Film finance and the pre-budget report 2004

United Kingdom

The Chancellor of the Exchequer presented his pre-budget report to parliament on 2 December 2004. This included proposals to counter perceived abuses of film tax relief which the Government intends to enact in next year's Finance Act. The main proposals are:

1. No double dips for film tax relief

As expected, legislation is to be introduced so that only one claim for relief can be brought under section 42 Finance (No.2) Act 1992 ("Section 42") or section 48 Finance (No.2) Act 1997 ("Section 48") in relation to production or acquisition expenditure incurred on or after 2 December 2004 (unless there was an unconditional obligation to incur that expenditure under a contract entered into before 2 December 2004 or principal photography on the film started prior to 2 December 2004 but was not completed by that date). Any previous owners of the film will need to give irrevocable notice to the Inland Revenue that they have not claimed relief under either section. Section 42 relief will also be restricted to the "total production expenditure" on the film to bring the legislation into line with Section 48 relief.

2. Film tax deferral to be limited to 15 years

Relief under each of Section 42 and Section 48 will be limited so that tax is not deferred for more than 15 years. This will apply to transactions entered into on or after 2 December 2004.

3. Company exit schemes to be prohibited

From 2 December 2004 there will be changes in the tax treatment relating to the disposal of: (i) any company which is a 75% subsidiary of a principal company (under section 838(1)(a) of the Income and Corporation Taxes Act 1988) which owns the film rights leading to guaranteed income arising from a film where relief has been claimed under either Section 42 or Section 48 ("Film Rights") or (ii) Film Rights by any company. In the event of a company disposal, the company will be required to bring into account in the accounting period that ends immediately prior to its exit, a trading receipt, as if it was a receipt of income in respect of the Film Rights, equal to the value of the Film Rights. In the event of a disposal of Film Rights, the company selling the Film Rights will be required to bring into account in the accounting period in which the disposal is made, as a trading receipt in respect of the Film Rights, the amount by which the value of the Film Rights exceeds the amount actually received as trading income for the disposal.

4. Restriction of loss relief in relation to individuals in partnership

Partnership loss relief is to be limited to an individual's capital contribution to a partnership, limited partnership or limited liability partnership with effect from 2 December 2004.

Should you require further details or advice please contact Peter Hewes on +44(0) 20 7367 3670 or at [email protected]