DB7

Lights, camera, turkeys

The British film industry might whinge, but its days of fleecing taxpayers will soon be a thing of the past

Nick Cohen
Sunday May 15, 2005
The Observer

The turn of the millennium won't only be remembered for the dome, Young British Artists and the dotcom bubble, but also for a rash of disastrous Brit-flicks. Mad Cows, Final Cut, Love, Honour and Obey appeared in cinemas, only to disappear within days. Each had its passionate detractors, but in the struggle to find the perfect artistic and commercial failure of the late 1990s, none could begin to match Rancid Aluminium, a film whose incoherence has been surpassed in our times only by Sex Lives of the Potato Men.

James Hawes's pacy and occasionally touching novel was transformed into the cinematic equivalent of a nervous breakdown. The frenetic plot, in so far as it can be understood, features Stephen Berkoff as a Russian gangster who is determined to find a British gentleman to marry his daughter and give him grandchildren. As this peculiar premise is fitfully developed, the leading man gets overwhelmed by road rage for no good reason, Sadie Frost and Dani Behr take off their clothes and an Irish accountant tries to murder everyone.
The critics looked on and wondered if the English language contained condemnations strong enough to give what they were seeing the pasting it deserved. Jacques Peretti of the Guardian did his best when he wrote: 'By universal consent, it is the worst film ever made in the UK. People who have seen it belong to an exclusive club. They cannot speak about the film - they simply shudder at its mention.'

Harsh words, but true in all respects except one. Rancid Aluminium has a telling quote which encapsulates what happened to the British film industry in the New Labour years. For once, the hero wasn't played by Jude Law but by Rhys Ifans, the Welshman in the underpants from Notting Hill. He's offered a line of cocaine long enough to kill a bull elephant. Before he sucks it up and suffers no ill-effects, he muses: 'I had it all on a plate, so why not stick a little of it up my nose?'

Just so. Between 1997 and 2005, the government piled the plate of the British film industry with billions of pounds of public funds. It was money which came from working-and middle-class taxpayers who didn't hire accountants but paid as they earned. It was money which might have been spent on schools, hospitals, the army or other fripperies.

Instead, a part did indeed go up the noses of Soho. More went down the drain. More still went up the wall. And further portions went to Premier League footballers, partners in City law and accountancy firms, Hollywood and the tax havens of the Cayman and Channel islands. What was left was spent on making movies.

The Treasury and the Inland Revenue are furious and have every right to be, although you would never guess it from the obsequious coverage the film industry has received from the broadsheets and Radio 4.

Last week saw the latest round in a battle between Soho and Whitehall - or W1 and SW1 - which is only going to become more clamorous as the Treasury decides what on earth to do with the industry. Michael Kuhn, a producer of genuine talent, was widely quoted when he warned that the government's proposal to clamp down on tax breaks meant that outlook for the British film industry was 'darker I think than most years in my lifetime'.

Before him, film financiers, showbusiness accountants and lawyers had told a sympathetic press that 80 per cent of the British film industry would disappear if Gordon Brown ended favourable treatment. On the face it, their protests were reasonable. The film industries of all countries need protection from the Americans, and the British industry is more exposed than most because it is cursed by sharing a common language with Hollywood.

It's hard to remember, but when Tony Blair came to power, it was as mandatory in the arts world to support New Labour as it is now to denounce New Labour, and the government returned the affection by offering full tax relief on all money invested in film production.

Gradually, as Brit-flick followed Brit-flick, the Inland Revenue began to notice a disconcerting pattern: tax relief on film production wasn't financing film production but being creamed off by middle men. The technicalities of the deals were complicated, but the basic 'sale and leaseback' scam was simple. A corporation - a Hollywood film studio - or a consortium of wealthy men - footballers, City law partners - would nominally buy a film for, say, £100 million and lease it back to the producer. As corporation tax is at 30 per cent and the higher rate of personal tax is at 40 per cent, the sale would entitle corporations to knock £30m off their tax bills and footballers and City lawyers to knock £40m off their tax bills. The bulk of their 'investments', however, wouldn't be risked in the notoriously unpredictable film market.

