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Double trouble in Brit tax break

Possible rule changes could hamper local indie prod'n

LONDON — The Hollywood studios and U.K. film producers are bracing themselves for another crackdown on tax financing for British movies, which would increase the cost of shooting in the U.K.

Experts warned that possible rule changes, which some fear will be announced by Chancellor of the Exchequer Gordon Brown in his pre-budget statement Thursday, could drive the U.S. majors out of British filmmaking and decimate local indie production.

Big-budget pics such as the “Harry Potter” series, “Alexander,” “Troy” and “Phantom of the Opera” have accessed British tax relief worth tens of millions of dollars apiece. The total value of the tax incentives to producers last year alone has been estimated at more than $1 billion.

The U.K. government seems intent on slashing the value of such deals, at a time when the weak dollar has made filming in the U.K. pricey for Hollywood.

Senior officials from Inland Revenue, the tax-gathering arm of the U.K. government, issued a stern warning Nov. 25 at a meeting of film-tax specialists that they are “exasperated” by abuse of the Section 48 and Section 42 tax break.

In particular, the Revenue wants to stop “double dipping,” where tax relief is claimed twice on the same film — once via a production fund, and later via a sale-and-leaseback deal.

Tax financiers say the Inland Revenue previously approved this method, which can be worth up to 40% of a film’s budget, and has been standard for all U.K. movies over the past couple of years.

” ‘Phantom of the Opera’ simply wouldn’t have happened without double dipping,” said Martin Taylor of Scion Films, which provided the tax financing for Andrew Lloyd Webber’s Warner movie.

But the taxmen told the Nov. 25 meeting they dislike double dipping, although they confirmed the practice is not illegal — yet. “There’s real mischief afoot and we are determined to put an end to it,” David Hartnett, Inland Revenue deputy chairman, reportedly told the meeting.

At the meeting, the officials concentrated on a particular form of double-dipping, which takes place in only a small minority of movies, where the production fund and the sale-and-leaseback deal are “packaged” together by a single company.

That left those at the meeting, and the rest of the industry hearing the reports secondhand, confused about what the Inland Revenue regards as abuse, and what is likely to be done to prevent it.

Speculation is that Brown will use his speech to unveil restrictions on Section 48 and Section 42 relief. Section 48, which will expire next July, applies to films budgeted at less than $28 million. Section 42, which has no expiry date and provides a lower level of relief, is used for bigger pics, typically by the Hollywood studios.

Brown is grappling with a reported $19 billion black hole in his Treasury budget because of a shortfall in tax revenues, and is looking at every opportunity to claw back cash.

One industryite opined that “the Treasury has always had a bit of an attitude about the film business,” suggesting officials have long remained skeptical about the benefits of film tax breaks. Experts estimate the film tax break alone cost the government $1.5 billion last year, so Brown has a strong incentive to reduce that figure.

Meanwhile, indie producers are rushing to complete double-dip financing deals for their projects by Thursday.

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