There is a sense of deja vu about the sudden tax changes in the UK last week. The government ostensibly clamped down on so-called sideways loss relief, whereby a wealthy individual could offset tax against accounting losses recorded by a partnership. It was a loophole that spawned what became known as Gaap (Generally Accepted Accountancy Principles) schemes and was used by many industries to attract wealthy investors.

For film, it looked like a nice source of new revenue. Martin Churchill, editor of Tax Efficient Review reckoned as much as $3.8bn (£2bn) would have gone through this financial year.

Such schemes effectively brought that dream to a sudden halt. And to compound the difficulties for producers, it became quickly apparent that the catch-all guidelines from the UK's Inland Revenue department would also cover the final year of sale-and-leaseback arrangements. Only six days later did the government introduce an exemption, after a concerted series of protests from the industry in the UK and beyond.

The anger and frustration in the UK was all too familiar. We saw it in the UK and Italy in 2004 and Germany in 2005.

In effect, the exploitation of tax for film has become something of an arms race. Governments draft legislation, and accountants find holes in the provisions which are then exploited until they reach the stage where they begin to make a dent in public finances. And so new rules are drafted for accountants to find new holes.

The surprise is that there is surprise every time governments act. There have been at least 12 individual actions to close tax loopholes in the UK alone since 2000. The writing has been on the wall for Gaap since last year.

Justifying the move last week, UK paymaster general Dawn Primarolo suggested the government had been forced into action: "Despite the introduction of extensive anti-avoidance legislation in this area, scheme providers are continuing to devise and operate more contrived schemes."

The language perhaps overplays the notion of a conniving middleman about to get his comeuppance. Most of the providers are big global companies with lots of strings to their bows.

Ingenious Media commercial 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."

Rather, the impact will be most felt by some producers left with budget shortfalls and by those who may find the films they were planning to work on postponed or cancelled.

"A lot of UK films that were going to shoot over the next few weeks are going to fall apart," says Paul Brett of Prescience Film Finance.

But it is important to look beyond the hyperbole. The history of similar recent clampdowns has been turmoil followed by regrouping and then often a period of success.

The Italian business seemed dead in the water in 2004, yet so far in 2007 it is the box-office poster boy, with local film-making a considerable impact.

Germany's depression after the collapse of the media funds in 2005, has at least been soothed by a cinematic flowering, highlighted by this year's Oscar winner The Lives Of Others and the box-office success of Perfume: The Story Of A Murderer.

Three years after the panic inspired by government plans to end Section 42 and 48, UK prime minister Tony Blair, with impeccably poor timing, announced that we were in the midst of a golden age for the British arts (ironically, the iconic films he may have had in mind such as Casino Royale and The Queen were beneficiaries of the extended sale-and-leaseback scheme).

That is not to minimise the effect on producers now. But many film companies have already been looking to the future. There is after all a tax regime in place, which has been operating since January 1. There are also other advantages such as EIS (Enterprise Investment Schemes), which give breaks to investments in small business.

New businesses, such as Visible Films - an alliance between Samuelson Productions, Ecosse Films and Recorded Picture Company - are already looking at new models. Pooling together companies with track records and with an emphasis on commercially viable film, it is offering investors the idea that film is a worthwhile investment in its own right rather than a mere tax loss.

"The UK tax break with EIS lowers the threshold for making a profit and rewards success, allowing you to get super profits," says Visible founder Anne Sheehan.

Dresdner Kleinwort bank last month announced its intention to establish a pan-European slate-financing venture that again pools independent film into an attractive investment opportunity for private equity.

Less obvious but potentially as significant is the exploitation of new media platforms and the downward pressure on budgets that may further enhance profitability.

The need to shift attention to profits and private equity is accentuated by hints that the taxation arms race may be in its last few laps. But in the post-Enron world, disclosure rules have become far more stringent. That theory will be thoroughly tested.

The impact of the UK tax clampdown - and indeed of the territory tax break - will not really become clear for some time. The irony is that if governments really are driving away private investment in film, the taxpayer may end up paying through lost revenue.

But equally, if it heralds a new era of finance in which film can be taken seriously as investment in its own right, the UK government may be doing its industry a favour.


- Sideways loss relief made a quick impact on a great many businesses, allowing investors a means to avoid tax during a financial year.

- An estimated 5,000 such wealthy investors have put money into partnerships which invest in enterprises, including film, that are expected to make losses.

- The partnership allocates losses to the investor who can offset them against other income or capital gains to reduce their tax bill.

- The new rules have made such moves uneconomic, limiting eligible investment to just $48,000 (£25,000).