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Blighty rethinks tax rules

U.K. gov't proposes 20% ceiling for Hollywood pix

LONDON — The UK government has proposed a radical new system of film tax credits, designed to boost British talent and production companies while also attracting Hollywood movies to shoot in the U.K.

The new regime, which is intended to start in April 2006, will replace the existing Section 48 and Section 42 tax breaks.

The tax credits will provide up to 24% of the budget for British movies costing less than £20 million ($35 million), and a maximum of 20% for bigger-budget pics.

That compares favorably with the current reliefs, with S48 typically worth 14% for films up to $26 million, and S42 generating around 8% for bigger movies.

But in a significant shift of policy, the new credit will apply only to U.K. expenditure – unlike the old system, where the tax break applied to the whole budget. That means the maximum benefit will be available only to films spending 80% of their budget in Blighty.

The government is also proposing that films should have to pass a new “cultural test” to be eligible for tax credits. Pics will have to meet more stringent cultural criteria to qualify as British.

In addition to the tax credit, producers will be able to claim a slice of tax-free income from their films – equal to 50% of the U.K. expenditure for lower budget movies, or 25% for films in the bigger budget category.

Significantly, this deduction does not have to be set against income from the film in question, but can be spread across a slate of British films. That could provide an incentive both for longer-term investment in prodution companies, and for vertical integration between production and distribution.

All of these proposals will now be subject to a formal three-month consultation process with the film industry, before the government settles on the fine print.

John Woodward, chief exec of the U.K. Film Council, said, “The new tax credit system will continue to provide a subsidy for British films, but also offers the potential to help build British businesses by encouraging investment in slates of films rather than single projects.”

“The precise value of the new relief will be determined by the way in which filmmakers chose to use it. Where they continue to structure their films in the same way as they do now, the level of benefit will be broadly the same. However, the new reliefs will deliver a bigger benefit when the income from a film is reinvested against future production.”

“This marks a totally new beginning for film tax relief, and the coming months of the consultation period will be crucial as the detail of the proposal is working through.”

Treasury minister Dawn Primarolo commented, “This consultation signals the government’s continuing recognition of the cultural and economic benefits that film production brings to the U.K.”

First reactions from the industry were cautiously positive. “The proposed … cultural criteria and the new … tax credit should provide a clearer and simpler system of support for producers of U.K. films,” said Ivan Dunleavy, chief exec of the Pinewood Shepperton studio group.

Under the new proposals, producers of films costing up to $35 million will be able to claim a 30% tax credit on their U.K. expenditure, up to 80% of their budgets. That translates as 24% of the total budget for films that spend the maximum amount in Blighty.

As an additional benefit, producers will not pay tax on income from the film until they have recouped 50% of the qualifying U.K. expenditure.

For films costing over $35 million – typically Hollywood movies shooting in the U.K. – the tax credit will be worth 25% of British expenditure up to 80% of the budget (ie a maximum 20% of the total budget). Tax on income will be payable after 25% of the U.K. expenditure is recouped.

The old rules for qualifying as a British film, which were largely based on expenditure, will be replaced by a points system based on the British setting and content of the storyline, and the participation of British talent and companies in the production.

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