Films: I spoke too soon
Having crowed about the Government’s u-turn on film tax, it seems I spoke too soon. It is complicated, but the problem goes something like this. The Government abolished “sideways loss relief”, which allows partnerships to off-set losses in one part of a business against profits in another, thus saving tax. The abolition applies to non-active partnerships, so excludes organisations like law firms.
The u-turn on film simply protected film tax relief, which knocks about 20% off the cost of a film. It did not protect non-active partnerships which invest in film, which is how production companies get the other 80 per cent they need. Now the film industry has realised that this reform will have a huge impact on film financing in the UK.
In yesterday’s Evening Standard, it is reported that the remake of St Trinian’s lost £2 million in investment overnight. The film’s producer, who last week attended a film summit at DCMS designed to show how good the Government is, described the reform as “a massive kick in the nuts” (excuse his French). He goes on “Suddenly, our budget was 30 per cent down two weeks from shooting…I think the Government believes in film, but they’ve chanegd the laws three times in four years. You try to run a business where they change the rules as frequently and arbitrarily. They’ve got a right to root out abuses but to come in like thieves in the night makes it impossible”.
A leading film investor has written to the Chancellor and to George Osborne to say that the announcement will have a “serious and negative impact on the UK film industry…all future UK investment in the film industry is now at risk”.
This problem is a useful metaphor for this Government. Yes it may believe in something but No, it is too incompetent to put a proper policy in place. And ultimately, whose fault is it? Gordon Brown.
Mark Williams said on March 21st, 2007 at 11:32 am:
Ed, you are well informed about the taxation of film companies, but most businesses would die for the sort of support that has been given to the film industry though tax breaks for passive investors. These partnership arrangements simply subsidise the cost of individual projects that have just enough nexus with the UK to justify the tax break, but when the project is completed there is little evidence of an increase in the size of the indigenous film industry. There is a statistic that another film has been made but little in the way of enduring assets or created natural advantage.
The Hollywood film producers love the tax break because the “investors” effectively cover 20% of their costs. The investors borrow 80% of the cost of the film and put up about 20% of the cost out of their own money. Although the deals look as though they are film distribution and revenue sharing agreements, they are actually secured by bank deposits placed by the production companies. The side of the deal that the UK tax man doesn’t see is that instead of paying 100% of the cost of the film, the Hollywood producer simply puts 80% of the cost on deposit with a bank.
Net net for no risk, the investor puts up 20% and gets 40% back in tax savings, and the Hollywood producer effectively pockets 20% of the cost of a project that he might well have made anyway. If that compensates him for any marginal extra cost of employing British technicians, then he will do so, but most of the production work and profit from the fiulm stays in Hollywood.
And it is the tax payer who picks up the tab for all of this.