The Final Cut
Linda Roberts
19-Jul-07
Will recent changes to Film Tax Relief result in the haemorrhaging of support for one of Britain’s most glamorous industries wonders Linda Roberts?
There’s no question that 2006 was a good year for British film-making. Figures published by the UK Film Council show that the amount of money spent in 2006 on making films in the UK with production budgets of £500,000 or more increased by 48% in 2006 to £840.1 million, making it the second best year in film making history. The figures include the UK spend of indigenous UK film production, inward investment productions (films with more than 50% finance from overseas but made mainly or significantly in the UK), inward co-productions, and UK co-productions filmed both in the UK and abroad using UK crew and expertise. Inward investment, mostly from Hollywood studios was particularly successful with spend increasing by over 80% to £569.6 million.
British films are also enjoying success worldwide having scooped up many awards for their efforts including BIFAS, Golden Globes, LA and New York Critics awards. At the BAFTAs, UK films won the coveted Best film, Best actor in a leading role and Best actress in a leading role awards amongst others. British films have also received a total of 16 nominations for this year’s Oscars®, including nominations for ‘Venus’, ‘The Last King of Scotland’, ‘The Queen’, ‘Notes on a Scandal’, ‘United 93’ and ‘Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan.’
John Woodward, Chief Executive Officer of the UK Film Council commented:
‘We are back in business with British filmmakers winning international awards, a crop of great British films produced, British talent and facilities in demand from filmmakers around the world, and the new tax credit which came into force this year will ensure that the UK stays one of the best places in the world to produce a film. 2007 has already seen the release of a number of exciting new films including the award-winning ‘This is England’, ‘Notes on a Scandal’, ‘Atonement’, ‘The Other Boleyn Girl’ and ‘28 Weeks Later.
’ But is 2007 shaping up to be a good year for British film investors? A significant change to the legislation regarding tax reliefs for British films was introduced in January of this year. Prior to 1 January 2007 the prevailing legislation allowed taxpayers to obtain significant tax benefits via investment in an unincorporated limited partnership that invested in British qualifying films. The tax relief was created through the purchase of film rights, which were acquired by a film partnership in which the investor became a trading partner. Film partnerships therefore offered a viable alternative to other income tax planning opportunities in specific circumstances. Expenditure on qualifying films was eligible for 100% first year tax relief. Therefore, the purchase of film rights in a year when no other income was received from that film would create a trading loss that, where appropriate, could be set against the current year’s income and potentially, capital gains. Alternatively, the loss could be carried back to either the previous year’s income or capital gains or the previous three years’ income (taking earlier tax year’s first). Companies could also invest in film partnerships but the loss relief rules were different to those applying to individual taxpayers. The tax relief system was perceived as subject to abuse for antiavoidance purposes and has been replaced by a new Film Tax Relief. Transitional arrangements are available for overlapping films.
The new Film Tax Relief (FTR) is available to film production companies (FPCs) only and is not available to those whose involvement in film making is purely financial. It is applicable to films intended for theatrical release which commenced principal photography on or after 1 January 2007. Such films will be entitled to the new film tax relief if they satisfy the new cultural test and meet the other relevant conditions. The tax relief is underpinned by a new treatment for FPCs that ensures that, for tax purposes a FPC will be defined as a company responsible for principal photography, postproduction and for delivering the completed film. Each film will be treated as a separate trade for tax purposes.
The FTR will be available on a maximum of 80% of qualifying expenditure in the UK where at least 25% of the total production expenditure is in the UK. An additional deduction of 100% is available for films with total production expenditure of £20m or less and 80% for all other films. If the deduction leads to a tax loss a payable tax credit is available at 25% of the loss on films costing £20m or less or 20% on all other films. Alternatively the loss can be carried forward against profits from the film or surrendered to a film maker in the same group when the film is sold or ceases to be exploited.
In order to be certified as a British Film the Department for Culture, Media and Sport must be satisfied that the film passes the ‘Cultural Test’. To do this it must be awarded 16 points out of a possible 31 points, subject to the following ‘golden points’ rule: A film scoring all 15 of the points available in sections A4, C, and D, and less than two points in section A1 and less than two points in section A2, must additionally obtain the points in section A3 to pass the cultural test. If a film scores two points in section A1 or two points in section A2, it will not require the additional points from section A3 in order to pass the test.
The points are awarded within the following sections:
Section A – Cultural Content
This category considers the British subject matter of a film i.e. where the film is (or is represented to be) geographically set; the nationality or residency of the principal characters; the nationality of the writer; and whether the film is wholly or mainly in the English language.
A1: Film set wholly/mainly in the UK (4 points)
A2: Principal characters British citizens or residents (4 points)
A3: Film based on British subject matter or underlying material (4 points)
A4: Original dialogue recorded mainly in English language (4 points)
Section B – Cultural Contribution
This category considers the contribution the film makes to the promotion, development and enhancement of British culture. Section B in particular seeks to identify those films which make a significant cultural contribution over and above the cultural content assessed in the four categories in Section A. Section B will be assessed under three key categories: Cultural Creativity, Cultural Heritage and Diversity.
Points will be awarded as follows:
Significant representation/reflection of British Cultural Heritage (1 point)
Significant representation/reflection of British culture through a novel and creative approach to filmmaking (1 point)
Significant representation/reflection of British Cultural Diversity:
(1 point for subject/portrayal)
(1 point for other factors impacting on the final content)
Two points may be awarded if a film can demonstrate it makes an outstanding contribution towards these factors.
Section C - Cultural Hubs
To maintain a ‘critical mass of UK infrastructure’ for film making, this category considers whether or not the facilities used in making the film are UK based. Except for principal photography the amount of work on a particular film-making activity in this section will be calculated by the amount of expenditure on that work.
