, the tax credit works infinitely better but there is a blip in the system. From a producer's point of view it's a problem and it would be great to solve it.'

Curling has just completed his latest film, The Last Station, which has a predominantly UK cast including James McAvoy and Helen Mirren. Initially it was intended as a UK-German co-production but because of the current tax credit system the project is now a straight German film.

Death Defying Acts, another of Curling's films, is shot entirely in the UK and is a UK-Australian co-production. 'If we had been able to shoot it as a straight British film, the tax credit would have been worth £400,000,' Curling said.

Curling has worked on many co-productions such as Hannibal Rising and in the past when shooting abroad, a huge part of the crew would be British.

'It used to be a huge incentive to use as many British cast and crew when filming abroad. Now there is no British reason to shoot something as a British co-production.'

In response to the Oxford Economics report the UKFC spokesperson said 'Film-makers understand how the tax credit works, the Treasury is paying out quickly and under the new system the money goes directly to the film so it's much more efficient. We are, of course, monitoring film outputs carefully to fully understand the consequences of the new tax credit system on the UK production environment.'

David Pope, CEO of the New Producer's Alliance, is optimistic that the report will be the beginning of the hunt for a resolution. 'We know we're dealing with Treasury issues and the turnaround on this requires a proportionate amount of time but we are hopeful that there will be something to address the downturn in co-productions.'

Nick Quested of Goldcrest Films International says thatthe tax credit is only partially doing what Gordon Brown intended it to do.Ithas prevented the abuse of sale and leaseback by certain financial service providers. However he says the repercussionsfor co-productions are huge.'As the owner of one of the largest film postproduction facilities in the UK I have personally felt what many in the industry are going through. We have had to reduce our workforce as the work just simply isn't there.'

Quested hassent mixers to Belgium, Holland and Germany to complete films that would have posted in the UK under the previous incentive. Hebelieves that the tax credit is perfectly suited for the Studio film, 'but Studio films are primarily made by American Studios. The core of the UK film business, the independent producers, have been cast aside.'

He says that British labour working abroad should count as good spend if they are paid in the UK. 'If the government would implement this, co-productions would then become viable. The volume of work would return to the sale and leaseback years, the economy would benefit from the additional expenditures, there would be more British people employed, and we would have a vibrant exciting industry again.'

What do you think' email michael.gubbins@emap.com