Just as the European Union apparently had its butter mountain and wine lake, since the early days of National Lottery funding for film in the mid-1990s, the UK has supposedly had its own surplus of unreleased movies, spurned by distributors and gathering dust on shelves. The production fever of the sale-and-leaseback years only added to this perception.

A familiar criticism of the UK film industry is that there is too much money around to make too many poor films that are never released.

A report recently commissioned by the UK Film Council (Ukfc) into low and micro-budget filmmaking in the UK (defined as those projects budgeted at up to $1.8m (£1m)) discovered the territory is producing around 100 low and micro-budget features a year, most of which fail to secure conventional theatrical distribution.

Between 2002 and 2007, the report calculates that 427 low and micro-budget films were produced in the UK.

Unsurprisingly, producers, distributors and sales agents associated with the many low-budget schemes operating in the UK strike a bullish note. They argue film-makers working in this arena are far more savvy than they ever used to be about getting their movies into the marketplace. Significantly, heavyweight figures in the UK support them.

'You've got very smart producers out there, like Mark Herbert (at Warp X) and the guys at Slingshot and Vertigo who have created a business model specifically around this budget of movie. They will survive and thrive,' says Paul Webster of Kudos Productions, who has previously spoken of his belief the UK should make films of scale to compete on the international market.

Buyers at Toronto expressed relief that 'at last the price of British films is coming down'. Foreign distributors have long complained about the price of UK films and ask why UK film-makers cannot make movies for the same budgets as their US and European counterparts. Now, it seems, they can.

Variety pack

The low-budget and micro-budget arena encompasses many different kinds of film-making. As Peter Carlton, senior commissioning executive at Film4, which is involved with Warp X, points out, they include everything from tiny budget movies shot on 'dad's credit card or on money you can scrape together from mates', to schemes such as Microwave which have a broadcaster involved 'but for a very low licence fee'.

There are also mini-studios such as Warp X which have sales and distribution strategies at their core; Optimum Releasing is one of Warp X's founding partners and on the greenlight committee for all Warp X films.

Indeed, some of the most distinctive UK films of the past year have come from the low-budget end of the industry: Paul Andrew Williams' London To Brighton, Terence Davies' Of Time And The City (made through Northwest Vision and Media's Digital Departures), Warp X titles such as Donkey Punch, A Complete History Of My Sexual Failures and Hush, Joe Lawlor and Christine Molloy's Helen and Duane Hopkins' Better Things.

All have featured prominently on the festival circuit and some have sold outside the UK. However, theatrical box-office figures for even the most well-received low-budget movies remain comparatively small (for example, even a relative critical success such as London To Brighton made only $450,000 theatrically worldwide).

Nonetheless, producers argue this can still be a profitable sphere. ''Theatrical' now doesn't just mean finding the audiences in cinemas,' suggests Mia Bays, a freelance producer who also serves as production executive and marketing/distribution consultant for Microwave, a low-budget initiative run by Film London and BBC Films.

It is producing titles such as Steven Sheil's horror picture Mum & Dad, which Revolver Films is releasing in the UK. 'It means it's a feature film with an audience and isn't a 'movie-of-the-week' or a made-for-DVD schlocker, but a movie that can stand up in a cinema but not just have to be seen in one.'

Indeed, Revolver enjoyed theatrical and DVD success in 2006 with Menhaj Huda's Kidulthood, which grossed more than $1m (£560,000) at the UK box office. 'We always felt Kidulthood was a better movie in that it had a very constrained budget,' says Justin Marciano, managing director of Revolver, of the $1.2m (£650,000) film.

'There's a certain energy to it almost because (the filmmakers) were trying to achieve something bigger than financially they had the capability to do. There's an energy that you wouldn't have got if they had a padded out, traditional budget.'

Better chance of a return

Other distributors point to the profits that can be made through low-budget film-making. 'There is an economic reason for making films at that budget - you simply have a much better chance of earning your money back,' says Rupert Preston of producer-distributor Vertigo.

He cites the example of Vertigo's initial release, Football Factory, Nick Love's 2004 drama about football hooligans starring Danny Dyer, which was produced for around $920,000 (£500,000). It performed modestly at the box office but has done well on DVD. 'It has sold 1.2 million units and will keep selling,' notes Preston.

Similarly, in 2006 Revolver racked up DVD sales of more than 40,000 copies on Kevin Gates' ultra low-budget horror picture, The Zombie Diaries, which cost a reported $9,000 (£5,000) to make.

Vertigo's philosophy is not complicated. As Preston puts it, the company focuses 'on films that have an immediate hook, an audience and some commerciality to them.

'There's an identified existing subculture within each film.' It helps, too, that Vertigo is affiliated to a new sales company, Protagonist Pictures. 'If we develop something, it gets made. If we make it, it gets released. And it gets sold internationally as well,' he explains.

Preston turns on its head the suggestion the UK market is over-saturated with low-budget movies. 'The craziest thing we get is when we are approached by British producers with a budget, which they think is low, of $3.7m or $5.5m (£2m or £3m).

There's no cast. They openly say it's an arthouse film. You scratch your head and think, 'They've got to wake up.' It just doesn't work.'

