TaxCorporate TaxMore meddlings and a funeral

More meddlings and a funeral

The Inland Revenue's sudden decision to close a tax loophole, used by some film finance partnerships for raising money to fund big-screen productions, has created a media storm. Newspapers have been full of stories prophesying impending doom for the UK film industry currently undergoing a renaissance.

The Revenue claims the closure of the loophole ensures that only genuine investors, who risk their own money in bona fide business partnerships that end up making a loss, will benefit from tax relief ðeffectively blocking those ‘abusive’ schemes that allow investors to reduce their tax bill by investing in loss-making film partnerships.

In its defence, the taxman points out that its decision in no way impacts upon existing legislation (introduced in 1997 and known as section 48) that grants relief for small British-made movies, which, without the relief, would not have been made in the UK.

Nevertheless, its decision to close the dodge has resulted in angry cries from many in the film industry, who say this will result in many major film productions going to the wall.

One big-name production under threat is Tulip Fever, starring Jude Law, and part financed (33%) by Ingenious Media, which is now believed to have been halted.

Sources close to Ingenious say 13 out of 16 films already financed using its Inside Track financing scheme, and with a total value of £250m, are in jeopardy because of the changes to the loophole. These films include such high-profile productions as The Constant Gardener, starring Ralph Fiennes, and The Black Dahlia with Scarlett Johansson.

Ingenious is understood to be urgently seeking discussions with the government claiming these films do not exploit the loophole, but have been unfairly lumped together with schemes that do.

The Film Council has already held discussions with the Revenue in the hope of securing a transitional implementation of the loophole to protect films where the funding is already in place, but the Revenue apparently remains unmoved.

The taxman claims it cannot just stand still and ‘let people draw up complex and abusive schemes at the expense of honest taxpayers’.

Though it has also sought to reassure ‘legitimate film-makers who have not sought to avoid tax’ that they will continue to be protected.

But, Tim Levy, managing director of Future Film Group, which has itself raised £1.25bn from private investors to fund productions without using ‘cleverly constructed schemes’, says the current briefing given to media is not a true representation of the government’s actions.

According to Levy, schemes that have been affected are those operated outside of the 1997 legislation, and ‘were always at risk of being challenged by the Revenue’.

These films were reliant on ‘aggressive financing schemes, as they were not sufficiently commercial to attract the usual sources of production finance and relied inappropriately on the heavy subsidisation being provided by the British taxpayer’.

Levy says such schemes were always going to be ‘short-lived’ and that it was only a matter of time before the Revenue and the Treasury found them unacceptable.

He says there are still many legitimate arrangements available to producers and investors, with the reality being that films affected will still get made, ‘albeit with cutbacks to their often excessive budgets’.

Levy says that he is in favour of tax relief linked to expenditure, and he says the ‘hue and cry’ from companies like Ingenious is misleading journalists and creating unnecessary ‘collateral damage’ for the industry.

Levy is not alone in his view, although those that agree with him are more sympathetic.

David Knight, director of tax shelter research at fund managers Allenbridge, says the media is overreacting, and that the new legislation is not intended to end film partnerships per se. But he is far more sympathetic to those films affected by the change and says a transitional period would have been ‘perfectly reasonable’.

Bhupinda Anand, managing director of Anand Associates, an IFA which advises investors entering into film schemes, including the recently publicised MPPI Bollywood project (which is not affected by the loophole closure), says the media attention has, if nothing else, raised awareness about an ‘obscure tax’.

Anand says the change has caused his clients to think twice about doing anything, but he adds: ‘We are showing clients that there are still ways of taking advantage of investment opportunities.’

The Revenue, though, is unlikely to feel much sympathy for what it calls ‘abusive’ schemes’, and pleas from the likes of Ingenious and the Film Council are likely to continue to fall on deaf ears. Instead, the debate will turn to what tax relief proposals will be in next month’s Budget to succeed Section 48, which ends in 2005.

The Budget should also be a good opportunity to clear up any confusion about legitimate film financing schemes and indicate just where the government stands on this high-profile and highly sensitive issue. As David Knight says: ‘The ball’s now firmly in the government’s court.’

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