Gov't makes radical changes, complex calculations

LONDON — The British film industry is going to get a lot more British, and a whole lot less international, if the U.K. government gets its way.

The government has proposed a complex regime of production tax credits, combined with a new “cultural test” to qualify for the benefits, to replace the existing Section 42 and Section 48 reliefs next April.

The changes are so radical, and the calculations so complex, that they have caused a mass outbreak of head-scratching even among those accountants and lawyers who specialize in the dark arts of production financing.

Mere producers confess to being utterly baffled.

“My immediate reaction is that I had better go back to school and learn some more math,” says Ealing Studios topper Barnaby Thompson, his head swimming with the effort of trying to work out what a 30% credit on U.K. expenditure up to 80% of budget (for a film costing up to $35 million) plus a 50% enhanced tax deduction against income really adds up to.

“I just want to know how much I get for a movie,” he says plaintively.

The simple answer is that there’s no simple answer. It depends how much money is spent in the U.K. and how the movie is financed. But after a few days crunching the figures, some tentative and not entirely positive conclusions have started to emerge.

According to John Graydon of accounting firm Tenon Media, the tax credit looks rosy for purely British movies under $35 million, delivering a net benefit up to 19% of budget, vs. around 14% for S48 sale-and-lease-back.

But it’s not so great for big Hollywood pics shooting in Blighty, worth at most 8% (vs. 9% currently under S42). And it’s very bad indeed for international co-productions.

Previously, the U.K. was unique in offering its tax break on the entire budget of a movie, regardless of where it was shot, so long as it either spent 70% in the U.K. or qualified as British under co-production treaties. In theory, that meant a pic could spend as little as 10% (though more typically 40%) in Blighty, and still get the maximum U.K. tax break.

The government says this actively encouraged British producers to spend less money in the U.K. and bred a counterproductive culture of “relief tourism.”

But by restricting the new tax credit to U.K. expenditure, the new system offers little to those British filmmakers whose creative horizons stretch beyond the White Cliffs of Dover.

This came as a particular surprise to those industry execs who have spent many months working with the Dept. of Culture, Media & Sport on a review of co-prod treaties. “You wonder if it was worth the bother,” says one lawyer. “A huge amount of work has gone into these treaties, and now few people will ever use them because the financial incentive has disappeared.”

Scant rewards

Take Ridley Scott’s “Kingdom of Heaven.” Fox bent over backward to reach the 40% U.K. spend required to qualify that pic as a co-production for the S42 tax break. It might not be too hard for such a film to pass the new cultural test, which awards points for using Brit talent above and below the line, for telling British stories and for using U.K. facilities. But it’s highly questionable whether the studio would think the effort worthwhile for a tax credit worth as little as 4% of the total budget.

The Hollywood majors, Brit studios such as Pinewood Shepperton and the Soho f/x houses are sure to lobby hard for an improvement during the three-month consultation period that now follows. Otherwise, the days of Britain as a launch pad for blockbusters such as “Troy,” “Alexander,” “Batman Begins” or “Charlie and the Chocolate Factory,” let alone such undeniably British product as the Harry Potter movies or the upcoming “His Dark Materials” trilogy, could be over.

There are many other issues to address. The tax credit supposedly gives greater value to companies investing in slates of movies rather than single projects, but no one has yet explained how. And the proposed cultural test bizarrely omits to award any points for a project having a British producer.

“That’s when you think, oh my God, these people don’t know what they are talking about,” says Thompson despairingly. “Who do they think the British film industry is?”

That’s the fundamental question begged by the latest proposals. There’s no doubt the U.K. government is sincere in trying to help, but it’s unclear what kind of film industry it wants to promote. The radical new policy has a parochial subtext that contradicts all previous rhetoric about establishing Britain as a cosmopolitan filmmaking hub. It will be up to the industry to challenge this contradiction in the next three months.

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