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Of Tax, Tulips, Deja Vu and Portia’s question

  1. portia Says:
    March 6th, 2007 at 12:30 pm My comment doesn’t actually relate to the script competition blog (though i appreciated it greatly) but I couldn’t find a direct email address & I have a request for you…. - your thoughts on the recent blocking of GAAP funds by the government. Does this change impact you directly as a producer in the UK? Is slingshot run in such a way that it is not effected by the recent changes and prevention of sale & leaseback? I’m curious because the Varietys and Screen Internationals are painting a very negative, dramatic picture with this news simply about how much money will not be invested in the UK industry & that it makes it ‘nearly impossible for the independent producer’ etc etc, so was just wondering what your perspective on it was…

Three years ago, almost to the day, the Inland Revenue closed a number of GAAP loop-holes, which scuppered a selection of film funds, causing the shut-down or rescheduling of a bunch of high profile films and the loss of lots of revenue from the boutique finance firms that put together these limited partnerships. Independent producers and the trade press were up in arms, there was talk about the end of the British film industry, letters were written, producers bemoaned on talk-shows; the Revenue remained intransigent.

Sound familiar?

I was embroiled in the thick of that episode (melodramatically christened ‘Black Tuesday’ in the film industry), because I was involved with the biggest budget and highest profile project to be killed by the tax change. TULIP FEVER, was to be a period romantic epic, re-uniting the multiple Oscar winning team of John Madden and Tom Stoppard, the script based on a novel by Deborah Maggoch, told of star-crossed lovers against the back-drop of the Tulip boom of 17th century Amsterdam.

We were 6 weeks into pre-production, millions had been spent, entire fields of tulips planted, big stars committed. And it all fell apart. In vain protest against the inevitability of tax, I added my voice to the chorus of despair, and on behalf of my then boss, the film’s producer Alison Owen, drafted letters to the Chancellor, and worked frantically to try and rescue the picture. It didn’t work.
So my heart goes out to all those producers in similar binds this time round. I know their pain.

But actually, the horrible dirty secret, then as now, is that I’m with the Revenue on this. There, I said it. Why?

First, because lets call a cat a cat. The GAAP schemes are tax avoidance. That’s the view of the revenue, and if you sift through the protesting voices, you won’t find a compelling argument to the contrary. There’s a reason that all the tax funds are bemoaning the effect of the decision, not the rational of it. The truth is that the structure of most of these funds is so complex and obscure as to suggest either Columbian drug cartels money laundering schemes, or (as is the case) avoidance.

So much as I love people giving money to film, I also like the fact that we live in a civil society, where the cost of being rich is paying tax.

That’s my left liberal reason for being with the revenue on this one. Now for the free-market capitalist reason. Subsidy distorts markets. And distorted markets, as the story of the Tulips of Amsterdam showed, are bad things in the long run.

The availability of money for films that is motivated not by profit, but by tax, means that films get made that don’t have market justification, or they get made at price points that would be unsustainable in the absence of tax breaks. In short: bad films get made, or good ones get made inefficiently.

And that makes us less competitive as an industry.

So, no, slingshot was not affected by the ruling. We made it a principal of our financing that we don’t depend on such schemes, we utilise the Film Tax Credit and EIS structures, both of which are statutorily approved and strike an appropriate balance between motivating investors and encouraging a valuable cultural industry on the one hand, and allowing the market to do its work on the other.

And in the long run, that balance will make us healthier. Despite the short-term pain (as intense now as it was in 2004 after black Tuesday), the industry will absorb the shock and evolve to be better - that’s what sustainability means, and that’s what we all say we want, right?

This entry was posted on Wednesday, March 7th, 2007 at 6:34 pm and is filed under General Updates, Industry Debate, film finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

6 Responses to “Of Tax, Tulips, Deja Vu and Portia’s question”

  1. portia Says:
    March 8th, 2007 at 12:19 pm

    thanks for this, is fascinating. Gordon seems to have done the right thing with his swift decision about sale & leaseback, but if i understand correctly GAAP schemes are still finished? it sounds like this strikes the perfect balance between supporting the industry and at the same time preventing the tax credits which encourage ‘bad films getting made, or god ones inefficiently’ (excellent point), would you agree?

