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Brit biz ponders new tax credits

On paper, new system looks generous

LONDON — The U.K.’s shiny new production tax credit is finally here. But it will take months before anyone knows for sure how it will work, and years before it becomes clear how it will change the shape of British filmmaking.

On paper, the new system rolled out by U.K. Chancellor Gordon Brown in March, which replaced the old Section 42 and Section 48 tax relief on April 2, looks generous.

At 20% for films costing less than £20 million ($35 million), or 16% for bigger-budget movies, the credit compares favorably to the old sale-and-leaseback deals, which delivered around 14% for movies up to $27 million under S48, or 8% for more expensive films under S42.

However, production funds using S48 delivered over 20% of budgets; and in the halcyon days before double-dipping was outlawed 18 months ago, those could be combined with sale-and-leaseback deals to deliver a total benefit edging towards 40%.

Such inadvertent largesse, which fueled the U.K. production boom of 2002 and 2003, was never likely to be matched by the new tax credit. Indeed, the film industry has reason to be grateful that the government swallowed its anger over what it saw as the abuse of the old system, and fixed the new benefit at such a reasonable level. The credit for bigger-budget films is actually a couple of percentage points higher than the industry had dared to lobby for.

The drawback is that the credit applies only to that part of the budget spent in the U.K., up to a maximum of 80% — whereas the old relief applied to the entire cost of a British-qualifying movie, wherever it was shot. Even the salaries of British actors or crews working abroad are excluded, yet the salary of an American actor shooting a Hollywood pic in Blighty would count.

As Charles Moore of law firm Wiggin explains, “The wages of Ralph Fiennes in ‘The Constant Gardener’ would not have counted towards the tax credit, but the wages of Johnny Depp in ‘Charlie and the Chocolate Factory’ would have done.”

Also excluded are development costs such as writers’ fees and the price of material — which typically account for up to 10% of budgets — along with producer fees and financing costs.

Films must spend at least 25% of their budget in Blighty to qualify for the credit. They must also pass a fairly easy cultural test. Points are awarded for the use of British facilities, the nationality of the talent (not just British, but any European qualifies) and the cultural origin of the storyline.

All of which means that the new system is less attractive to co-productions, particularly those generated abroad using the U.K. merely as a financing partner. It also penalizes British producers with ambitions to tell international stories, but is notably generous to Hollywood studios wanting to make big British movies — so long as they can work out the mind-bendingly complicated “transfer pricing” issues that remain unresolved.

There’s also the complex question of how to define a film’s “producer” within the tax language — the intent is to pay the person most directly responsible for making the movie. But that begs the question: Who is really the producer? Arguably, the real control lies with the financier, who is taking the financial risk and who benefits from making sure the credit application gets made properly and the credit gets paid as quickly as possible. And there’s the question of how soon producers will get the money back, given the considerable discretion of HM Revenue to delay payment if there are any irregularities.

Such uncertainty further raises the question of whether any financiers will be willing to advance the value of the credit as part of the production financing, and what price they would exact for that service.

Some observers believe that the logical conclusion of this is that the financiers will become the producers, and the producers will become their employees. That might start to look like a properly structured industry — but it’s not what the government and the producers’ lobby intended.

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