Sale and leaseback deals are O.K.

LONDON — The British film industry breathed a huge sigh of relief Wednesday when the U.K. government excluded film sale-and-leaseback deals from its latest tax clampdown.

Industry leaders have been lobbying furiously for this U-turn since Friday, when the government announced a sudden change in tax rules.

Change was intended to shut down tax-avoidance schemes across a wide range of industries, but a side effect was an immediate halt to sale-and-leaseback deals on more than 90 British films completed in the second half of 2006, including “Casino Royale,” “Fred Claus,” “Hannibal Rising” and “The Queen.”

Both U.S. studio movies and many Brit indie pics were affected.

As a result, producers, financiers and studios were facing a retrospective shortfall of 9%-16% in their budgets, with effects rippling out to all corners of the production biz.

But the government’s decision to exempt S&L deals utilizing the old Section 42 and Section 48 tax relief schemes from its clampdown indicates that it had been unaware of how devastating the impact would be on the local movie biz.

John Woodward, chief exec of the U.K. Film Council, said, “This clarification is great news and welcome reassurance for the film industry. The government has moved really fast to put an end to uncertainty that a number of films would lose their funding under sale-and-leaseback arrangements. Confidence is now restored across the industry.”

Although S&L deals have won a reprieve, so-called GAAP funds are still outlawed by the anti-avoidance rules announced last week.

In any event, the Section 42 and Section 48 tax breaks on which S&L deals are based expired last year and have been replaced by the U.K.’s new production tax credit scheme.

But under transitional arrangements, British-qualifying movies that started shooting before March 31 last year and were completed before Dec. 31 could still claim Section 42 or Section 48 relief before the end of the current tax year in April.

Having laid out this detailed timetable for phasing out the old tax breaks, the government appeared to slam the door shut prematurely Friday, when more than 90 movies were still in the midst of the complex legal and financial process necessary to complete these S&L deals.

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