Andrew Tate may not have the jawline of Michael Douglas or the curves of Catherine Zeta Jones, but he knows a good tax break when he sees one, and he’s on the verge of a Hollywood lifestyle as a result.
In the nine months since he founded his own production company, Evolution, he has raised Pounds 94m for investment in the UK film industry. The financial package he’s selling looks like a winner for investors, producers and the government alike, and now it may also give Britain a new movie mogul.
Evolution makes its money through ‘film partnerships’ which make private investors, partners in a production company set up to provide one-off financing for feature films. They’re a popular place for high net worth individuals to sink their money because they take advantage of tax relief that was intended to boost the British film industry.
Taking advantage of tax legislation
The 1992 Finance Act (section 42) provided for a write-off period of three years for film production costing Pounds 15m or less. (Under the terms of the 1985 film act, any film with a total budget of under Pounds 15m is deemed ‘small’.) Then, the 1997 Finance Act (section 48) extended the offer so that the write-off could be completed in the year the film was acquired.
A film partnership can create a loss through the capital allowance it gets on the master negative that feeds its way back through to individual subscribers. Each partner gets the trading loss relief that is available to anyone with a regular trading business.
Many have exploited this principle in ‘sale and leaseback’ schemes, whereby film partnerships buy a completed film from a producer with the combination of a bank loan for 83% of the money and 17% of their own funds. The producer takes a fee, around 9%, and then puts the investors’ money into a financial institution, which pays the partnership back in instalments over 15 years.
But this only puts a small amount of money into the industry – the producer’s cut – and has operated as a means for some producers to make a tidy sum from films that they know will fare disastrously.
Bringing investors into the industry
The spirit of the legislation, as Tate sees it, was very different: to finance the actual making of films. ‘We all like good films, and my real frustration was that sale and leaseback wasn’t producing decent enough quality products, not getting enough products to market and turning investors away because it would be very difficult to get sufficient products to market by the end of the last tax year (covered by the legislation).’ What’s more, he adds, the ‘sale and leaseback’ and lottery-funded films never actually made any money.’
Evolution aims to use the same tax break to finance the production of films based on a rigorous selection process for commercial potential, and then sell the film on to distributors. It also minimises the risk to funding partners by issuing the producer with cast-iron ‘completion bonds’.
‘If you go out and make films, there are things that can go wrong, for example if you run over-budget, it might not be made in the tax year,’ explains Tate. ‘That’s why we take out completion bonds guaranteeing if the film isn’t made by the deadline, we get the money back.’
A tax shelter with no risk
What this means for funding partners is a tax shelter involving next to no risk that could be profitable if one of the films in their portfolio becomes a blockbuster. They must back a minimum of three films to comply with the legislation, but can pick and choose Evolution movies they want to back.
‘The last series of partnerships shared eight films, so they got a good spread,’ says Tate. ‘If one film bombs, it’s not a problem, if one does fantastically well, then everybody benefits. The losses are capped at the subscription level.’ What’s more, he points out, ‘we take partners on three visits, they watch scenes being filmed, they meet producers, cast, and we also show them some rushes on videotape of scenes that have been shot previously. We keep them updated with regular newsletters. And, of course, all the partners will be invited to the premiere. From my point of view, it’s a lot more interesting than being in Tax Returns Land.’
Tate says his decision to set up Evolution was the result of nothing more than an enjoyment of movies, frustration at the lack of investment in UK films and the scent of a business opportunity. ‘With my background as a chartered accountant, I’ve always had this at the back of my mind: how important it is to look at the overall structure of any tax-driven scheme,’ he points out. ‘So while we looked at the tax break, it’s a business opportunity first.’
Meeting key players in Cannes
His first step was to consult a client who was a film producer, Steve Sheen. ‘He basically helped me gatecrash the Cannes Film Festival,’ says Tate, ‘and introduced me to some key players.’ He appointed a lawyer, Richard Hallows, who runs his own practice but now works in-house two days a week. He then drafted in another client to assist with marketing: Keith Dearsley had office space to spare and involved his partner Simon Maudsley, who specialised in admin.
‘It was a good team,’ says Tate, ‘Keith would do the marketing, I would do strategy, accountancy and tax stuff plus develop client contacts. Simon would be in the back room to deal with the producers and the admin, which I hate.’
Dearsley and Maudsley ran a financial services company in north west England, which gave Tate access to a new client base to add to the high net worth individuals he had represented in the past, so he was able to generate money for the scheme very quickly.
Setting up a team to evaluate ideas
The next task was to set out the criteria on which scripts would be accepted for financing. Tate employs a team of ‘creatives’ from various parts of the film industry to evaluate ideas. He points out: ‘We were very clear we wanted commercial pictures that would appeal not just to a UK audience but one that was more international; America is our biggest market. To do that they’ve either got to be in the genre of either romantic comedy, thrillers, action movies or psychological horror movies.’
Tate thinks his most promising films are Al’s Lads, a comedy that tracks the journeys of three Liverpool waiters who take a steamship to New York in 1927 and end up working for Al Capone, and a spoof of Charlie’s Angels, which has sales estimates of $33m (Pounds 22.5m). (‘It’s coming out at the right time, it’ll have a 12 certificate, we’ve got some cameo appearances by big names, it’ll be a great fun movie to make.’) Evolution is investing in impressive talent, with actors from popular TV shows and feature films ranging from The Sopranos to the Star Wars Trilogy.
From here, Evolution has to prepare for the probable end to film partnership tax relief scheduled in 2002. ‘When the Revenue sets a time limit on something, it’s unusual for them to extend it,’ Tate says. ‘If we show amazing results, there’s a chance we could lobby to extend it, but they’ve extended it once already. What may come in to play more is the political angle because we’ve got an election next year.’ The first test of Evolution’s profitability will come at Cannes in May this year, because all the international buyers will be there.
‘The long-term vision,’ says Tate confidently, ‘is to float the company because it is going to be profitable and we’ll be looking to acquire post-production facilities, film libraries and studios. Once we can ignore the Pounds 15m barrier, that’s when we can go and get people like Tom Cruise.’
Tate works at a hundred miles an hour
Tate is certainly ambitious, dedicated and a workaholic, but he’ll show you his jovial side as long as you reciprocate his rugby-forward’s handshake and don’t waste his time. His colleagues say they’ve had great fun working with him over the last six months: ‘We’ve been learning and inventing,’ says Keith Dearling, Evolution’s sales and marketing director. The team describes him using words like ‘superb’ and ‘genius’, but they aren’t afraid to tease him either.’The difficult thing to cope with about Andrew says Dearling, ‘is that he works at a hundred miles an hour. Tying him down is a nightmare; he’s here, there and everywhere and he probably only sleeps for five hours a night.’
Even in his free time, Tate is addicted to speed: at weekends he races motorcycles at Oulton Park in Cheshire trying, in Dearling’s words, ‘to wear out as many tyres and kneepads as he can’. He’s also got a helicopter pilot’s licence, a Ferrari and an Aston Martin DB7. ‘I used to own a half-share in an ex-RAF jet Provost,’ he adds nonchalantly. He says he takes his wife and two daughters skiing and it’s easy to imagine him encouraging them to venture onto black runs. He is, as he puts it, an ‘adrenaline junkie’.
But what gets Tate’s pulse racing most is something else entirely: ‘For the first time, I’m not in a service industry; I can actually say I’m creating something.’
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