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Brit tax funds ante up $1.2 billion

Experts disagree: GAAP financing is either boon or boondoggle

The U.K. government may think it killed off GAAP funds in its notorious February 2004 clampdown, but they’re back. And GAAP funding is bigger than ever.

In the last tax year, which ended April 5, estimates suggest that £700 million ($1.24 billion) of production finance was raised from British investors using generally accepted accounting principles — GAAP — to write off the costs as a tax loss.

Roughly half of that money is believed to have flowed through Ingenious Film Partners, the pioneer of this form of finance and the market leader by a distance. Future Film contributed another $350 million, Scion Films raised in the region of $160 million, and Baker Street’s Take 9 partnership brought up the rear with a modest $4 million for a single movie, Tom Hunsinger and Neil Hunter’s “Sparkle.”

GAAP funds put up equity worth about 30% of a film’s cost (although they actually bankroll the entire budget), and in return they get a revenue corridor from first-dollar gross. Because they don’t use Blighty’s official film tax breaks, they are not restricted to investing in British movies. But most do to keep the government happy. Still, Hollywood studios also have tapped GAAP backing for movies such as “X-Men: The Last Stand” and “Garfield 2.”

The sheer scale of the GAAP funds — which have grown from nothing since their predecessors Inside Track (from Ingenious) and First Choice (from Grosvenor Park) were razed two years ago — is sparking fears that the government will once again crack down.

The GAAP operators protest that they have learned their lesson from the last clampdown, and are following the government’s edicts by the letter — particularly the requirement that investors must be genuinely at risk to claim tax relief. They argue that these are not mechanisms to avoid tax, but real investments whose goal is build profitable businesses, and thus actually to pay more tax on that income.

But the skeptics believe that some of the methods the financiers are using could yet be challenged by tax authorities. They worry that the government, which has shown its indulgence towards the film industry by creating a generous production tax credit, will be alarmed to see producers taking advantage of an alternative and unsanctioned form of tax-based finance.

“This is either the next big thing or a disaster waiting to happen,” says Martin Churchill of the specialist publication Tax-Efficient Review. “The jury is still out.”

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