Other producers express their pleasure in making UK movies for what would be the cost of the legal and financing fees on larger UK films. The paperwork is less. So is the stress level, suggests Christine Alderson, the founder of Ipso Facto Films who created the low-budget scheme Moxie Makers.

'It came from us wanting to take control of our own destiny,' Alderson says of the thinking behind Moxie Makers, which is aiming to make nine micro-budget features over the next three years. 'A film that costs $370,000 (£200,000), if it works in the UK, is going to make its money back.'

Nationwide spread

Regional screen agencies are keen to back low-budget movies if only because they have far more of a say in how these films are made than they would on bigger-budget films. London's grip over UK film production is being loosened as jobs and film-making opportunities are being created elsewhere.

The low-budget schemes are also picking up some of the slack from the UK broadcasters, which no longer commission single television dramas in the way they once did (there are few equivalents to TV-made films from a generation ago such as Stephen Frears' Bloody Kids or Alan Clarke's Made In Britain and The Firm).

The benefits in terms of training new talent is also self-evident. So is the creative freedom that low-budget film-making can offer new talent.

'As a financing industry, we are fairly conservative. With micro-budget, we can afford to take more risks and with those risks can come fantastic surprises,' says Janine Marmot, director of film at UK training body Skillset, which is involved with Microwave.

The growth of the sector points to an increasing polarisation in UK film culture. The middle-ground is fast disappearing. It is becoming harder and harder to make films in the $1.8m-$9m (£1m-£5m) bracket - precisely the range from which films including Shallow Grave, The Full Monty, Billy Elliot, Trainspotting, Bend It Like Beckham and East Is East came.

Today's marketplace is stark. On the one hand, there are the low-budget movies. On the other, there are UK films aimed at international audiences (Atonement, The Duchess, Slumdog Millionaire). But does it matter if there is nothing in between'

'How do we make films that appeal to British audiences and work economically without having to sell to America or sell massively internationally'' asks Carlton. 'It used to be that you could make a movie for $5.5m-$7.4m (£3m-£4m) and it would work in the UK.

The reality is that figure is now $1.8m-$2.8m (£1m-£1.5m). The marketplace is much more fragmented. TV licence fees have dropped because the broadcasters no longer command the audiences they used to.'

Tough second coming

UK production is increasingly slanted either toward first-time directors or established names. 'For second-time directors who want to make bigger films, it is very tough,' says Warp X's joint managing director Robin Gutch.

With up to 10 movies released theatrically every week in the UK and more distributors in the market handling world cinema, UK films of any budget are squeezed for space. As Carlton says: 'It is very hard to get British product into the multiplexes and the so-called art circuit is very limited, with ... a very particular sense of what type of movie will work.'

Distributors have to be inventive. Revolver is planning a multi-platform release for Mum & Dad, which premiered to mixed reviews at the Edinburgh International Film Festival in June. It will be the first Microwave title to be released.

Gary Phillips of sales agent Moviehouse argues that if a UK broadcaster was to set up a dedicated channel for independent UK film, 'they would be pleasantly surprised by the level of success they would have'.

Moviehouse has sold a range of low-budget UK movies including Sugarhouse, the first movie from low-budget scheme Slingshot, and titles from Moxie Makers. Moviehouse closed US deals on both Sugarhouse (with Image Entertainment) and horror movie Credo with Grindstone. Both titles will go straight to DVD. Nonetheless, the sales show there is some appetite for UK low-budget fare among US buyers.

Indeed, the UK low-budget sector is often compared unfavourably with its US equivalent. At Locarno, Killer Films' Christine Vachon commented that European films are too dependent on public subsidy. '(In the US) we don't have any kind of film subsidies,' she said. 'It's a state of mind. I'm not popular for saying this but I feel a system for subsidy is not always the best thing for film-makers because it separates a film-maker from their audience.'

Vachon's remarks are echoed by producer Chris Collins, who oversees the Feature Film Development Programme at the UK Film Council. 'My worry is that these are all variations on a theme,' Collins says, citing the explosion in low-budget film-making. 'Trying to encourage projects to be made in an institutional-backed way perhaps doesn't solve the problem or encourage the right kind of films to be made ... If you look at the so-called US credit-card movies, we've had 20 years of US indies now. We've had wave after wave. The most recent is 'mumblecore' (a recent wave of New York film-making with a talky style) All are interesting, engaging, audience-friendly, quirky and work to the scale of films that can be made by film-makers operating outside the system. I'm not sure we've been able to generate that in a very positive way here.'

Nonetheless, Collins - like most others in the UK low-budget sector - agrees there are now new opportunities for film-makers that weren't on the radar before. 'It takes two or three films (for film-makers) to find their form. That's where micro-budget film-making can help,' Collins suggests.

The Ukfc report found 'only 18% of low and micro-budget films were released theatrically in the UK and only 16% were released theatrically abroad'.

Most observers agree - as Paul Webster puts it - that '100 low-budget features a year is far too many.' However, as Peter Carlton points out, if the UK wants to maintain its own film culture, low-budget movies are likely to remain its bedrock.

'It would be an incredibly sad day if the only cinema that could be made in Britain was cinema that was made primarily for an international market,' Carlton says. 'You should be able to make British movies for British people. Cinema is a very necessary and live part of our culture and I think the only way to do that, and the right way to do that, is at a low budget.'