Business Analysis: Film studios hit by long-running saga of future tax breaks

Britain's major film studios, Pinewood Shepperton, the home to James Bond and the recent Batman Begins, issued a profits warning yesterday, blaming uncertainty over future UK film tax breaks combined with the weak dollar for poor trading conditions.

Operating profits for the half-year to 30 June are expected to be about £2m, against previous full-year estimates of £8.7m, the company said. Yesterday's news followed a warning in April.

Pinewood Shepperton shares stood at 120p yesterday, against 180p when it was listed on the stock market in June last year in a £92m flotation reported to have made Michael Grade, its chairman, a cash and paper fortune of about £1.5m.

The disappointing figures appear to confirm widespread fears about the current state of film making in Britain after record levels of production in 2003.

Michael Kuhn, a veteran producer behind recent films such as Kinsey and I Heart Huckabees, claimed in May that British film makers were facing the worst conditions for 20 years, while Pact, the Producers Alliance for Cinema and Television, has warned of a "black hole in production" this year.

The next titles in the James Bond and Harry Potter franchises are among the films that might have been expected to go ahead at Pinewood Shepperton, but are now rumoured to be heading for rival studios in Eastern Europe.

Ivan Dunleavy, the chief executive of Pinewood Shepperton, admitted business was being hit by the transitional phasing in of film relief.

More than a year after the Treasury announced plans to modify tax breaks, it is about to embark on consultation over what is known as Section 42, the relief applying to films budgeted at more than £15m.

Smaller-scale British films benefit from Section 48 relief which has been extended until next year, but this is to be replaced with a 20 per cent relief whose details are still being negotiated.

Although film makers seem convinced that the Government is genuine in pledging continued support to the industry, they regard themselves as in limbo until the new reliefs are agreed and implemented.

"The Government has been very supportive in its statements about film and they are actively looking at ways in which they can improve the fiscal policy. We're in a stage where we're awaiting the outcome of that," Mr Dunleavy said.

All sides in the industry are signed up to the consultation but it will take a minimum of 12 weeks, then two or three months for legislation to be passed. Pinewood Shepperton claimed trading would be affected into the first half of 2006 as a result.

The company said at its AGM last month that it would depend, as it always did, on converting provisional film bookings for its 36 stages across more than 200 acres into firm contracts, including at least one blockbuster. But trading conditions had not improved since then.

"We have a usual level of provisional bookings, we're simply being cautious about how many of them convert," Mr Dunleavy said.

The uncertainty was compounded by the adverse dollar/sterling exchange rate, which makes it comparatively more expensive to film in Britain.

He added: "The film-goers' appetite for new films is very high and growing. And the UK has always been a very desirable place to make films in. There are extremely high levels of skilled and creative and technical talent in the UK. If we can resolve some of the current issues, I don't think there's any fundamental problem long-term."

But the board will not be declaring an interim dividend in respect of the current financial year and will decide whether to pay a final dividend for 2005 when its results are known.

A spokeswoman for the Treasury said it did not accept there was any uncertainty over the future of UK film relief. The Chancellor said in the Budget that the current reliefs for both large and small budget films would remain in place until 31 March 2006 at least.

"He also announced that there will be formal consultation on draft legislation, with the explicit aim of enabling the industry to gain a full understanding in advance of how the relief will affect them and allow them to plan future productions - there will be no gap in relief," the spokeswoman said.

"In the meantime, film producers can plan for productions with certainty under the current reliefs that have been available for many years."

Despite such reassurances, Martin Spence, the assistant general secretary of the union Bectu, said hundreds of film industry workers were being laid off because there was less work available in 2005 than the previous two years.

"We're talking about thousands of fewer working opportunities. In an industry like this, producers have to plan and invest with as much certainty as possible. When there are no agreed rules of the game in place, it's enormously difficult," he said.

The Government's re-evaluation of tax relief was partly attributed to abuses of the system. The film industry has largely accepted these were a problem and needed to be tackled, but Mr Spence said: "There's an enormous amount of pain involved."

Paul Brett, an independent film financier, said what was required was for the promised 20 per cent relief for smaller-budget films to be extended to the budget of bigger pictures, creating one coherent system. This would put Britain on a par with countries such as Malta, Luxembourg and Ireland which have been winning business. Dubai and Singapore are the latest places also bidding to become media centres.

It is thought that the Treasury believes 20 per cent relief across the board would be too expensive, but Mr Brett said the "multiplier effect" to the economy would be considerable.

In the meantime, not everyone is downhearted. David Jeffers, the managing director of Moving Picture Company, which provides special effects for films such as Kingdom of Heaven and the new Charlie and the Chocolate Factory, said the film business had always been challenging.

But an "extraordinary centre of excellence" in post-production and special effects had been created in London in the past six to eight years and the Government was now well aware it existed, he said. "I remain 'foolishly' optimistic for the visual effects industry."

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