System hasn't received European Commission's seal of approval

LONDON — British indie producers say it’s too soon to tell if the U.K.’s new film tax credit is delivering the desired benefit to their business — mainly because of an unexpected delay in its official ratification.

In theory, any sufficiently British movie that started shooting after April 1 will be able to claim the credit, worth a maximum 20% of budgets for pics costing up to £20 million ($38 million), and up to 16% of budgets for bigger projects.

But more than six months after the new system replaced the old Section 42 and Section 48 tax reliefs, it still hasn’t received the necessary seal of approval from the European Commission, the executive body of the European Union.

This rubber stamp was expected by early October, but the EC raised questions about how the cultural test that sits alongside the tax credit will work. Under EU law, national subsidies are permitted only for cultural reasons, so the test was created to ensure the benefit only goes to movies that are genuinely British.

Although there seems no doubt the EC will eventually approve the system — most likely by Christmas — what’s unclear is whether the cultural test will require significant tweaks to pass muster.

Indie producers are hoping to be able to use the tax credit to give them an equity stake in their own projects, which in turn would allow them to build up their companies. But they cannot start to test out this proposition with key public financiers such as the U.K. Film Council, BBC Films and Film4 until the system is officially up and running.

This delay has sent a frisson of renewed insecurity through the sector. The past couple of years have been dominated by uncertainty over tax rules, which made the financing of British movies a constantly shifting target. Although some producers preferred the old S48/S42 system, they thought the advent of the tax credit in April would at least usher in a new era of clarity and stability.

Opinion is divided over whether this uncertain transition to the new system prompted a slowdown. There was a spurt of activity in the first quarter of the year, as producers rushed projects before the cameras to qualify for the last round of S48/S42 deals. Since then, however, the evidence is contradictory.

“My colleague producers are all talking about a chill,” testifies Peter Watson, managing director of the Recorded Picture Co.

In contrast, Miles Ketley of legal firm Wiggin & Co. comments, “I haven’t seen a wobble. If anything, for us, production is slightly ramped up since April.”

Departing British Film Commissioner Steve Norris offers, “I think we’re looking at a pretty decent second half of the year,” although he acknowledges that the forecast for U.S. studio pics is more clearly positive than for Brit indies.

Several indie movies have found a way to use the new system in recent months, including “Magicians,” “Son of Rambow,” “Mrs. Ratcliffe’s Revolution,” “Dangerous Parking” and “Run, Fat Boy, Run,” along with bigger studio projects such as “The Other Boleyn Girl,” “28 Weeks Later,” “The Golden Compass,” “Inkheart,” “The Bourne Ultimatum” and “Fred Claus.”

The retrospective nature of the credit — it’s payable for finished films — poses a challenge for indie producers. For major studios shooting pics in Blighty, it’s a relatively simple matter to bankroll a project with the knowledge that they will be able to claim back 16% or 20% of the cost from the U.K. government on completion.

But indies don’t have such deep pockets. If they want to use the tax credit to help get their projects financed in the first place, most must find someone willing to lend cash in advance. The big banks, such as Royal Bank of Scotland, have indicated they will start cash-flowing the tax credit — but only once it has received EC approval.

In the meantime, several middlemen have emerged who are willing to take the risk — for a hefty fee, typically about 25% of the value of the credit.

“There are various outfits that will discount tax credits and take views that banks won’t, but I won’t be happy until this is a straightforward volume business for the banks, as it is in Canada,” Recorded Picture’s Watson says.

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