PROPOSED SOLUTIONS
Government/UK Film Council plans
66. Much of the evidence received from the Committee
was positive about the UK Film Council and DCMS vision for the
future of the British film industry, but many believed that there
are alternative solutions to the industry's difficulties.[112]
Mr John Hough from the Directors' Guild of Great Britain even
said: "I think the film industry needs something quite dramatic
to reshape from its current situation".[113]
The UK Film Council proposals are outlined more fully above but
centre around the development of a distribution-led industry,
with improved training and education, promoting the UK as the
'Film Hub' of Europe, and increasing links with the industry in
Europe whilst increasing diversity within the UK industry.[114]
Studios/BBC development
67. Mr Michael Kuhn, film producer, told the Committee
that Britain does not have a sustainable film industry at present
and that in order to produce one the Government needed to do two
things.[115] Firstly:
"set up a method of underwriting the marketing
and distribution of marketable films in North America and in some
key European territories, thereby beginning the building of an
international marketing and distribution expertise and power base,
using the funds and the stated intention of the UK Film Council,
which is to get more into distribution and marketing and into
production, or having a more equal balance."[116]
Secondly, he said: "I believe there is no reason
why we cannot at least have one studio on a level playing field
with the Hollywood studios,"[117]
and that the studio should deliver marketing power equal to that
of UIP,[118] which
is needed to create a globally successful film and a sustainable
industry. Many witnesses emphasised to the Committee the importance
of marketing to the success of a film. [119]
68. Creating a studio, but not on the scale of those
in Hollywood, is exactly what Mr Barnaby Thompson is trying to
do at Ealing:
"What we are primarily interested in doing
is finding a way of building a new kind of content producing and
distribution studio that is a mirror to some extent of our Hollywood
counterparts, but obviously completely different, because the
environment here is completely different."[120]
Mr John Hough, member of the Directors' Guild of
Great Britain, would like to see the BBC used as a global distributor
of British films as outlined below:
"I would like us to do something really
dramatic and form a film unit within the BBC — I know they
have one at moment but I do not consider it representative of
what it could be — by experienced film practitioners and
producers, and revolutionise the way the BBC makes films, using
Lottery money. I would take the Lottery money away from the existing
outlets, put it into this outfit, and I would make the BBC purchase
a screen, one screen on every multiplex in Great Britain, and
show the British films they make in these multiplexes, and in
that situation train people but learn that you have to make films
that have an audience and promote the culture. That is what I
would like to see happening."[121]
69. Mr François Ivernel from Pathé
explained to the Committee how the French and British systems
differ, and explained why, in his eyes, the British film industry
deserved consistent government support:
"For the French, culture comes first, so
it is not even a debate that it must be supported, it is more
how to vary the support, but support for the film industry has
been for 50 years without really much of a question. In the UK
the economic aspect is as important, or more important sometimes,
than the cultural aspect. What strikes me, really, being in the
UK is that you would think it would be easier to make independent
films in the English language, while on the contrary it is sometimes
more difficult because France or Spain or the Dutch, or whatever,
they are isolated by their language and they can create their
own stars. In the UK when a director is successful, or an actor,
most of the time they go and work for the US studios. So it is
another hurdle that has to be crossed and I think it is one more
argument for supporting British films, specifically — even
more so than the Spanish or the French or the Dutch."[122]
Although a number of European Union countries do
have extremely restrictive, protective measures for their indigenous
production, there is no strong evidence that this has benefited
their industries either financially or creatively.
Partnerships with Europe/US
70. The UK Film Council outline, in their plans for
the future, the importance they place on the creation of further
links with European film industries. This was one area where Mr
Alexander Walker supported policy saying: "We can never make
a success of challenging the Americans. However, we can make a
success, and indeed have, of combining our talents with the film
production companies in Europe".[123]
But, some of the most successful producers in Britain (Mr Barnaby
Thompson[124] and Working
Title) felt the emphasis should rather be on co-operating with
the US studios and forming links or partnerships with them. Working
Title said:
"We believe that our [business] model is
a good one; it is that we are harnessing one of the giants in
the movie business that we get money from them to make our movies
because we have creative autonomy because we have got a bit of
experience in this business as we tend to make films — at
least half our slate is British content — and that we are
putting our cultural message out there that way. There are five
other studios and we think that harnessing those, the giant distribution
machines, is the way to do it."[125]
This idea has already been capitalized on with the
announcement of a £30 million joint venture between Fox Searchlight
(US specialist distributor of lower budget films such as Bend
it Like Beckham and 28 Days Later) and DNA (one of
the three lottery film franchises) which will finance, produce
and distribute British films worldwide.[126]
Distribution-led industry
71. We have been told by the UK Film Council that
it is crucial for the British film industry to become distribution-led
in order to become sustainable.[127]
Mr Woodward, Chief Executive, pleaded with the Committee in evidence
saying: "for God's sake let us make sure that production
is properly harnessed to distribution"[128]
when he was talking to them about the future of the industry.
