The UK Budget changes were announced this week and many are calling them an attempt to buy votes, all that is except for the Film Industry who have been hit hard by some clearly harsh changes.
Most newspapers and websites are reporting on the fact that the Chancellor has blocked a loophole which Film Producers were using to double dip, a term being used to describe claiming tax relief twice for the same movie production. They make this move by the Government sound extremely harsh, but fair, since the language used actually does imply that the Film Industry were cheating or exploiting the laws. However, they aren’t wholly accurate in that statement.
The Guardian described the act of double dipping as one…
…in which financiers claim tax relief for production costs and sale and leaseback arrangements. Using a variety of schemes, financiers can save up to 40% of the cost of films.
So they aren’t quite claiming Tax Relief twice for the same thing, they are claiming on different aspects of the Film Production, however they do go on to point out that this move:
…is set to save √Ǭ£120m by 2007
Brilliant, that’s another √Ǭ£120m that the Government can squander on god knows what instead of transport, healthcare, education…hold up, stay with the movies here Richard, everyone may have missed the numerous references to your Birthday, but keep going, don’t get mad.
That’s all very well, but what is the Film Industry missing out on? Well the Guardian newspaper this weekend carries a large story about some of the aspects of Film Production from all sides. The main story on the tax breaks reveals some interesting facts and figures.
Last year, private investors piled √Ǭ£2bn into UK film productions which gave tax breaks of well into √Ǭ£800m. This matched the all time high in British film productions of √Ǭ£1.2bn in 2003 with the number of people working in the industry rising from 32,000 in 1994 to 57,000 today. A typical film Producer could witness as much as 40% of his film being financed through tax reliefs. All this added together shows some really strong financial reasons of why the UK film industry is a viable going concern and shouldn’t be taken lightly.
This 40% financing figure will now be cut to 15-20%, and with even further cuts due to hit the film industry next year, this could fall to 10%. That’s a large drop in the financing of a film worth millions of pounds.
There are two current tax incentives for UK movies, one has just been closed by Mr Brown this week, and the other is due to be closed in January and replaced by a fixed tax relief amounting to a maximum of 20% of the production costs. This figure is widely disputed by experts and analysts in the Film Industry who believe that it will drop to between 6 and 14%. However, added to that change is the raising of the limit for qualifying films from £15m to £20m, which will make it even harder for the lower or middle budget based films to reclaim money and attract investors.
Mr Brown already closed another tax relief option to the Industry earlier this year, and it directly caused the closure of various production companies. Analysts, particularly PACT (a trade body representing independent film and television producers) are stating that that was just the beginning and that these further tax relief closures are going to hit the industry hard just at a time they were beginning to build themselves up again.
Martin Churchill, one of the independent film analysts, said:
The vast majority of these investors were not doing it for the love of film, but as a way to defer tax and as a source of fairly cheap borrowing. Film lovers they ‘ain’t.
This is of great concern, as the financing of a movie in the UK will no longer be seen as a good tax break or a good investment, and the private investors who were providing these vast funds to the productions will now cease, and with it the number of UK film productions.
The only good news appears that films that begin shooting before December the 2nd will not be affected. The rush to move films from production to filming begins now.
However, there are alternatives. Setting up the movie as a company, a common practice nowadays, opens the gates for Enterprise Investment Schemes which allows the company to sell shares to investors. Shares qualify for immediate tax relief and a further tax relief after three years, if they are kept that long by the investor, and also can be offset for losses when finally sold. So there are other options, and what is needed is a change of thinking on the part of the production companies and their investors.
Does that mean that in five years time, when this is being exploited for every movie that the Chancellor will close down these areas of tax relief and the industry will have to move on again? Hardly, these are typical tax incentives for all share subscription schemes, so the Government couldn’t possibly curb these. Could they?
So for all the concern over the changes, EIS offers a unique new way of opening up the investment into a movie, and as I see it, provides a genuine possibility for the investment base of a movie production to change from private companies and high earning individuals to smaller private investors and individuals.
Imagine having some spare cash and checking out a website to find the film productions that are seeking finance, purchase some shares in the ones you are interested in and you think have a chance, and from a £10,000 investment you instantly reclaim £6,000 from the taxman with any future profits being tax free. Now that is exciting, obviously the £10k is a figure for easy calculation, but buying £100 or £1,000 shares in a recent UK production such as The Merchant of Venice would have been an excellent move.
For all the harshness that the tax changes have brought the industry this week, it looks like there is a genuinely positive way forward, which could widen the investor audience dramatically and offer the individual an exciting investment opportunity.
