The UK tax authorities say they will make no exception for sale-and-leaseback funding arrangements under new tax rules announced last week.

But the industry is continuing to fight with many believing that the decision will be overturned by the government.

On Friday, a Treasury briefing effectively closed the door on so-called GAAP finance schemes, which some estimates suggested could have raised up to $3.5bn this tax year. Click here to see Revenue statement.

Those arrangements depended on what is called 'sideways loss relief', through which wealthy individuals, working through a partnership, could offset tax against expected losses on a film.

Such relief has also been a big part of the attraction for investors in partnerships acting as a vehicle for existing Section 42 and 48 arrangements, which have funded such high-profile British films as The Queen and Casino Royale (pictured).

The Revenue confirmed that there would be no exceptions but there are still serious efforts being made to overturn the decision as far as sale and leaseback is concerned.

Yesterday, producers body PACT confirmed that it would be lobbying hard for a change of heart, hoping that the government could be made to understand the effect of the decision not on big financial partnerships but on small producers.

'We need to explain that those involved are often one or two men bands putting their neck on the line to cashflow sale and leaseback according to established practice,' said PACT's director of film, Tim Willis.

The body is trying to ascertain the scale of the damage, which will effect different films in different ways. 'We need to know who is going to get hurt.'

The UK Film Council and indeed the Revenue itself are separately compiling data on the number of films involved - expected to be around 90.

A number of individual organisations have also made representations. Chartered accountants Malde & Co have written to Ministers:

'The consequence of the new proposed legislation to our clients (which total 31 films) will be immense and in many cases catastrophic. Some of the clients' companies will face serious financial hardship including an inability to fulfill their financial obligations to third party suppliers and personnel,' wrote partner Aashish Gudka.

Others have been pointing out the effect on private investors.

'We have advised high net worth individuals on investing into the film industry for a number of years now and it seems to be clear that the Government is determined to stop this,'said Neill Millard, group director of Cavanagh Group.

'In order to get private client monies invested into such areas, it does require some form of tax break. It is not appropriate for 'normal investors' to enter into such arrangements, it is too high risk.

'So if each successive structure that achieves this is removed, the British Film Industry will suffer, probably with immediate effect. Where the funding goes towards US films, the proceeds from those films will no longer end up within UK LLPs, thus HMRC will lose this tax revenue,' he said.

Three other factors may aid the case for a rethink.
  • The fact that sale and leaseback only has a year to run, limiting the amount of possible investment going through the Revenue
  • The potential for legal action: the move will be damaging for individual investors and producers who may turn to the courts to assert their right to relief under a bona fide legal arrangement entered in good faith
  • The profile of the films themselves. Prime Minister Tony Blair yesterday proclaimed a 'golden age' for British arts, at the same time that the Revenue was attacking a financial system that had helped produce Oscar-winners like The Queen and iconic UK productions such as Casino Royale and Harry Potter.
So far such arguments are falling on deaf ears.'The proposed restrictions apply to partnership trading losses which arise from film production in the same way as those arising from other activities,' said a Revenue spokesman. ' And this will be the case whether or not the partnership is able to benefit from the 'old' film reliefs.'

Although such arrangements have not been picked up by the Revenue in previous years, the spokesman said it was now easier to spot avoidance. 'Under new disclosure rules we can now act decisively to close loopholes.'

He again emphasised that the new rules were not aimed at the film industry with the same rules applying to other industries such as forestry and he ruled out any hope that lobbying may be effective.

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