The producer would put most of the money in a high-interest bank account and pay it back to the lenders over the 15 years of the lease. Only a small proportion, typically between 10 to 15 per cent, would actually be spent on the film. Even if every penny was lost, the investors wouldn't have suffered. They would have gained far more in tax breaks than they had lost in the multiplexes and still have the £85m earning interest which would one day be theirs.

The dodges which flowed from this simple trick were wondrous. The banks came up with the tactic of 'double-dipping', whereby tax relief was claimed twice on a 'sale and lease back' investment by leasing it on to a subsidiary. In our example, that would mean a consortium of Premiership footballers would be getting tax relief at 80p in the pound.

Meanwhile, there were rumours in Soho that Hollywood companies had managed to finance 'British' films entirely from money given to them by the British taxpayer. And the Inland Revenue found examples of costs being deliberately inflated and loans being given on the understanding that they need never be repaid.

As they tried to regain their composure, the tax men studied the pages of Screen Finance and were struck by films which had amassed takings of less than £100. Perhaps it was because they were so dire that they could secure only the most limited of releases. Or perhaps it was because the tax advantages of making a movie were so great that it didn't matter if next to nobody actually paid money to see it in a cinema. Either way, film had trumped theatre.

The standard populist complaint against state support for the National Theatre and RSC is that working-class taxpayers are forced to subsidise plays which are only seen by the educated middle class. In film, taxpayers from all classes have been forced to subsidise films which are seen by no one.

Even if films weren't being made to fail, the effect of tax breaks has hardly improved their quality. David Puttnam told me that in 1983, when he made The Killing Fields, 93 per cent of the money he raised was on screen for the viewer to watch: it was spent on the actors and technicians; on getting the crew on location; on editing the film. Today, he guesses that about half the money raised for a British film would be spent on setting up deals and paying off financiers.

How much public money has been frittered away since 1997 is anyone's guess. Michael Kuhn said that tax breaks were worth £5 billion in cash terms between 2003 and 2005, far more than the £323m the Film Council has taken from the lottery to give us such classics as Sex Lives of the Potato Men. But the Treasury and the Inland Revenue say the tax dodging was so ingenious they may never be able to find out how much has been lost.

What is certain is that both civil servants and ministers have had enough. There will be no more subsidies for investors. Tax breaks will be for film producers and that will be that, however loud the cries of despair from Radio 4 and the Independent grow. If I were a member of artistic London, I would be grateful for the Treasury's limited generosity.

If New Labour was really made up of the philistine warmongers of the modern liberal imagination, it would look at the way the film industry has behaved, cut all subsidies and send a Swat team into Soho with orders to arrest everyone found within 100 yards of the Groucho Club.

Wetherby Pond

...and anyone with any genuine regard for the British film industry would cheer them on all the way.

What's most dispiriting about Cohen's piece - I've only skimmed it, but I can't see anything with which I'd seriously disagree – is that exactly the same thing happened twenty years ago, when Margaret Thatcher's government scrapped tax breaks (notably the Eady levy) for British film-makers after discovering that the bulk of the money was being spent on Hollywood blockbusters like Alien and Superman (both technically "British", though you'd never know it to actually watch them), plus a vast quantity of soft porn.

So, not too surprisingly, they turned off the tap, which led to over a decade of lobbying by people like David Puttnam and Richard Attenborough for it to be turned back on again. They finally got their wish in 1997... whereupon exactly the same thing happened, only on a far greater scale.

The tragedy is that the scam merchants will simply move onto their next tax dodge, while it's conscientious producers like Puttnam in the 1980s and Michael Kuhn now, who end up carrying the can – even though it clearly isn't their fault that the system was so abused.

The late Alexander Walker was frequently called a monomaniacal obsessive in his constant highlighting of how much taxpayers' money was being spent on worthless celluloid junk (and he only covered the stuff that was actually released) – but he was one of the few critics to predict where this would lead, and I imagine his ghost is probably saying "I told you so" as I write this.

DB7

That's fair enough but whilst the tap was turned off the likes of an unproductive Elstree were partly sold off to become a supermarket. If Pinewood/Shepperton were to go the same way during another period of government disinterest when the tap is finally turned back on we might have little production base left.

As it is I'm sure the treasury will endeavor to find a solution as production does seems to be heading to 80s levels.