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UK Government reprieve film industry...partially

PaperclipMoney.jpgRecent proposed Tax law changes in the UK were inadvertantly threatening the UK Film Industry yet again, and had threatened to hit some high profile titles, so much so that they could be looking forward to serious shortfalls of their overall budgets.

Good news this week though as we hear that the complaints that have been spoken both privately and in the press have been headed, and the Government has (for once) acted speedily to rectify the situation.

The UK Government were trying to close down GAAP funds, which are, as according to Cineuropa:

...these GAAP funds allowed rich individuals to write off high-risk investments as losses against their income tax. This subsequent reduction in tax payments was a key element behind the recent renaissance of the British film industry, also luring US productions to shoot in the UK through the lucrative tax incentives.

...and Variety also describes the GAAP funds:

GAAP specialists such as Ingenious Film Partners, Scion Films, Future Film and Prescience Film Finance used generally accepted accounting principles (hence the name) to create an upfront tax loss that mitigated the risk for equity investors.

According to one production company head, Jeff Abberley from Scion, who has been using the Tax benefits to fund films it will be virtually impossible to fund an independent film out of the UK. There's even more short term worrying news though:

Nor is it certain that films set to shoot in the coming weeks – e.g., Michael Winterbottom’s Genova and Julian Jarrold’s Brideshead Revisited (30% of whose budgets were to come from GAAP funds) – will be able to go into production as planned.

It seems disaster is looming for many films.

Cineuropa go on to tell us about the sale-and-leaseback financing that is used for many big name productions:

To make matters worse, the new change in tax rules also blocks sale-and-leaseback financing, a staple financial model behind over 50 films made in the UK last year, including Casino Royale and Hannibal Rising.

Variety also had some startlingly bad news. They figured that this meant over ninety films made in 2006 would suddenly have a retrospective budget shortfall of up to 16%

It didn't sound good at all, and then something happened. After five days of lobbying and press releases, the government realised they'd made yet another mistake and decided to lift the ban on the sale-and-leaseback partnerships. Yet that was only part of the problem.

So the retrospective budget shortfalls were sorted, that means that studios wouldn't be scraping to find 16% of the budget for Casino Royale, even though the film had already been released.

Yet the problem of the GAAP funding being closed down still remains, have a read of this to understand what it could mean for the UK industry:

In the year to April , these funds were set to pump an estimated $2 billion into movies -- many of them British though not all, and many distributed by the Hollywood majors. Much of that money was already spent by the March 2 clampdown.

Pics that previously tapped such coin, typically worth around 30% of budgets, include "Night at the Museum," "Eragorn," "The Golden Age," "Atonement," and smaller indie pics such as Mike Leigh's next untitled movie and Nick Love's "Outlaw."...

...Danny Boyle's "Sunshine," Matthew Vaughn's "Stardust," Julian Jarrold's "Becoming Jane," Martin McDonagh's "In Bruges" and Edgar Wright's "Hot Fuzz" -- that were fueled by these equity funds...

...DNA Films topper Andrew Macdonald admits that Boyle's $45 million sci-fi epic "Sunshine" simply could not have been made without Ingenious to match Fox's investment.

It certainly is a worrying read. Luckily though none of the current films in production that are using GAAP to assist in funding have fallen apart, but reading these facts and figures it does make you wonder if the appetite for making films in the UK is going to drop even more.

Before long the UK industry is going to act merely as a feed for Hollywood, we see our stars head off there for more money and recognition, now we're seeing behind the scenes talent and productions head that way too.

Surely the government must realise that they can tax something too far, and indeed tax it to death.





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Comments

'Surely the government must realise that they can tax something too far, and indeed tax it to death'?

I think you might have missed the point here - this is nothing to do with taxing the income from films, but rather with stopping rich individuals using film partnerships as a means of not paying income tax on their vast salaries and bonuses.


No, no, no John. You have. Two British films are already struggling for money and have had to have cash injected into them this week just to keep them going, big films too. We are seeing the British films suffer right now, how is that the right outcome?

Films - well British films at least - already get 20% of their budgets paid by the Government with no strings attached. That's on top of any lottery grants they might get. So there's no justification whatsoever for them taking another chunk by helping rich fat cats avoid paying income tax.

If films can find real investment as opposed to dodgy tax breaks, it's because the films are not good enough to encourage people to put thier own money in them.

Not sure which two struggling films you're referring to, but I know one film has been 'saved' by a hefty grant from the lottery. It's a remake of St Trinians. Need I say more?

Where do you get the 20% from? How does the Government pay for 20% of all film budgets?

The Lottery money isn't a bankable option though, it's dependent on if lottery money is put towards films and then if that film gets it, definitely not a guaranteed option.

Then when you get the Olympics coming up you find that the chance you may have had of getting money from the lottery is gone as it gets syphoned off for the Olympics.

Take a look here:
http://www.filmlondon.org.uk/press_details.asp?NewsID=925

Or here:

http://www.hmrc.gov.uk/films/draft-guidance/index.htm

And there's lots more info if you want it.

Even putting lottery money aside, British films get 20% of their budget paid by the taxpayer. And if you look at the guidance, you'll see that this 20% isn't just a reduction of their tax bill, it's free money - irrespective of whether they actually pay a penny tax in the UK.

(And 'British films' in this context includes such strapped for cash films like Casino Royale and the Harry Potter series.)

