Cinema: The cameras may be rolling again. Just don't mention 'Tulip Fever'

On the eve of the Cannes film festival Tim Luckhurst reports on how the UK industry got over its Gordon Brown crisis

Cursory perusal of the programme for the 57th Cannes International Film Festival, which opens this week, might induce panic about the state of British film. Only one UK production, The Life and Death of Peter Sellers, starring Geoffrey Rush and Charlize Theron, is in competition for the celebrated Palme d'Or. Most of its funding came from the US company HBO.

Cursory perusal of the programme for the 57th Cannes International Film Festival, which opens this week, might induce panic about the state of British film. Only one UK production, The Life and Death of Peter Sellers, starring Geoffrey Rush and Charlize Theron, is in competition for the celebrated Palme d'Or. Most of its funding came from the US company HBO.

Back in February such pessimism would have been supported by many leading figures in the industry. British producers were predicting a crisis for their industry. 2003 had been a year of triumph, with a cumulative total of more than £1bn spent on the production of 177 films. Revenues from DVDs were outstripping box office receipts for the first time and Britain's solid base of creative and technical talent was ideally placed to win investment.

Then, without warning, the Treasury closed a tax loophole that ministers claimed was being exploited by film investors who were "drawing up complex and abusive schemes". The Inland Revenue said the "sideways loss relief" was being targeted by investors who routinely pulled out of film projects before the films could make profits so as to maximise their eligibility for relief. The Paymaster General, Dawn Primarolo, said: "These schemes exploit tax reliefs that are intended for people who risk their own money in running genuine businesses."

The Treasury said the scam was blatant. It proclaimed its duty to be consistent in closing abusive schemes and insisted closure of the loophole did not prevent film-makers benefiting from legitimate tax breaks.

Film-makers were incensed. Russ Smith, executive producer of Johnny Depp's British-based project The Libertine, warned that his movie could be moved out of the UK within weeks. Smith said: "Britain will become a no-go area for film-makers."

He was not alone. The government-backed UK Film Council (UKFC) sent ministers a list of 40 films it thought could be affected. There was industry talk of 40 more that might never get beyond the planning stage.

The most high-profile casualty was Tulip Fever, the film version of Deborah Moggach's novel about romance and the flower business in 17th-century Amsterdam. Starring Jude Law and Keira Knightley, Tulip Fever was already in production when the tax rules changed. Producer Alison Owen of Ruby Films was forced to shut down production. Eighty jobs were cut and a source close to Ruby Films estimates the loss to their budget at £6m. Owen warned that she might move to America because it was "too difficult to make movies here".

Four months on, and tempers have cooled. The Libertine was refinanced immediately, and began filming on the Isle of Man last month. The losses to Tulip Fever were real but it, too, is being reorganised and Ruby Films expect to complete the project. A spokesman for the UKFC says: "With the benefit of hindsight, people over-reacted. It felt like a crisis at the time. To people with films in production it did set things back a long way. A certain amount of money was lost. It was the sudden nature of the change that was a disaster. When it was announced nobody knew precisely what it meant."

Film-makers remain angry about the sudden disruption to financial plans. One explains: "Changing the tax loophole knocked investor confidence." It seems to have been largely restored by the Chancellor's decision to introduce a new tax credit for movies made in the UK.

In March, Gordon Brown announced that future tax relief will typically finance 20 per cent of the production budget for British-made films. That is an increase of 5 per cent on an existing scheme due to end in July 2005. The new scheme, which replaces relief granted under section 48 of the Finance Act, is specifically designed to limit the role of film-financing firms. Ministers believe that such firms have been active in using the film industry as a mechanism for tax evasion.

The tax credit system appears to work. Since 15 per cent relief was introduced in 1997, the number of films produced in Britain has doubled. Films such as Gosford Park, Calendar Girls, Bend it Like Beckham and Girl With a Pearl Earring were all made using Section 48 financing.

The message that UKFC staff will take to Cannes this week has very little to do with the competition for the Palme D'Or. Working from their temporary UK Film Centre on the beach, they will proclaim that Britain is up and running as a film-producing nation. A spokesman explains: "Cannes is not just a festival. It's a market, and the market side of the business in Britain is buoyant. The commitment from Gordon Brown to fund a new tax credit settled the industry. It reflated confidence."

The UKFC says there are 22 major productions filming in Britain at the moment. The core attributes of the industry, which attracted £409m of overseas investment in 2003, remain strong. The continuing strength of the pound against the dollar may result in costs rising this year, but Britain remains one of the few countries with the craft and post-production skills to support a large range of film-making at the same time. The panic over sudden changes to investment rules has not changed that. Insiders suspect it has not changed the French reluctance to award prizes to British films either.