The UK industry has welcomed a surprise signal from Chancellor Gordon Brown that he intends to renew tax-based support when the influential Section 48 expires in 2005.

The government's pre-budget report stated that it would unveil the results of talks with the industry about a so-called son of Section 48 in the full budget in April. The new support is expected to take the form of transferable tax credits modelled on Luxembourg's system of support but available both to production and distribution, including international distribution costs.

"Building on the tax measures introduced by the Government in 1997, and extended in 2001, to promote investment in British films, Budget 2004 will announce the results of discussions with the industry and others to extend support through the tax system beyond 2005," the report stated. "In doing so, the Government will consider the scope for further simplification, and ensure that the extended support is targeted effectively."

Alan Parker, chairman of the UK Film Council, which has proposed the Luxembourg-style tax credits, said: "We are extremely pleased that the Chancellor has taken the opportunity to highlight the Government's continued commitment to supporting film in the UK. Film plays an important cultural and economic role and the Chancellor's comments will be widely welcomed throughout the UK film industry."

Films Minister Estelle Morris, who has endorsed the tax credit proposal, added: "The Chancellor's announcement is good news for the UK film industry. It reinforces this Government's commitment to a truly sustainable UK film industry that brings with it huge cultural and economic benefits. Over the next few months, we will work closely with the industry and the Treasury to find ways to simplify and target the extended support effectively."

But there was also a significant tightening of existing regulations, with the Inland Revenue cracking down on film partnerships that abuse the system by encouraging investors to exit in the first few years of a partnership in a bid to avoid any tax liability.

"If individuals, on or after 10 December 2003, exit from a film business in a way that gives rise to a permanent tax advantage, they will be subject to an income tax charge that will remove this advantage," the Revenue said.

"Sale & Leaseback schemes are nothing but tax deferral products, but I suspect are widely mis-sold as tax mitigation products," said Martin Churchill, editor of the Tax Efficient Review. "The Inland Revenue has firmly closed the door on any chance of exits from these schemes in today's pre-budget report. I suspect that a large number of investors will feel that they have been mis-sold this product. It now does what it says on the tin - it is a 15 year tax deferral where the investor is borrowing from the Inland Revenue at around 5.5% per annum."