Earlier this spring, when the UK government clamped down on "sole trader" schemes, it seemed like the last hurrah for a gold rush era in UK film financing. The old Section 48 and Section 42 tax reliefs were no longer in place. A period in which hundreds of millions of pounds had been raised for UK production through tax funds supporting elaborately structured sale-and-leaseback deals was definitively over.
"Back in the Section 48 days, there was a lot of crazy money being raised. Basically, it was free money for bad films and a lot of very bad films were being made," says Nigel Thomas of London and Los Angeles-based production and financing outfit Matador. He suggests: "The moment Section 48 went away (in April 2006), so did most of the financial intermediaries. They were in it for financial reasons, not because they had a long-term commitment to the British film industry."
Few would deny it is now more difficult for UK film-makers to complete their budgets. Producers broadly welcome the new tax credit introduced last year but they are struggling for the "equity slug" they might once have received from tax funds. This means an increased reliance on such potential partners as the UK Film Council, BBC Films, Film4 and the regional film funds.
However, the UK film financing sector is arguably more buoyant than some reports might suggest. "There is no shortage of money. Most financiers would say there is a shortage of good projects with strong commercial prospects," says Ivan McTaggart of Limelight. The difference now, he adds, is that producers "have to look very closely at the cost of their project relative to its value in the market."
Limelight, launched last year through its venture capital trust (VCT), offers producers 100% of the forecast value of the tax credit. "We'll charge a fixed fee for doing that - 20% of the amount we advance - and we defer that entirely into revenues," McTaggart explains. Limelight also takes 2% of net profits. Through its relationship with BMS Finance, it also offers gap and super-gap financing. Limelight raised an initial $11m (£5.5m) and has supported such films as Moon, Adulthood, Daisy Chain and Rounding Up Donkeys.
Another prominent player is Aramid Capital Partners, whose entertainment fund discounts the tax credit while also providing bridge and gap financing. In the year or so since it launched, it has raised more than $200m and invested in close to 30 features, including US-based slate deals, one with a major US distributor, one with a top US sales agent and a slate deal with UK producer Vertigo for low-budget films. The fund aims to generate returns to investors of 15%. "We've structured ourselves as a hedge fund. We've therefore managed to attract a number of other hedge funds to invest in ours," says Aramid's chief executive Simon Fawcett. "A lot of hedge funds are looking for diversification in their portfolio. They're looking for non-correlated investment - ie, non-correlated to the financial market. An investment in Aramid is for them a very good diversification."
Some producers are grumbling about how "expensive" Aramid's money can be. Fawcett says its pricing is "totally commensurate with the level of risk" it takes. Perhaps alarmingly for the UK industry, Aramid is supporting more US than British films. "Because of the tax credits now available in the US, which are in many instances more attractive than the UK tax credit, if you combine that with the value of the dollar, the US has become a far more attractive place to be producing films," Fawcett says.
Last August, the Isle of Man supported the setting up of new production venture CinemaNX (NX), headed by Steve Christian. NX undertakes to provide between 50% and 100% of budgets, taking rights to English-speaking territories in return. "We came in just on the back of (Section) 42 and 48 going," Christian says. "We were able to cash-flow the tax credit straight up. We are in a wonderful position because we are able to chase material rather than return on capital employed. We're not there to please the returns of a hedge fund manager or to return the capital a studio might want from you." In the eight or so months of its existence, NX has backed such projects as Bunch Of Amateurs and Me And Orson Welles.
Meanwhile, Future Films (a major player in the sale-and-leaseback era) has remoulded itself as a one-stop shop covering finance, production and production services. "We've been focused on different forms of finance," explains chief executive Stephen Margolis. "We've got relationships with VCTs, we've got relationships in America and relationships in Spain and Australia. The pure provision of tax deals is not first on our agenda any more. We are continuing to produce films and looking elsewhere for the finance."
Some UK financiers are still raising funds through "active sole trader" schemes (with investors actively involved in production who work at least 10 hours a week on film-related activities). However, observers point out such schemes will be scrutinised carefully by the UK government.
Meanwhile, new funds continue to be launched. For example, last summer Footprint Films and the Route Group launched a fund with a minimum investment of $98,000 (£50,000) which aims to provide a 21% return for investors.
"A number of the tax schemes are trying to reinvent their processes and continue in a similar way but as far as I can see, the volume will be massively reduced," notes one well-placed financier. There is particular interest about how Ingenious - which raised hundreds of millions during the sale-and-leaseback days to back films including Vera Drake, Hotel Rwanda and The Golden Compass - will evolve. "Investors know we do everything possible to mitigate their risk and so persuade them to stay in the game," Ingenious' policy adviser Martin Smith recently said. "They know we know investors will only commit capital to an investment proposition that earns a return on capital greater than the cost of capital. That's the test."
Since the end of sale-and-leaseback, Enterprise Investment Schemes (EIS) have become increasingly popular as film financing tools. Baker Street Entertainment (an offshoot of the now defunct Baker Street Media Finance) has used EIS to raise funds for CGI-animated feature The Kitchen Games and Dave Kean's Luna. Meanwhile, Liberty Films successfully kick-started its project Moon - now with a Sony deal - through EIS.
Nigel Thomas of Matador, which has successfully raised funds for both its own and third-party films through EIS, points out investors recognise EIS as a "proper business enterprise", not a tax wheeze. A well-structured EIS can give investors on a successful film a better tax advantage than they might have received through an old tax structure.
Despite the end of sale and leaseback, Thomas argues that UK producers are at last starting to "think about making commercial films, building businesses that can stand on their feet and not just relying on the teat of the taxman".
"It's pretty hair-raising," Thomas ventures when asked about the health of the UK film financing sector. "But there is definitely money out there."