Film finance: TAXATION OF THE BRITISH FILM INDUSTRY

A sale and leaseback agreement has provided a safe way for people to invest in the film industry over the last few years.

As films are unpredictable, investors are reluctant to put money in up front before they have seen the finished product.

Once the film is in the can, the producer sells the masterprint to the investors, who then lease it back to the producer over a 15-year stretch. As the success of a film is still very difficult to predict even after it has been made, the value of the film is based on the cost of its production.

During that time the producer is entitled to exploit the film, but pays a “rental” to the investors, which pays back the initial investment. After the 15 years the rights revert to the investors, who will sell them to the producer at the market value. The producer builds his fees into the original cost to the investors. During that 15 years the producer is also obliged to pay a partnership of individuals (not financial institutions) a small percentage of the film's profits.

In 1997 the Government expanded a tax-deferment scheme to encourage further investment into the UK film industry.

Until then there were tax concessions available that allowed an investor to write off as a loss for tax purposes 33 per cent of the film each year over a three-year period.

This situation still exists for films with a production cost of over £15m, but in 1997 the chancellor allowed a 100 per cent tax write-off for films with a production cost of up to £15m.

To qualify as a British film and attract the tax shelter, the product has to satisfy the following criteria:

The production company has to be incorporated in a European Union country with the central management and control exercised in that country;

At least 70 per cent of the production money must be spent in the UK;

At least 70 per cent of labour costs (ie payment to actors and crew) must be paid to people who are citizens of the EU, the European Economic Area or the Commonwealth. If you want to have a major star whose payment can go into eight figures, then you can deduct the costs of one or two people who do not fall within those criteria (usually US stars).

If the film meets these criteria then the investors do not have to pay tax on the first £15m they have invested until the rentals from the producer start coming in.

The tax concessions are better for rich individuals than for companies, as the top bracket of individual tax is 40 per cent compared with 30 per cent corporation tax. Many partnerships of wealthy people, then, have been set up specifically to invest in the British film industry.