Tax law ruling rocks U.K. production biz


The British film industry felt last week like a shanty town after a hurricane had hit it.

A sudden change in tax law, announced without warning Feb. 10 on what producers are calling “Black Tuesday,” blew apart the financing for many of the significant British movies due to start shooting over the next couple of months.

The government outlawed two of the U.K.’s most active equity funds, Inside Track and First Choice, effective immediately. That left perhaps as many as 25 projects with a gaping hole in their budgets, and their producers facing heavy losses if the pics go down.

As dazed industryites struggled to grasp the scale of the disaster that had just struck from a clear blue sky, they pleaded for a temporary reprieve to protect those already in pre-production. The government has requested a detailed list of projects in peril, but gave no sign whether it will cut them some slack, or if so, where it will draw the line.

Top of the risk-list is “The Libertine,” starring Johnny Depp, due to shoot Feb. 23, with a third of its $22 million budget from First Choice. “It’s mind-blowing,” said the pic’s American producer, Russ Smith, partner of John Malkovich. “I just came here to make a movie. I didn’t know that what has been legal could be made illegal in a second.”

Inside Track alone has “a couple of hundred million dollars worth” of movies currently under negotiation, per one insider, typically investing a third of the budgets. These include “The Constant Gardener,” directed by Fernando Meirelles for Focus Features; James Ivory’s “The White Countess,” backed by Sony Pictures Classics; the DreamWorks/Miramax project “Tulip Fever” directed by John Madden; and Julian Temple’s “The Golden Man.”

Andy Paterson, producer of “The Golden Man,” commented bitterly: “We’ve already committed very significant money to the film. Unless there are transitional arrangements, major productions are going to fall, and there will be huge consequences for companies. I personally would face a great financial loss.”

The cost of such a mass failure to British filmmakers, above- and below-the-line talent, agencies, post houses and any number of other related businesses would be catastrophic.

What’s remarkable is that no one seemed to see the clampdown coming. The new rules trap those funds that operate outside the U.K.’s Section 48 film tax break. Ingenious Media’s Inside Track and Grosvenor Park’s First Choice use generally agreed accounting principles (GAAP) rather than Section 48 to write off production costs as tax losses.

Both started last year and proved so successful in grabbing the lion’s share of British filmmaking that 17 imitators were in the midst of launching when the government blocked them. The Inland Revenue has decided that all of these are naked tax avoidance schemes, not legitimate businesses. The move also hits the P&A funds that Invicta and Scotts Atlantic have launched to bankroll the release of movies from Sony and Warner.

Ingenious execs long predicted that the other funds would eventually be closed down for precisely this reason but were shocked that their own Inside Track, whose more aggressive recoupment position was specifically designed to satisfy the taxmen, was caught in the net, too.

The long-term effect of the ban will be a significant contraction of the British production sector. Indie pics will face a harder struggle to get financed, and studio pics, already discouraged by the strong pound, will find even fewer reasons to come to Blighty.

The traditional Section 48 schemes, such as the Foresight fund coincidentally launched last week, will pick up some of the slack. But Section 48 is timed to expire in 2005, and its replacement has not yet been announced. In any case, investor confidence in a future scheme is likely to be shaken by last week’s events.

The greatest damage, however, could be to the psyche of British producers. The collapse of presales and the advent of tax funds has made dealmaking fiendishly convoluted and frustrating. It will take some resilience to recover from seeing complex and fragile production structures smashed to kindling on a single day by an indifferent government.

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