The New Horizons of UK Film Finance, a Life Jacket for the UK Film Industry?

When the Chancellor announced the Pre-Budget report last December, the film industry could breath a great sigh of relief. Following the ambiguity which ensued after the announced cull of section 42 and 48 relief, an uneasy few months resulted which witnessed a slew of production companies including several Hollywood productions being pulled from the UK.

In July 2005, the Government conducted two consultations. The first by the Department for Culture, Media and Sport (DCMS) concerning a new cultural test which was to be set against British films applying for tax relief. The second by the Treasury concerning the introduction of a new tax credit and the legacy of the current film tax reliefs. The results of these reports were published last December, both however were short on detail.

The DCMS announced that the new cultural test will remove the existing expenditure and labour costs tests. The presently used maker test and pre-existing footage test will remain.

The new scheme is clearly aimed at eliminating co-productions with a minor UK involvement which currently qualify as "British" from exploiting the system. The new cultural points test proposes to apply an objective criteria to a film's:

1. cultural content (e.g. British subject matter, the percentage of the film which is in the UK and the national or residential status of the main characters);
2. cultural hubs (e.g. the use of the UK's film-making facilities and UK locations); and
3. cultural practitioners (e.g. the use of personnel with creative input who are from UK or are EEA nationals).

Nevertheless, it is not clear in practice how the criteria will be defined or how points will be awarded. Following the film industry's demand for clarification, on 17 February 2006 the DCMS published guidelines on how the new cultural test should be applied. The guidelines offer further detail and also point to how the test will be applied to animation and documentary films. However, the draft legislation is still subject to approval and guidelines for co-productions are still to be released. What's more they are also subject to amendment and review in light of the forthcoming Finance Bill.

As for the new tax scheme, we will not be certain of the finer details until Gordon Brown delivers his anxiously awaited budget on 22 March 2006.

In the interim, we do know that we are being promised a new regime committed to being "more effectively targeted". The new system removes the loop holes which were so easily exploited before by middlemen such as finance houses and is dedicated to reducing the "abuse and manipulation" that has bled the industry's production companies and independent filmmakers.

Statistically, the Government assures us that British films:

1. with a budget of £20 million or less will be able to benefit from a tax break of up to 20% of qualifying production costs through a deduction of 100% of the qualifying production costs with a payable cash element of 25%;
2. those with higher budgets will be able to take advantage of a relief which will amount to circa 16% of the qualifying costs through a deduction of 80% with a payable cash element of 20%; and
3. smaller budget films which include co-productions which have spent 40% of their budget in the UK, they will be able to claim a minimum 10% benefit.

Although the proposed tax reliefs were larger than expected, the reliefs will be assessed on the amount of money spent in the UK rather than the whole production budget and films will be subject to passing the new DCMS cultural test as outlined above.

The Chancellor is obviously trying to stimulate production spend in the UK but however welcome the increase of a 20% tax credit, the UK is expensive and it will be interesting to see how many production companies will take advantage of this relief.

The fact that legislation enforcing the new regime is not likely to come into force until the Autumn is also worrying. It is possible that the confusion will induce a turbulent transition period, which could subsequently endanger films planned for this summer.

On the other hand however, it appears that a more accommodating regime will commence with producers no longer having to wait until the end of a film's accounting period before taking advantage of the tax break. After the 1 April regime kicks in, producers will be able to choose when to take tax credits, whether at the beginning of a production or later in the day once the film's profits begin to roll in, although it is still unclear how this flexibility will work in practice.

Following the stagnation of UK film production over the last year, the story so far appears to be showing potential. The Government has increased the tax credits available which can only be good news for the industry. The new regime implies a promising endorsement of the Government's commitment to fostering a tax-efficient environment which encourages filmmaking. However, the truth is in the tasting. We may have been given an enticing menu so far but the anticipated success of the UK film finance era will be decided largely when the pudding arrives on 22 March 2006.

Annie

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