UK Film Council chief executive of the John Woodward has warned the UK film industry it will have to face up to a tough period of contraction following this month's tax clampdown.

'Things will get worse before they get better,' he said.

Earlier this month, the Treasury announced it was effectively ending so-called GAAP finance schemes through which wealthy individuals would offset tax against the paper losses of partnership schemes.

The impact of that move was somewhat overshadowed by the initial inclusion - and subsequent removal - of sale and leaseback in the tax measures from the Revenue.

But Woodward said the government's tough action on tax avoidance, while not specifically aimed at film, would have a significant effect, perhaps ending an era.

'There's been a mass hallucination that somehow the vast sums of money poured into film by the tax avoidance industry is legitimate.'

That chapter in the history of British cinema needs to close, he suggests.

'We are reaching the end of the line (for film funding by tax loophole.) There will be several more turns of the dice over the next year or so until everyone gets the message.'

'What's not going to be there is the ability to go out and source 30% of your film from a tax fund.'

The result will inevitably be that production will be tightened, although not on the scale of the 2004 cutbacks that followed the reform of sale and leaseback schemes.

'Less films will get made and production will contract, although the idea that there will be a wholesale collapse is totally wrong.'

He said there might even be benefits with finance concentrated around high-quality products.

'There have been times, particularly before 2004, when soft money from tax funds led to oversupply, which was not good for the brand of British film. Now, the cream may find it easier to rise to the top.'

He warned that there were companies who would try to tempt producers with a new version of GAAP, administered as sole traders rather than through partnerships. 'Some of the cowboys out there are regrouping,' he said.

But the government was in no mood to tolerate what he calls a 'global cat and mouse game where the rich look for places to hide money.'

He said the concentration instead needed to be on new forms of legitimate finance, particularly the UK tax credit, which came into force at the beginning of the year.

There were also incentives that would be particularly valuable for low-budget films, such as Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT).

He claimed the industry could also count on the support of a government, which he says is committed to film.

The proof, he suggested, was in the speed with which the government acted when it discovered last week that a measure aimed at tax avoidance in many industries had managed to trap the final year's sale and leaseback funding.

'They listened to what the Film Council and others had to say and acted quickly.

'This government has been totally supportive of the film industry. We don't always see it because sometimes we only see the world through the prism of film.'

What the UK industry can bank on now is a 'state of clarity' on which to build future production, he said.

UK producers may need more convincing. Although in the short term, most have been able to deal with the immediate effects of the GAAP clampdown, there are worries about the wider effect on confidence in the business.

'What this does to overseas investors I don't know. I think it robs them of any kind of confidence,' says Mark Shivas, director of Headline Pictures.

'We haven't been affected but I think the industry generally will badly be affected by that hiccup. The Government can turn around and do the same thing again. People are very nervous.'

'The issue we had at Vertigo with it was why this decision wasn't made in April (at the beginning of the tax year) rather than in March,' says James Richardson founder of Vertigo.

'Had this been a decision in April, it wouldn't have affected all the films this year and we could have been prepared for For us, it has been relatively OK, but for a lot of people, it has been an absolute nightmare.'

See this week's Screen International for more.