But rather than saying this is great, thanks for your generosity, etc., film makers just go ahead and try and get even more from the Treasury. And then scream when the government try and stop them.

Still think that these poor films are 'struggling for money' because they're being taxed so much?

Well that is interesting. I'm no tax expert but the general newspapers in the UK keep carrying the stories that films are struggling.

There are some points in the finer detail. For everyone else here's the excerpt:

In order to qualify for the relief, a film must meet three conditions. It must:

- be made to be shown commercially in cinemas;
- be certified as British either because it is an official co-production or because it satisfies a new cultural test administered by the Department for Culture Media and Sport; and
- incur at least 25% of its total production expenditure on film making activities in the UK.

The rates and levels at which the relief would be provided were announced in the 2005 Pre Budget Report.

British films costing £20 million or less will be eligible for an additional tax deduction of 100% of qualifying UK expenditure and to surrender losses in exchange for a cash payment of 25%, amounting to a benefit worth at least 20% of qualifying production costs.

Other British films will receive an additional deduction of 80% of qualifying UK expenditure and will be able to surrender losses in exchange for a cash payment of 20%, amounting to a benefit worth typically 16% of qualifying production costs.

What leaps out at me there is that the reduction in tax is for the UK costs alone, which is a good thing as it encourages the films to be made in the UK, but it's only for the UK costs. So Casino Royale, for example, would only have been able to use this tax for all the costs incurred in the UK filming.

Still think that these poor films are 'struggling for money' because they're being taxed so much?

I'm not sure about the tax bit now, I'll have to understand the rules a bit more, but I still think British films are struggling for cash. Why? Well because they are, it's a fact that they can't get the funding behind them. Whether that's because of the tax is now a little hazy for me.

On one side there's all the newspaper and film body reports saying that the Government is closing tax incentives which formerly brought them money, and then there's the tax rule you just pointed out.

By the way you were right, St. Trinians and Brideshead Revisited (read here) are the two films struggling for cash just now, or the ones publicly announced. However it isn't just them. By the way Trinians has a huge amount of British talent behind it. You can't just dismiss the film for funding because you don't think it's going to be good.

I think my point was that you have to take stories about films folding becuase of government action against tax scams with a pinch of salt. The fact that none of them bothered mentioning that films were already getting 20% of their budgets paid by the taxpayer anyway just shows how that film makers have lots of friends in the media who are prepared to publish biased stories where they are always the innocent party.

I don't doubt that producers find it difficult to raise funding - after all about 90% if films lose money at the box office, so they are very risky for investors - but that's nothing to do with the lack of financial support from the UK Government. Perhaps the answerlies closer to home - that they've depended on soft money for too long and are now incapable of making films which anyone actually wants to see.

And incidentally, there was an error in your original article - the 16% shortfall on the funding for Casino Royale came from the announced action which would have affected sale and leaseback deals, and not from GAAP schemes. Let's say that the budget for the film was £150m - that means they were expecting a subsidy from the taxpayer worth £24m. The James Bond franchise must be one of the most lucrative in the world. Is this really the most deserving recipient of Government support?

"films were already getting 20% of their budgets paid by the taxpayer"

I already brought this point up, although you say 20% of the budget, according to the points listed in the pages that you provided it says that there's a tax rebate on a percentage of the UK costs, not complete costs. It seems a bit more confusing and limited than simply 20% of the total budget.

I then don't see how you leap to the conclusion that the filmmakers are manipulating the media. I'd be interested to hear why you make that statement. Is it because you believe that the films are funded properly, or over funded, and the papers are saying otherwise? I'm just trying to find facts behind the statements.

As for the statement that there's an error in my article, there's not. When you read the article the context during the sentence is exactly as you state. Also the information was taken from various articles including Variety.

It is all a little confusing - and part of it comes from the fact that the new 20% tax relief replacing an existing tax relief which effectively had been in place since 1992.

The old relief, unlike the new one, gave tax relief on the basis of total expenditure - not just expenditure in the UK. (This was the relief which Casino Royale would have qualified for - in other words, getting UK tax relief on expenditure in Jamaica, Germany, Italy and France.) What this meant in practice was that there was an incentive for films to be made overseas (because you could get relief in the UK and then get additional support from, say, Germany on the expenditure incurred in Germany).

Which is simply madness - and you won't be surprised to hear that the UK was the only country in the world to provide tax support on this basis. And why they now only offer it on UK filming.

In answer to your question, well, I think I'm trying to set out the facts behind the media stories. After all, you - as someone who I assume takes a direct interest in these matters - took the impression that the Government was somehow making films pay more tax than was fair, thereby damaging production. And nothing could be further from the truth. Whether you call this bad journalism or media luvvies doing favours for their film friends is rather a moot point.

I don't really know whether films are properly funded or not. (Although the CEO of the UK Film Council recently said that the problem in the British film industry has been one of over supply - which implies overfunding.) But I do think they do show signs of ingratitude - being given hefty Government support and then complaining that they're not getting any more.

Oh and another thing - there was yet another instance this week where the film industry complained about the Government cutting a source of funding. This time it was in Wednesday's Budget - have a look: http://cineuropa.org/newsdetail.aspx?lang=en&documentID=75786

As I said, it's very confusing...

And you're right - I misread your article: the 16% was a sale and leaseback deal, not a GAAP scheme. Apologies.

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