New tax proposals endanger film and environmental projects

Film makers in the United Kingdom have been spitting feathers all weekend.

Uncle Gordon has decided to remove most of the tax incentives for investing in films.

First, some background. Some new tax rules for the film industry were made some time ago, and these apply to films which started principal photography on or after 1 January 2007. However, the old rules are still in place for films which were in production on 1 January 2007, and it is these old rules that are affected by the latest changes from Uncle Gordon.

Generally, under the old rules, an investor could become a 'non-active partner' in a film partnership. His main role would be to contribute money to the partnership, which was in turn used to finance the film. As films tended to make losses in the early years, the investor was entitled to loss relief which was worked out on the basis of how much capital he had contributed to the film.

As such investors tended to have high income or gains elsewhere, they typically offset the losses against these, achieving a lower tax bill as a result. This is called 'sideways loss relief' because it operates to reduce taxable profits or gains from other sources arising in that tax year (and sometimes in an earlier year). If sideways loss relief were not given, the losses would have to be pushed forward and offset against profits from only the partnership in future years. It is thus clear why sideways loss relief is so attractive.

Not for much longer. Uncle Gordon has waded in and decided that, with effect from 2 March 2007, any such capital contributed to a partnership by a 'non-active partner' would be disregarded if it was shown that the capital was contributed with the aim of securing loss relief. In addition, any sideways loss relief given on or after that date to a 'non-active partner' would only be restricted to £25,000, or if the amount of losses incurred was lower, then that lower amount. Any losses that do not qualify for sideways loss relief would be carried forward to future years.

Understandably, there is an outcry. The film industry is not happy, because with the tax relief severely restricted, investors would no longer wish to invest.

Environmental projects may also suffer. Partnerships trading in carbon credits are also attractive to investors for the same reason as the film partnerships. The environmental groups are also not happy.

So who is going to say something to Uncle Gordon? Will the film industry collapse first before he realises the folly of his actions?

UPDATE (9 March 2007). Uncle Gordon has performed a U-turn. The rules are not going to apply to certain film partnerships where the producer sells the film to the investor and has it leased back to him. This is a common arrangement by which the producer raises the money he needs for the film. It is normally used for films certified as 'British' films because they get more generous tax treatment.  It was this type of arrangement that the film industry was most concerned about when they heard of Uncle Gordon's plan to restrict relief. They're happy now.

Unfortunately for the environmental partnerships, no such U-turn for them. Uncle Gordon is digging his heels in. So much for all that 'environment is king' rhetoric he has been mouthing of late.