The UK government has overhauled tax-based funding for films by cutting out the middlemen.
Still no doubt smarting from the negative press over last month's clamp down on GAAP funds, finance minister Gordon Brown this week set out to tighten up a sector where some funds, he said, were abusing the system.
Under the rules unveiled in this week's budget, film-makers will no longer need a group of wealthy investors to put their money into a film partnership. In fact, the new rules do not require investors at all. The new relief for production expenditure incurred, which will be introduced next year, can either be offset against profits or surrendered to the Treasury for a cash payment.
In other words, a US studio or the odd independent film company that actually has profits can use their production spend to offset tax. Everyone else can go to the government and collect a cheque worth 20% of their budget, five percentage points more than the 15% that Section 48's sale-and-leaseback scheme currently yields. As the new support seems to be a tax break rather than a deferral, like Section 48, the Treasury will in effect become the UK's biggest investor in film.
Martin Churchill, editor of The Tax-Efficient Review, said the new rules were "virtually the death knell" for the film schemes that act as middlemen. "The new system is a very smart move. It is targeted straight to where it is needed." The head of one major UK film scheme said: "We will have to reinvent ourselves. It is good for the film industry, though, and I suspect we will move more into the production end of the business." Producers body Pact was also upbeat, pointing out that the new relief will not be time-limited like Section 48.
Another positive is that Section 42, for larger-scale films, seems to have been left intact. But there was no sign of any transitional relief for films hit by last month's clampdown on GAAP production schemes, leaving some analysts bemused that UK productions such as Tulip Fever are frozen out, while the government had no apparent objection to the GAAP schemes that underwrite the p&a costs on US films.
The biggest worry, however, was the lack of detail. The Film Council had been pushing for transferable tax credits as an efficient way of supporting both production and distribution. This week's news does indeed make even the efficient transferable tax credit look flabby, but the government's commitment to distribution is vague. It has said only that it would consider the scope for the new relief to be extended to distribution, with full details to be published in the summer. "The commitment to look at how the new credit might get more new UK films into more cinemas is a significant step forward in tackling the key issue facing the UK film industry," said Alan Parker, departing chairman of the UK Film Council. "Extending the scope of the new tax credit to distribution would provide a major boost to the UK film industry, helping to ensure many more people get the chance to see UK films both at home and abroad."
There are dissenting voices - and not just the film schemes that are now trying to find ways of reinventing themselves. Many of the schemes have attracted equity investment that doubles or even triples the traditional amount available under sale-and-leaseback schemes, and that may well disappear with the expiry of Section 48 next year. "I hope you write that the film industry has been stuffed in 10ft-high letters," said one seasoned producer.
Yet this seems grossly unfair. For one, the industry was worried until recently that the government, fed up with various abuses, would not grant any further relief at all. Another experienced producer questioned whether investors in some of the more aggressive schemes understood the risks they were taking - or whether schemes were being mis-sold.
That worry seems to have been a factor in this week's budget. In another announcement, which seemed to be aimed at providing investors with more security, Brown said anyone promoting schemes would have to register them with the Inland Revenue in advance. That is no doubt aimed at preventing a repeat of last month's clamp-down, when films were already on the eve of production when the government closed a loophole. Do not expect the film industry to suddenly become a nice safe place, however: some analysts are already predicting a rush to set up aggressive funds under Section 42 or GAAP.