In order to do this, Mr Barry Jenkins from the Cinema Exhibitors'
Association believed that:
"they should give more to distributors to
spend on prints and advertising because if there is an injection
of money into distributors to bring out more prints of specialised
product certainly there are enough screens out there in the country
now to show that product."[129]
Filling the gaps left by Hollywood
72. Some of the evidence we received suggested that
the British film industry should focus on 'filling the gaps' in
the US market as it has done so quite successfully in the past
with films such as Notting Hill, Billy Elliot, Four
Weddings and a Funeral and Mr Bean. The proven model
is that of Working Title, who are effectively supplying Universal
with a small number of films that are successful in the US market,[130]
as they are of a particular genre which happens to be British.
Mr Mark Thompson, Channel 4, feels that there is only a limited
market for British films and said "I am not convinced that
it is possible to effectively market and to achieve proper theatrical
release for more than a certain number of British feature films
a year"[131] suggesting
that there is not the endless global appetite for British films
which seems to be assumed by many within the industry, including
the UK Film Council and others striving for sustainability.
The tax regime
73. We heard
from virtually every witness in the UK, and also from Studio heads
and others in Los Angeles, that the engine for the recent improvement
in the performance of the British film industry has been the tax
regime.
74. It was absolutely clear to us that the current
system of tax reliefs, while not solving the industry's problems,
was of indispensable importance in maintaining a healthy throughput
of large productions from overseas (with clear advantages for
the domestic industry) and of equal importance in promoting a
critical mass of indigenous film-making.
75. Under Section 42 of the Finance (No. 2) Act 1992
relief is obtained over three accounting periods in equal amounts
for production expenditure of a revenue nature incurred on the
production of a British qualifying film (see above) or on the
acquisition of the finished master negative of such a film for
leasing back to distributors for exploitation ('sale and leaseback').
In July 1997, following a report of the National Heritage Committee,
the Government enhanced this relief for British qualifying films
costing £15 million or less by increasing the amount that
could be written off as trading losses in a single year from 33.3-100%
(Section 48 of the Finance (No. 2) Act 1997). This enhanced relief
has been extended twice but is due to expire on 2 July 2005. Section
48 relief represents about 12-14% of production budgets for films
costing less than £15 million. Section 42 represents about
7-10% of production budgets of films costing over this amount.
76. The historical cycle of change in the tax regime
was presented to us by the majority of witnesses as a huge disadvantage
to the industry.[132]
Mr Elstein, Chairman of BSAC, stressed to the Committee that:
"What we actually need…if we were really
going to try and solve this once and for all, is a permanent fiscal
regime which we know is there forever, that is how you treat a
film from a tax point of view. The end. Because that would allow
long-term planning, long-term investment."[133]
77. BSAC argued that it has only been since last
year, 2002, that Section 48 has begun to have the impact it was
designed to achieve because until then its exploitation was distorted
by 'abuse' by television production. In these circumstances, the
possibility that the mechanism might be lost within a year and
a half was characterised as 'galling' and a cause of 'despair'.[134]
Many submissions to the inquiry emphasised the need for consistency
within government policy in the sector:
"Predictability is very important to investors
and it is something that has been emphasised by others and I also
tried to emphasise in my own remarks. one of the worst things
I can imagine is to create uncertainty about the environment by
de-stabilising some of the elements that have been very successful
without knowing what will be coming along next. It takes time
for industry to make the adjustments, whether it is our own member
companies or other companies here. So long lead times are certainly
critical if change there is to be and I think change has to be
considered very carefully before implemented."[135]
PACT also argued that the tax incentives, particularly
Section 48 for smaller budget films, had just started to work
and that to reduce, or alter them, significantly would be immensely
harmful to the industry. The film industry did not want to continue
in the 'boom and bust' seven-year cycle described by one witness.[136]
78. According to BSAC and Mr Somper, of ScottsAtlantic,
the initial impact of the tax mechanisms was the encouragement
of 'sale and leaseback' — essentially a tax deferral product.
Under this arrangement a finished film is bought and leased back:
the lessor benefits from the tax break and the lessee gets an
input of between 7-14% of production costs. Some witnesses suggested
that the long-term benefit of this was limited and initial opportunities
for development of British film were lost due to an initial focus
on eligible television production. However, Mr Somper pointed
to the more recent emergence of genuine equity investment in film
projects — of the order of £30-40 million over the
last two years — managed by a range of specialist firms
who had moved from exploiting opportunities for tax efficiency
to bankrolling film production.