C1: Studio and/or location shooting/ Visual Effects/Special Effects (2 points)
C2: Music Recording/Audio Post Production/Picture Post Production (1 point)
Section D – Cultural Practitioners
For the purposes of this test a qualifying person means a citizen or a person ordinarily resident in a member State, that is, a citizen or resident of: i) The UK (including citizens of the Isle of Man or Channel Islands),
ii) Any EEA state (Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Ireland, Italy, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain Sweden, Iceland, Norway, Liechtenstein, Bulgaria and Romania).
To qualify in relation to a point a person must be a national of one of these countries at the time the film was being made. If a person holds dual nationality he/she may choose either nationality for the test.
The new Film Tax Relief (FTR) is available to film production companies (FPCs) only:
D1: Director (1 point)
D2: Scriptwriter (1 point)
D3: Producer (1 point)
D4: Composer (1 point)
D5: Principal Actors (1 point)
D6: Majority of Cast (1 point)
D7: Key Staff (1 point)
D8: Majority of Crew (1 point)
Roger Holman of Elanar Productions gives his reaction to the legislation changes:
‘The 20% tax break doesn’t make a huge difference to us. Though 20% is nice off anything, we’re making movies at around £250,000 so it’s not mega bucks. The kind of investor we’re looking for is someone who’d enjoy being involved in the industry; we can offer real hands on involvement across all aspects of film-making.’
The change of emphasis on the applicability of the FTR means that FPCs can now launch their own film-investment companies which offer private investors direct investment into their films. Visible Films (Ecosse) plc, Visible Films (RPC) plc and Visible Films (Samuelson) plc have been created by three highly successful film production companies: Ecosse Films, Recorded Picture Company and Samuelson Productions, whose combined films have won or been nominated for 14 Oscars, 11 Golden Globes and 26 BAFTAs. Their Visible Films companies will enable individuals to invest directly in the three independent film production companies, benefiting from an investment infrastructure that combines the tax benefits of the Enterprise Investment Scheme (EIS) with the new FTR.
The EIS element of the investment infrastructure allows an investor to take advantage of: a) 20% income tax relief on new ordinary shares up to £400,000 per tax year;
b) Exemption from Capital Gains Tax on qualifying shares held for three years or more;
c) 100% Inheritance Tax Relief after two years;
d) Loss relief against income or capital gains for losses made after three years; and
e) Unlimited Capital Gains Tax deferral on realised gains.
The Visible Films companies aim to raise up to £24 million across the three companies which would be used to finance film production. The target for each company is £8 million, and the minimum investment in each Visible Films company is only £10,000, making it an accessible investment for a wide range of private investors. Jeremy Thomas, one of the producers involved in the Visible Films companies reported: ‘One of the attractions of this plan is that investors can be involved in a varied group of films with high aspirations and with risk mitigation from the tax relief available.’
City Caledonian Limited is also planning to introduce an EIS based film investment vehicle later this year. I asked Martin Pollins, a director of City Caledonian Limited for his view on the current status of the film investment industry. He commented: ‘Film productions can be a worthwhile investment for UK taxpayers. With the introduction of film tax credits to provide incentive to the British film industry, producers are adapting their business to utilise all tax incentives for maximum benefit. This not only includes production scheduling and accounting, but also the use of other tax efficient vehicles, such as the Enterprise Investment Scheme, to help reduce investor risk.
‘Film has been, is and remains a high-risk venture, primarily because it is a collaborative art. As many a wit has commented, there is no accounting for the public taste: not every film can be a blockbuster.
‘Investment in any particular film is first sought when there is only paper on the table: a script, a list of creative personnel (including stars) wishing to be attached to the project, a budget and sales estimates. All are subject to change, particularly the sales estimates – especially when the picture is finished. Performances may or may not have met the producers’ original aspirations, or, the movie is no longer seen to appeal to cinemagoers.
‘Yet despite the risks, the potential return on film investments can be great. For every ‘Titanic’ there is a ‘Waterworld’. In between there is still room for smaller films such as ‘The Full Monty’ which, with a budget of only US $5m, generated box office receipts of over US $250m.
‘The film business is a business. Whilst there may be many variables to achieving success, it remains vital to look at the business structures and the business plans offered before making a decision.’
In addition to private investment, supplementary funding is also accessible to FPCs through a variety of funding initiatives administered by the UK Film Council Of particular interest are:
a) The Development Fund with £12 million over three years to support the development of a stream of high quality, innovative and commercially attractive screenplays. This fund is the largest of its type in Europe.
b)The Premiere Fund with £24 million over three years to facilitate the production of more mainstream films.
c) The New Cinema Fund with £15 million over three years to back radical and innovative filmmakers, especially new talent, and to explore new electronic production technologies. Its short film schemes have produced over 450 films.
‘Stormbreaker’, ‘Gosford Park’ and the recent Oscar® winner (Best Actor) ‘The Last King of Scotland’ have all enjoyed National Lottery funding.
The British film industry has a lot to offer potential film makers as evidenced by the significant rise in production spending in 2006. Certainly FPCs that meet the FTR criteria will enjoy the funding opportunities afforded by the new investment incentives.
It is expected that American studios will be particularly incentivised to make movies in Britain. But not everyone is happy: some producers have expressed concern that British movies that need to be filmed abroad will have difficulty in raising sufficient funding and that some of the successful British films that have been made in Africa and other inimitable locations would not have been financially viable under the new tax relief scheme. One thing is certain: the abuse of the previous tax relief scheme by investors who used the film industry for the purposes of tax avoidance is over and British film making can only benefit as a result.
