The scheme for 100 per cent tax write-off on production bills was announced in 1997 and was extended last year until 2000. Yesterday's announcement adds a further two years.
Without changing the details of the scheme, it does show the Government's continuing commitment to expanding and strengthening the British film industry. It was also the only arts measure announced in the Budget.
The pounds 20m tax breaks scheme allows the production costs of British films with budgets of pounds 15m or less to be written off when the film is completed.
The film industry asked for the measure so that it could plan ahead. The details of the scheme were put forward to the Government by its film policy review group.
Janet Anderson, the Films minister, yesterday welcomed the Chancellor's extension of the scheme which she said was now proven to encourage investment.
"This will give a boost to the British film industry and is in addition to the pounds 145m my department [Culture, Media and Sport] is spending on film in the next three years," she said.
The definition of what constitutes a British film will soon be adjusted to take account of the growing number of international co-productions that bring investment to Britain.
A British Film Institute spokeswoman said last night: "The BFI welcomes any initiative which helps to foster and expand the range of new film production in the UK."
The tax breaks for British films were introduced as part of a strategy by Chris Smith, Secretary of State for Culture, Media and Sport, to increase the number of films made in Britain and to double the percentage of the audience watching British films. The Government also wanted to put a brake on film-makers shooting in Ireland, where tax incentives have long been on offer.
The tax breaks scheme has made raising funds for British films a lot easier. Mr Smith has described the scheme as "a really significant step in getting more British films made, and in attracting more overseas film- makers here to use our facilities and our craftsmen and actors, who are the best in the world".