The UK Treasury has pulled the plug on tax schemes expected to raise hundreds of millions of pounds of film finance this year.

One expert believes as much as $3.8bn (£2bn) could have been lost before the end of this tax year, which ends early next month.

The UK revenue department announced changes to the law (see link right) which will scupper what many call GAAP (Generally Accepted Accounting Principles) schemes.

In essence, such projects act as tax havens for rich individuals. An estimated 5,000 such wealthy investors have put money into partnerships who invest in enterprises, such as film, that are expected to make losses.

Investors had been hoping to offset their tax against such losses (so-called 'sideways loss relief'). But the blanket rules announced today have made such moves uneconomic, limiting eligible investment to just $48,000 (£25,000).

'Move effectively ends as much as $3.8bn of film finance'

Martin Churchill, editor of Tax Efficient Review, said such a move would effectively end the dreams of a new stream of film finance this year, which he estimates could be worth as much as $3.8bn (£2bn).

He believes the Revenue had probably discovered the huge amount of investment aiming for approval and realised that it could cost the Treasury up to $1bn.

The effect on the film industry was not yet clear. 'I'm not sure how much of GAAP stuff really went to British film and I don't think the impact will be enourmous. It's really a challenge to film finance as a whole.'

Fiona Hotston Moore, of tax and business consultancy MRI Moores Rowland, said: 'This is an unexpected announcement which will have significant impact on levels of investment in partnerships to fund film, technology, environmental and potentially even ordinary trading partnerships.'

The proposals will impact not only on future contributions but those already made. UK film finance companies expected to be affected include Scion, Future and Ingenious Media.

'This is not the end of our activity in the film industry'

Ingenious chairman Patrick McKenna told Screen recently that he did not believe he was in the business of GAAP finance schemes, preferring to see the company as being a 'virtual studio' encouraging investors to support a slate, with incentives as a bonus.

Nonetheless, Ingeniouscommercial director Duncan Reid said the changes would affect up to 10 films and could close some. 'This will have an impact on all creative industries because if you don't have any tax relief, it will not be attractive to investors.

'This will have an effect on us but the commercial part of our work is still there and this is not the end of our activity in the film industry.'

Producers and financiers said the news spelled hard times ahead, at least in the short term. 'We've got IFAs around the country that have been raising funding that we won't be able to use. That's terribly sad,' said Paul Brett of Prescience Film Finance. 'A lot of UK films that were going to shoot over the next few weeks are going to fall apart.'

Brett added that the news caught most people in the film industry off-guard. 'This is really sad. It's completely out of the blue,' he said. 'The UK Film Council may have seen this coming but they were the only ones.'

While the crackdown is believed to target mostly GAAP schemes, some worried that the final films being produced under the former Section 48 film tax break would be hit. One producer said: 'I believe there are at least 50 British-qualifying feature films which, as of today, haven't closed on their sale-and-leaseback.'

Film producers and financiers said they are still waiting for the dust to settle from today's blanket policy announcement and how specifically it will be applied to film financing. If the law is followed to the letter, then some Section 48 films are now ineligible for sale-and-leaseback money, meaning that some independent producers could technically be insolvent now.

'The industry was already on its knees and now this happens'

Producer Mike Downey of Film & Music Entertainment said: 'The Revenue had drawn a line on Section 48 and everybody thought they knew where they stood with the films being made with Section 48, and now the rug has been pulled out from that.'

Alex Brown, a partner in UK production company Studio Eight, added: 'It was great that that the British were at the Oscars and winning awards -but what is going to happen to the next generation of talent' The industry was already on its knees and now this happens. To the Americans this looks like a government that is hostile to film.'

But a Revenue spokesman said the announcement would have no effect on legitimate film investment. 'This measure is not directed at the film industry. These people [investors in GAAP schemes] are not interested in film but in anything that allows the partnership to generate a loss.'

'We have not targeted the film industry with this announcement. This is a wider announcement, targeting tax all avoidance through partnerships and sideways loss relief (SLR).

The Government continues to support genuine film makers through the new film tax reliefs - one of the most valuable film production incentives in the world,' he said.

'This measure only targets those financiers who seek to gain an additional tax advantage over and above the new reliefs.'

Caroline Nagle, spokeswoman for the UK Film Council, didn't think that the Treasury announcement was a shock, considering the government's years of aggressive moves against avoidance.

'It's part of an ongoing government crackdown on tax avoidance,' she said. 'There is a generous tax system in place for films, and that's what the government wants film-makers to use, rather than relying on other types of funds.'