Section 48 was originally introduced in 1997 as a temporary measure to boost British film production, providing qualifying UK films with 100% tax relief. No other industry enjoys this kind of benefit.
It is feared that thousands of jobs could be placed in jeopardy if the tax breaks are suddenly withdrawn. All 60 films made by independent UK production companies last year used the section 48 tax break.
Christine Corner, head of films and TV at Baker Tilly, explains: ‘Finance is difficult at the moment because the pre-sales market is depressed.
The specialist distributors overseas used to pay for films in advance but because of the economic climate they are now waiting for films to be completed.’
Markets for UK films that Corner says have been particularly hard hit include Latin America, South Korea, Germany and Spain.
‘Production is really reliant on tax breaks. There’s a lot of uncertainty at the moment. The UK still has the best film industry outside Hollywood and it’s a massive exporter and employer. But it’s harder and harder to find film finance,’ says Corner.
Section 48 of the Finance Act allows for a 100% write-off of the production and acquisition costs of a film if it has a budget of less than £15m.
Typically, film finance schemes work by encouraging wealthy individuals to enter into limited liability partnerships. With the 100% write off, the tax relief effectively forms the investors’ deposit that pays for the costs of film production.
Usually, the partnership, which could have more than a dozen members, would invest in a range of films to spread the risk of failure.
In 2002 the government extended section 48 for another three years. The Film Council and the Producers Alliance for Film and Television (PACT) say the measure has been essential to complement the long-standing section 42 tax break.
This allows for British films, including those with budgets of more than £15m, to get tax relief spread over three years.
The Film Council says section 42 has been instrumental in attracting international films to be made in Britain, sharply increasing inward investment into the UK production sector from £58m in 1992 to £539m in 2000.
Sir Alan Parker CBE, chairman of the Film Council says: ‘We can retreat back to Little England. Or we can mount a sustained assault on wider horizons. The choice is there for all of us.’
A Commons select committee of MPs is set to present a report on recommendations for section 48 this September. The chancellor is likely to make an announcement in the 2004 budget.
For the Film Council and PACT, the best outcome would be the government extending section 48 with some relief for distribution as well. This would also mean cinemas obtaining some form of tax benefit for showing the films.
Ronnie Planalp, director of film at PACT, says: ‘It would be disastrous if it was not extended. We still think there’s a need for section 48 for the industry’s survival. But it’s very difficult to compete with Hollywood films and distribution is part of getting a film out.’
Christine Corner says: ‘Because of the tax-driven nature of these funds, many films are going into production before they are ready. This can result in the finished product being of a lower quality or less commercially successful. Tax breaks need to be restructured so the commercial performance of a film is important to investors.’
Ben Melling, tax partner at Grant Thornton, added: ‘There needs to be more of a nexus between quality and output. While many more British films have been made since the tax credit was introduced, only a small proportion are a commercial success.’