U.K. tightens tax relief

Benefit slashing will cause costly shoots to flee Blighty

LONDON — Filmmaking in Blighty is set to plummet in the coming months, following last week’s decision by the U.K. government to slash the value of tax breaks for movie production.

With the collapsing dollar already making Britain a less attractive location for Hollywood producers, local projects will also be increasingly driven abroad in search of co-production finance to plug the hole in their budgets.

Yet for all that, there was relief in the British film industry that the clampdown Dec. 2 by Chancellor of the Exchequer Gordon Brown was not as draconian as feared.

As expected, Brown outlawed “double dipping,” whereby producers routinely claimed tax relief twice on the same movie — once via a production fund, and later via a sale-and-leaseback deal.

For films made under Section 48 relief, which applies to budgets under $29 million, that double dip covered anything from 25% to 40% of the production cost. For bigger budget movies using Section 42, such as the “Harry Potter” franchise or “Phantom of the Opera,” the value ranged from 15%-25%.

Experts say these benefits will now be halved for upcoming pics.

But contrary to the industry’s worst fears, Brown said that films already in production on Dec. 2, or which had already closed their financing, can be completed under the old rules.

Reports of the impending crackdown had circulated in the Brit film community for a couple of weeks. That gave producers, financiers and studios the opportunity to rush forward their deal-making on impending projects, so that they could qualify for the transitional arrangements.

That’s a marked contrast to what happened last Feb. 10, when the government suddenly outlawed certain types of tax funding, causing dozens of projects to collapse overnight.

“The fact will all knew this was coming, rather than coming as a bolt from the blue as it did last February, was a good thing,” comments John Graydon of film accountancy Tenon Media. “I always sensed the news was going to be bad or dreadful, and it turned out to be merely bad.”

Graydon says that British producers are already thinking of replacing the lost tax benefit by taking their projects to shoot in other less expensive countries — accessing “tax credits in Luxembourg or Ireland, enhanced pre-sales in France or Germany, or cheap facilities in Prague or Lithuania.”

Brown also announced other restrictions. It will no longer be possible to claim tax relief on financing costs as well as the pure production cost. Blockbuster studio projects will be limited tax relief on their production budgets, rather than being able to do S&L deals on the higher figure of their claimed market value.

As ever, the detailed implications of the new rules will take some time to digest.

Some S48 production funds said they would be able to continue investing in movies as usual, although those pics would no longer also be able to benefit from a subsequent S&L deals.

But other tax experts suggested that new rules outlawing the use of non-repayable loans by investors would sound the deathknell for all S48 funds, leaving vanilla S&L deals as the only option for producers.

In any case, S48 is due to expire next July, when it will be replaced by a new production tax credit which is supposed to be worth 20% of budgets. The workings of this credit, however, have yet to be hammered out.

S42 is due to continue indefinitely, but the government has announced a review of this relief, to be completed by January. This is intended to ensure that the incentive remains generous enough to attract big-budget movies to Blighty, despite the end to double dipping.

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