LOOPHOLE TAXED WITH LAME DUCK FILMS
Copyright 2002 www.ft.com

[ January 5th 2002 ]

A treasury scheme to boost investment in British film is creating dozens of lame duck movies that allow speculators to avoid tax at a cost of up to pounds 400m to the public purse.

Such is the popularity of the tax break - which allows investors to claim savings of up to 20 per cent regardless of the success of the film - the Inland Revenue will pay up to eight times more this year than it had estimated, according to a new survey. The accountancy firm Grant Thornton calculates the Treasury will return between pounds 200m and pounds 400m to investors in the current tax year compared with Gordon Brown's Budget estimate of pounds 50m.

The Chancellor announced an extension of the system, called Section 48 relief, after coming under intense pressure from the film industry. He told the House of Commons that he aimed to boost the "unprecedented success" of independent British films. Supporters of Section 48 claim that it has brought valuable capital investment into the film industry by encouraging money from traditionally reticent investors such as the City.

Well-known films to have benefited include Grey Owl, which was made by Lord Attenborough and starred Pierce Brosnan as an Englishman who reinvented himself as a native American Indian in the 1930s, and To Walk With Lions, which starred Richard Harris as the lion conservationist George Adams. Others include Swing, the tale of a dance band starring the singer Lisa Stansfield, and 81/2 Women, a Fellini-inspired yarn about two men opening a brothel, by the avant-garde director Peter Greenaway.

Films costing an estimated pounds 1bn will be made in Britain this year. Movies such as Tomb Raider and Harry Potter and the Philosopher's Stone helped to increase production by a third last year. But critics of the tax relief system say that the scheme, far from sparking a renaissance in homegrown cinema, is being used by opportunistic high earners simply to avoid paying tax, with little or no return for the public.

The concession applies only to films with a maximum budget of pounds 15m - far less than a Hollywood-style blockbuster - resulting in a large number of films that never see the light of a cinema projector.

Mike Warburton, a senior tax partner at Grant Thornton, said: "There can be no doubt that this scheme is putting money into the film industry, but whether it is getting money into the right films is a different matter. "The way the system works means that the film does not have to be successful for participants to gain the benefits. As a result, a lot of people are doing it and the Government is paying out much more than it intended."

The system works through a complex arrangement that allows producers to sell a completed film to a consortium of investors, who then lease the negative back to the production house. The investors, who on average put up about a fifth of the funds themselves and borrow the remainder, claim tax relief on their investment at a rate of about 20 per cent. The consortium also pays the producer a fee of about 5 per cent of the film's cost - pounds 50,000 on a low-budget film made for pounds 1m. A similar scheme allows consortiums to invest in a package of three or more British films and claim full relief on production costs.

Experts say that the scheme has led to a flood of film scripts that had been gathering dust on production house shelves being used to meet the demand for "investment vehicles". One senior accountant with a London-based firm involved in the scheme said: "The reality is that dozens of lame duck films which would normally never have had a chance of being made are being shot just because of this scheme. Basically, you have City investors who are using the scheme to increase their wealth perfectly legally.

"But most don't even know the titles of the films they are helping to make. It might be putting money in the pockets of film makers and investors, but the vast majority of these films go straight to video or simply disappear. Very few make it to general release at cinemas."

The Treasury declined to comment on Grant Thornton's figures, but a spokesman said: "The tax relief scheme was set up to encourage investment in British independent film. We are satisfied it is achieving that goal."

Film makers admitted, however, that the structure of the scheme meant that it had succeeded in encouraging people to make films, but not in ensuring that the films were good. Eric Fellner, the co- chairman of Working Title Films, which jointly made Billy Elliot, said recently: "Sadly, quality and finance don't go hand-in-hand. The tax relief is encouraging production in the UK and it is up to us to come up with the goods."