Why indie producers are calling for a change to the UK's film tax relief

Michael Winterbottom has spoken of the “betrayal” of the tax credit.

By Geoffrey Macnab 5 Dec 2019

Why indie producers are calling for a change to the UK's film tax relief

Frustrated independent producers are suggesting an overhaul of the UK’s film tax relief, claiming they are not seeing the benefits for which it was designed. But many are horrified at the suggestion, pointing to the $3.7bn inward investment sector thetax credit has created.

The UK’s Film Tax Relief is regarded as the main foundation on which the thriving UK production industry, now worth more than $3.7bn (£3bn) a year in inward investment, has been built. But some independent UK filmmakers are questioning the way in which it is being used.

Michael Winterbottom has spoken of the “betrayal” of the tax credit and suggested tax benefits that should have gone directly to the producers of his new film Greed (of which he is one) went instead to the film’s backer, Sony Pictures Entertainment. “That seems to me to be wrong,” he said.

Producer Alison Owen also expressed her misgivings about the struggle to ensure the full benefit of the tax credit goes to the producer rather than elsewhere during her keynote speech at the Film London Production Finance Market last month. The financiers, she said, “will try to take advantage of the tax credit rather than the producer”.

From its start, the film tax relief has been applauded for being straightforward and easy to use. It provides a payable cash rebate of up to 25% on UK qualifying expenditure to both smaller UK producers and Hollywood behemoths. Any suggestion the tax credit might need to be reformed is met with a shudder by many in the industry, who point to the enormous amount of inward investment it has attracted, mainly from the US studios, pay-TV giants and streamers.

When the tax credit was introduced 12 years ago in 2007, the rhetoric was about delivering the relief directly to filmmakers and cutting out the middlemen. The reality in the indie sector today is that producers still cannot access the full benefit of the credit because they always need to cut deals and give away upside.

“The tax credit is fantastic in many ways. We all rely on it for production and it brings money in. But in every film I’ve done recently, it has been part of the finance plan. It goes straight back to the financiers. There is no direct benefit for the producers,” says Melissa Parmenter of Revolution Films, producer of Greed. “It feels like a one-way street, for the purpose of helping the financiers get the total budget together. Often, you’ll go in to the financier saying the budget is this plus the tax credit but it ends up being that including the tax credit. With all the pressure of wanting to get the film made, you make do, cut your losses and say, ‘Fine, we’ll do it.’ It’s a shame it has gone that way.”

Squeezed out

The independent film financing landscape in the UK is vastly different from what it was in 2007. The pre-sales market is vastly diminished, the US streamers now occupy a dominant position and the change in EIS regulations, which has stopped EIS funding being used for single projects, has put further pressure on budgets.

Although independent producers know the tax credit will be paid when they complete their films, they often need the money immediately. Which is why they look to financiers such as Head Gear Films, or, on bigger budget films, banks such as Coutts and Barclays, to cashflow the credit. Producers now say they have to pay premiums and fees to access money that was intended for them anyway. Financiers are bundling up tax credit risk with gap and equity lending as if it is risky money when, in fact, it is safe collateral.

In turn, financiers are driving harder bargains with filmmakers because “investing in independent film is a much riskier game than ever before”, says Phil Hunt, CEO of Head Gear Films, which works regularly on indie productions such as Sophie Hyde’s Animals and Sarah Gavron’s Rocks to cashflow the tax credit. “I can’t think of any investors in the film industry who are creaming it,” he says.

The challenge is that generally UK films are not seen as a good investment. Few achieve either theatrical success at home or significant sales internationally.

“EIS masked that because the investor would go, ‘Alright, you’ve got a one in a 100 chance of having a hit but you have the [EIS] tax relief,’” says accountant and film financing specialist Dave Morrison, partner at Nyman Libson Paul. That cushion is no longer there.

Hunt is one of those who believes the tax credit itself should now be fine-tuned. “It would be great to be able to tweak [the tax credit] from the independent producers’ point of view, to make their life easier.”

UK producers’ body Pact has long called for an enhanced 40% tax credit for independent UK producers making films in the $2.6m-$12.9m (£2m-£10m) range.

The arguments for an enhanced tax credit are familiar. The lack of a thriving indie sector not only impoverishes UK cinema in cultural terms but deprives filmmakers of the opportunities to gain the experience that might lead to the international films and high-end dramas made in the UK.

“There is room for a very big pan-industry conversation on how we make sure that in five years’ time, we still have British sales agents, British distributors and British producers making British films,” says Andy Paterson, one of the producers pushing hardest for a change to the tax credit.

Borrowed time

Another suggestion is for independent producers to take out an insurance policy for the tax credit rather than pay fees for third-party financiers to cashflow it. This insurance could be added to the completion bond, simplifying the process and cutting the borrowing cost.

“Rather than change the successful way the tax incentives work, we should be looking at other measures to help independent producers,” says Stephen Bristow, a partner at UK accountancy firm Saffery Champness. He cites the BFI-endorsed EIS UK Creative Content Fund as a practical example of a measure designed to help producers. However, the fund has yet to announce any investments.

“There really are no easy answers for this level of change in our sector, which is seismic and at a global level,” says Ben Roberts, deputy CEO of the BFI and head of the BFI Film Fund. “We recognise the pressure points being felt across the independent film sector and what is effectively a squeeze felt on all sides — from accessing finance and audiences, polarisation between studio and independent film, to unlocking value in the cycle of rights. But it is also not going to suddenly alleviate. We have to find what the new paradigm is and the factors that play into it.”

The consensus among most industry observers is that it would be perilous to tinker with UK film tax relief at a time of such political upheaval.

“We need to be very careful… [that] we are not in danger of appearing to be overzealous or mercenary,” says Adrian Wootton, CEO of Film London and the British Film Commission. “Frankly, no British film would be made without the tax credit. Without the tax credit existing, we wouldn’t have a film industry.

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