The U.K.’s tax financiers traditionally head for the beach at Easter to recover from their frenetic weeks of dealmaking prior to April 5, the end of the British tax year. But this year, their holiday may last longer than usual.
By shutting down sale-and-leaseback deals and GAAP funds, and by placing tight restrictions on Enterprise Investment Schemes, the U.K. government has, for now at least, succeeded in its stated aim of cutting the so-called “middlemen” out of the British film business.
What’s left is the U.K.’s new tax credit, payable directly to producers as a percentage of their production expenditure in Blighty. All the indications are that this system is now up and running, without apparent hitches.
Meanwhile, companies that used any of the previous forms of tax relief to bring private investors into film production, such as Ingenious, Scion, Future, Invicta, Prescience and Baker Street, are pausing to consider their options.
Whether these will include any future involvement in movies remains to be seen, but one thing seems sure — there won’t be quite so many luxury yachts sporting banners from U.K. tax funds at Cannes this year.
The U.K.’s old official system of film tax relief — Section 48 for films of less than £15 million ($30 million), and Section 42 for more expensive movies — ended in April 2006, replaced by a new system of production tax credits. Because of a delay in finalizing the tax credit rules, however, there was a transitional period in which movies shot in 2006 could still do S48/S42 sale-and-leaseback deals up to April of this year.
There was a brief panic March 2, when the government suddenly issued rules that appeared to shut down S&L with immediate effect. That would have stranded deals on an estimated 90 movies — including “Casino Royale” and “Hannibal Rising” — that were still in the midst of finalizing their S&Ls. But after a few days of frantic industry lobbying, the government relented.
But it didn’t relent on the shutdown of so-called GAAP equity funds, which used generally accepted accounting rules, rather than the film-specific tax relief, to create a tax benefit for private investors in film productions. Such schemes, run by the likes of Ingenious and Scion, put hundreds of millions of pounds into studio and indie movies alike over the past couple of years, typically providing roughly 30% of budgets. But this all ended March 2, leaving dozens of producers scrambling to refinance their upcoming projects.
Some producers were pinning their hopes on combining the new tax credit, worth up to 20% of budgets, with another form of government-sanctioned tax shelter called the Enterprise Investment Scheme. This would effectively double the value of the tax credit to 40%. But in mid-March, the government dropped another bombshell by restricting the amount that could be raised under an EIS to just £2 million ($4 million), making it unsuitable for funding slates of several film projects at once.
To qualify for the new production tax credit, films need to pass the British cultural test, with points awarded according to the content of the movie, the talent involved, the location of the production and a project’s nebulous “cultural contribution” to British life.
Once officially certificated as British by a dedicated unit at the U.K. Film Council, the producer can apply to tax authorities for a rebate on production expenditure in the U.K. According to the complex formula, a producer can get a 25% rebate on up to 80% of U.K. spend for films costing less than £20 million ($40 million) (equivalent to 20% of the total budget), or a 20% rebate on up to 80% of U.K. spend for more expensive movies (equivalent to 16%).
The big change from S42/S48 is that money spent abroad by British-qualifying movies doesn’t count for the tax credit. So there’s no rebate on the cost of British talent filming a culturally British movie in, say, Italy — but Warner Bros. can reclaim 20% of Johnny Depp’s salary from Tim Burton’s “Sweeney Todd,” which is shooting at Pinewood.
Still, it’s early days. The tax credit is paid once films are completed and producers submit their corporate tax returns only. So very few movies have yet received their actual rebate, although government insiders say at least one unnamed project has done so. However, several films have been part-financed with loans against the anticipated value of their tax credit, including Sharon Maguire’s “Incendiary,” Gillian Armstrong’s “Death Defying Acts” and Andrew O’Connor’s “Magicians.” Banks or other financiers who are providing such loans include Bank Leumi, Allied Irish Bank, Barclays, Royal Bank of Scotland, Bank of Ireland and Newbridge, either directly or through intermediaries such as Aramid and Abacus.
- U.K. Film Council
(for British certification)
Contact: Steve Bristow
Tel.: +44 20 7861 7861
- Her Majesty’s Revenue and Customs
Contact: David Harris, film policy adviser
Tel.: +44 20 7147 2562