As Hollywood toasts our talent, UK film production plummets

Industry faces huge challenges as credit squeeze and tax changes bite

Britain may be the toast of Hollywood, with Slumdog Millionaire leading a near-record challenge for this year's Oscars, but our film industry's finances are looking about as sure-footed as one of Kate Winslet's acceptance speeches.

Last week, as home-grown talent capped one of its best award seasons by securing 17 nominations for next month's Academy Awards, the UK Film Council slipped out figures showing that domestic film production has plummeted in the last 12 months.

In 2008, 111 feature films were made in Britain, down from 126 the previous year. Their overall cost, £578.2m, represented a drop of 23 per cent from the previous year. Overseas investment in the UK industry fell by more than a third – from £523m to £338m.

For independent film-makers less fortunate than Danny Boyle, who raised £8m to make Slumdog Millionaire, the slump is likely to get worse. The effects of the economic downturn have yet to hit production and may make it almost impossible to secure finance. "Credit deals are done well in advance of film production and release," the UK Film Council report said. "The immediate prospects for British independent films suggest it will become even harder for them to raise credit."

Britain faces a situation where, even as its actors, directors and screenwriters are among the most sought-after in Hollywood, the lion's share of the revenue, jobs and taxes they generate stay in the US. The challenges for home-grown producers were in stark evidence at this week's Sundance Film Festival, where 24 British movies were among the 200 titles selected for the prestigious event. Although many drew adulatory reviews, only a handful were successfully sold to a US broadcaster or distributor.

Movies that did sell included Moon, a sci-fi thriller starring Kevin Spacey, and An Education, for which Nick Hornby wrote the screenplay. But Five Minutes of Heaven, a $12m BBC film about the Troubles in Northern Ireland, which stars Liam Neeson and James Nesbitt and was nominated for the festival's Grand Jury Prize, is still searching for a buyer.

Even British films that do get a US cinema release can fail to strike a chord with local audiences. Mike Leigh's acclaimed Happy Go Lucky, which won a Golden Globe for its star Sally Hawkins and has just seen Leigh nominated for an Oscar, made only $3m at the American box office.

"It has undoubtedly been a tougher year for inward investment because of the exchange rate, plus increased [tax] incentives now offered in more than 30 US states," said John Woodward, chief executive of the UK Film Council.

He hopes 2009 will be brighter. The plummeting value of sterling will help reduce overheads for Hollywood film-makers looking to invest in the UK. Several major films are scheduled to begin filming in Britain, including Jack Black's Gulliver's Travels and Harry Potter and the Deathly Hallows.

However, our attractiveness for film-makers hasn't been helped by Gordon Brown's decision to suspend a tax break that allowed production firms to offset losses from one title against profits from another. A new tax credit, which gives back 16 per cent of costs on films worth more than £20m and 20 per cent on those costing less, was introduced in its place. But it is less attractive than incentives offered by some US states.

The UK film industry hopes America's ailing economy may level the playing field by forcing them to suspend tax breaks this year. But it is unlikely to completely loosen Hollywood's grip on the industry's purse strings.

"This business is run from Hollywood," said Eric Fellner, a producer of Frost/Nixon on Thursday. "Even when we've made... quintessentially British films, we've still been dealing with agents and studios and stars in Hollywood. Film is not a national business. It's international. And its centre will always be Hollywood.