In the wake of “Black Tuesday” (10 February 2004), when the UK Treasury effectively closed down a number of film production funds utilising “Generally Accepted Accounting Principles”, there was good news in the recent Budget about the proposed replacement for Section 48 (sale and leaseback) tax relief.
The Government has published an initial outline of the new regime which will replace the tax relief currently available under Section 48 of the Finance Act (No 2) 1997 for films with a budget below £15 million. The existing Section 48 relief is due to expire on 1 July 2005 and is available to films where the production or acquisition expenditure is incurred before 2 July 2005. This will be replaced by a new Section 48: a tax relief in respect of production expenditure incurred equal to 20% of the production budget which can either be offset against profits or surrendered to the Treasury for a cash payment. The tax credit will only be payable directly to film producers, thus bypassing third party financiers. Unlike the relief currently available under the existing Section 48, there is no time limit on the new Section 48 relief, which will continue indefinitely and will provide welcome stability for the British film industry.
Whilst this will obviously be of interest to producers of pure British films, in the context of co-productions it remains to be seen whether the new relief will be available for the whole of the production expenditure incurred or whether it will be restricted to the UK expenditure alone. The impact on co-productions will depend to a certain extent on the outcome of the root-and-branch review of co-productions initiated by the Government in November 2003. Indeed, Gordon Brown made specific reference to the Government’s intention to create a tighter definition of British qualifying status, a measure presumably intended to ensure that the new relief is reserved for projects with a strong British element.
The fine detail of how the new tax relief will operate will be published by the Treasury in the summer of 2004, following a period of industry consultation. One key question is whether the new relief will apply to the distribution as well as the production of films, a proposal supported by the UK Film Council among others. The Government has indicated that it “wishes to consider the scope for the new relief to improve the proportion of British films produced being distributed”.
Whilst the new Section 48 seems to spell the end of sale and leaseback deals for films with budgets under £15 million, the relief available under Section 42 of the Finance Act (No 2) 1992 will be unaffected and will continue in its current form. This enables expenditure incurred on the production or acquisition of a qualifying British film to be written off over a period of three years – one third of the acquisition or production cost in each year (as opposed to the 100% write-off in one year allowed under the existing Section 48). Historically the rates for Section 42 sale and leasebacks have been lower than the average 15% for Section 48 sale and leasebacks, averaging around 7% of the production budget for the film. This is because the three year tax write-off is less attractive to individual investors and is more likely to be taken up by corporate investors who pay a lower rate of (corporation) tax. Whether Section 42 relief can be combined with the new Section 48 remains to be seen.
Although he did not give any further information on transitional provisions to assist productions in difficulty following Black Tuesday, the Chancellor stated that he does not intend to introduce general anti-avoidance legislation at this stage. However, accountancy firms and those promoting such schemes will be required in the future to register them with the Inland Revenue in order to “improve transparency and allow the Inland Revenue to make a swifter and more targeted response to deliberate abuses of the tax system”.
Clearly the news about “Son of Section 48” is welcome but we will need to see the detail to determine how, and how well, this will work. No doubt the Treasury will be assiduous in ensuring that there is no abuse of the new system, or this relief too will be removed.