The event is a showcase for the work of some of the most exciting new talent in the industry, and also provides audiences with an opportunity to meet filmmakers and celebrities at open interviews and masterclasses.
But what contribution does the accountancy profession make to this glittering occasion? The answer, perhaps surprisingly, is significant. Without assistance from the profession, many films would simply never come to fruition.
Christine Corner is a partner with Baker Tilly, one of the firms who specialises in providing services for the film industry. ‘We tend to act for independent producers, assisting with all aspects of their financial arrangements,’ she says. ‘We have worked significantly with Enterprise Investment (EI) schemes, acting primarily as reporting accountants.’
Accountancy firms do not normally seek to find money for their clients, as brokers more satisfactorily fulfil that function. Tax partnership schemes and the associated structuring is more the profession’s role.
Baker Tilly was closely involved with the financial structuring of Scarlet Tunic and An Ideal Husband, though the firm is also extensively concerned with television productions.
Much of their involvement in tax partnerships with film productions is inevitably commercially confidential. ‘The other principal function we perform is to help producers by putting them in touch with sources of finance, including pre-production and gap finance,’ continues Corner.
The firm undertakes a keen appraisal of the track record of a producer before commitment to a specific project. Corner observes that she would expect a producer to have a sales agent on board, and Baker Tilly is in a position to provide advice with National Lottery applications.
Insurance and contingency arrangements inevitably reside with the brokers, though there is an advisory role for accountants.
So what are the main problems encountered with a film production? ‘Getting people to look at projects quickly. It’s invariably a question of whoever you approach for finance.’
Films are usually funded by a variety of sources, involving a complex process of putting together funds from a number of backers simultaneously.
What are the main challenges and interests of working in this area?
‘People in the industry are creative, but that frequently means they don’t have a clear grasp of financial matters,’ continues Corner. ‘One has to cut through the jargon, and explain the financial implications to producers.’
The principal financial challenge in the immediate future is the sale and leaseback arrangements outlined in section 48 of the 1997 Finance Act No.2, though the initial provisions have been superseded by more recent legislative developments. The Act extends until July 2002. The hope is that new requirements will match those of the Canadian and Irish governments, where the tax subsidy is 25%, as opposed to the UK’s 10%.
Terry Back is a partner with Grant Thornton and head of the firm’s media and entertainment group.
‘In terms of film and TV production, as I always tell everyone joining my team, rule one is that there are no rules,’ he says. ‘A film producer, trying to get a movie off the ground, will do whatever it takes to get the budget together. There’s no clear-cut template of a business model for film funding.’
Funding is the inevitable topic of discussion with producers, says Back.
‘Professional accountants haven’t traditionally been able to help much on that side of things, otherwise we’d be in the movie business ourselves.’
The principal area where accountants have had significant influence is in providing advice on the complex arrangements regarding section 48 of the 1997 Finance Act. If a film is classified as a British film, dependent on the cost and employment criteria, there is a potential write-off for tax purposes of 100% of the costs of acquisition or production if more than £15m is generated in income in the year that the movie is either completed or acquired.
Before the section 48 relief, previous legislation permitted a write-off against tax over a three-year period. A sale and leaseback industry emerged, which has mushroomed since section 48 came into operation. A number of investment vehicles have spawned film investment partnerships, designed to buy the rights to British films nearing completion. Prices typically vary between nine and eleven per cent of the total production costs, though there is frequently scope for deferment of producers’ fees.
‘Producers will do literally anything to get a film under way,’ continues Back. ‘This frequently means they will go into production before the final budget has been determined.’ A royalty advance on overseas rights is one method which can streamline the cash flow. Most film producers have no particular flair or acumen for sound financial planning, he adds.
Sale and leaseback
Sale and leaseback is another area where accountants have been able to exercise a direct input in helping film production clients. Most of Grant Thornton’s clients are predominantly engaged in TV rather than film, though the same principles apply to both media.
Back believes the profession will have to be very flexible to cope with the changes that are occurring within the film and television industries.
The current situation, with five terrestrial television channels and some 30 satellite stations, is set for a complete transformation with the advent of digital television. Digital TV will provide access to literally hundreds of stations, many of which will be devoted to film.
Another important area where accountants have contributed is helping to resolve the tax and national insurance position of people working in the film industry. In the past, the Inland Revenue classified people in the film industry as being self-employed, while at the same time the Department of Social Security regarded them as employees, and consequently deducted national insurance contributions.
The DSS has now accepted that the majority of people in the industry, in particular crew members working on location, are self-employed. The issues are technical, and usually handled by a firm’s taxation division.
‘A raft of claims has been submitted by film makers over the last few years, assisted by the accountancy profession, to reclaim national insurance,’ confirms Back.
As the film industry in the UK continues to prosper, there will be increased opportunities for the profession to continue to contribute to this continuing success.
Jonathan Ball is a freelance journalist