79. For the Hollywood studios and other foreign film-makers
these tax reliefs seem to have created a level playing field between
the UK and other popular destinations for film-making such as
Canada, Ireland Australia, New Zealand and the Czech Republic.
This has allowed competition on other criteria such as facilities
and talent (see below). For indigenous UK films, the relief has
given producers something to bring to negotiations. Independent
producer Mr Jeremy Thomas told us:
"It is very difficult for a film producer
to get ahead enough to be able to be entrepreneurial in spirit…When
he starts developing his film, he is completely weak … Section
48 … has now developed an enormous amount of money for independent
producers so they can come to the table and say, "I can put
20% down. Let's make a deal." For the first time that I can
remember there is a negotiating weapon for British entrepreneurial
producers and to lose that would be everybody shooting themselves
in the foot yet again." [137]
80. The forthcoming expiry of accelerated allowances
established under Section 48 for smaller budget films is already
said to be reducing expected investment in British films as the
lead-in periods are lengthy and the situation is uncertain. The
industry is facing a dilemma with regard to what lies ahead and
the Committee received a large amount of evidence which included
a number of ideas and suggestions about what should be done with
Section 48 for after 2005.
Retention
81. Nearly all witnesses and other interlocutors,
during formal and informal meetings, strongly argued for, at least,
the retention of the existing tax incentives. In the US we heard
that competitiveness amongst destinations for film-makers was
growing. The decision on where to make a film was a balance of
creative and economic factors leavened with the preferences of
directors, production designers and stars (in which issues of
language and wider amenities also figured). The balancing of these
factors seemed to vary from project to project and between studios.
Mr Anthony Minghella, Chairman of the bfi but speaking
as a film-maker, emphasised to the Committee the importance of
location for directors when choosing where to film: "You
choose location because it most serves the film you are trying
to make. I chose Romania because of a particular topography not
because of a particular cash register".[138]
Also consistent was an appreciation of the commitment of different
countries to 'welcome' film-makers and facilitate their activities.
It was at Dreamworks SKG — where creative factors were cited
as being the most important — that we were told that the
diminution of the existing incentives would have an impact, beyond
the 'dimes and cents' involved, being perceived as a signal of
a reducing commitment by the UK to fostering successful film-making
partnerships.
82. Mr Alexander Walker was the only witness who
seemed to believe that abolishing tax breaks would be of benefit
to the industry.[139]
He argued that "after 18 months to two years those pieces
of the industry that deserve to survive would have survived and
probably have been in a better and leaner position for it."[140]
Simplify
83. A number of submissions to the inquiry complained
of the complications involved in the process of gaining tax relief
in Britain. These complications included the certification process
and they believed the benefits from the relief would be enhanced
by simplification of the processes involved. However, we can report
from Los Angeles that, although involving complicated paperwork,
the process appeared to deliver the resources a lot quicker than
the superficially simpler arrangements in place in other countries.
Extend to distribution
84. This is the route that the UK Film Council,
[141] BSAC,
[142] and therefore
DCMS, [143]
favour in relation to an 'evolution' of Section 48. In keeping
with their aim to promote a distribution-led British film industry,
the UK Film Council told the Committee that "Section 48 is
not perfect and it ought to be revised. We have worked very hard
on how to do that. What one of your witnesses said is what is
needed is a son of 48".[144]
The 'son of 48' was said to be the subject of discussions between
BSAC, the DCMS, the UK Film Council and HM Treasury and consequently
not yet ready for public view. However, BSAC submitted, in confidence,
an impressive study commissioned by DCMS looking into how a new
tax mechanism could work. BSAC told us in evidence that "Sections
42 and 48, or versions of them, are essential to the health of
what we call the British film industry"[145]
but they should be evolved by "tying the distribution function
and its marketing sensibilities into production decisions by tailoring
the tax breaks in such a way that you get that relationship going
so much earlier".[146]
85. The film industry is an important national
cultural and economic asset with significant further potential.
We regard the existing level of tax relief for film production
as absolutely essential to the health of the industry.
86. We recommend that the Government commits to
an evolution of Section 48 relief, without further sunset provisions,
along the lines proposed by the UK Film Council and the British
Screen Advisory Council (publishing the BSCA study for consultation
on the detail as soon as possible). Lead times for decisions about
inward investment are long, therefore the Government must end
the current uncertainty plaguing the industry, must do so in a
positive manner and needs to do so as quickly as possible.
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