  2. Arvind Ethan David Says:
    March 9th, 2007 at 11:22 am

    Yes, I think I would. Closing the GAAP schemes was the right thing to do. The way it was done, however, was rather bull in the china shop, because it had retroactive effect on a whole series of films whose financing was part-GAAP and part s42/48. So yes, the much noted ‘U’ turn is probably the right thing to do in this case. That said, I suspect that the GAAP funds structured themselves as part sale and lease back and partly GAAP did so PRECISELY to create this sort of gray area, and so to the extent that my supposition is correct, duplicity is being rewarded. All the GAAP funds currently being raised for production next year, however, continue to be sunk.

  3. portia Says:
    March 10th, 2007 at 2:17 pm

    thanks again, this is much clearer to me now… looking fwd to the details on ‘Teen Hitchcock’ too!

  4. dav Says:
    March 11th, 2007 at 5:13 pm

    Thanks for insight into an area of the industry that to economic luddites like me can often seem bewilderingly obscure.
    ‘Teen Hitchcock’-love it. Nicely enigmatic but with clear reference points. Having produced a couple of docs on the great man, I’d say it’s a much broader brief than it might first appear as he worked in loads of different genres-and his early British films are often unfairly overlooked in favour of the Hollywood years.

  5. Arvind Ethan David Says:
    March 15th, 2007 at 9:52 am

    Hey, John Woodward agrees with me on the GAAP clampdown:

    From today’s screen daily:

    UK Film Council chief executive of the John Woodward has warned the UK film industry it will have to face up to a tough period of contraction following this month’s tax clampdown.

    “Things will get worse before they get better,” he said.

    Earlier this month, the Treasury announced it was effectively ending so-called GAAP finance schemes through which wealthy individuals would offset tax against the paper losses of partnership schemes.

    The impact of that move was somewhat overshadowed by the initial inclusion - and subsequent removal - of sale and leaseback in the tax measures from the Revenue.

    But Woodward said the government’s tough action on tax avoidance, while not specifically aimed at film, would have a significant effect, perhaps ending an era.

    “There’s been a mass hallucination that somehow the vast sums of money poured into film by the tax avoidance industry is legitimate.”

    That chapter in the history of British cinema needs to close, he suggests.

    “We are reaching the end of the line (for film funding by tax loophole.) There will be several more turns of the dice over the next year or so until everyone gets the message.”

    “What’s not going to be there is the ability to go out and source 30% of your film from a tax fund.”

    The result will inevitably be that production will be tightened, although not on the scale of the 2004 cutbacks that followed the reform of sale and leaseback schemes.

    “Less films will get made and production will contract, although the idea that there will be a wholesale collapse is totally wrong.”

    He said there might even be benefits with finance concentrated around high-quality products.

    “There have been times, particularly before 2004, when soft money from tax funds led to oversupply, which was not good for the brand of British film. Now, the cream may find it easier to rise to the top.”

    He warned that there were companies who would try to tempt producers with a new version of GAAP, administered as sole traders rather than through partnerships. “Some of the cowboys out there are regrouping,” he said.

    But the government was in no mood to tolerate what he calls a “global cat and mouse game where the rich look for places to hide money.”

  6. Caspar Says:
    March 15th, 2007 at 2:48 pm

    Agreed. Tax breaks just encourage people to turn out garbage simply to make a movie for the sake of a tax break as opposed to for the sake of entertainment, which in turn puts people of going to the cinema because there is so much nonsense sloshing about.

    It also creates a false economy - cast and crew are all used to being paid vast sums of money which in turn dents the low budget film producer who is trying to make his film with ‘real money’. This leads to conversations like this:

    The DOP wants £2,500 a day.
    Well we can’t pay him that.
    That’s what he got on ‘Tax Break Carnage’.
    Yeah, but what happened to Tax Break Carnage? It never even saw the light of day.
    That’s not the point.
    No, that IS the point!

    :)

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