Government asks Film Council to spy on tax evaders

Tessa Jowell, the Secretary of State for Culture, Media and Sport, is to order the UK Film Council to report suspected dodgy dealings and tax scams in the film industry direct to the Government for action.

Producers will be warned that any attempt to find new tax loopholes will put them at risk of losing their investment because the Government will close them down, Ms Jowell told The Independent.

Two tax breaks were created specifically to boost film-making in Britain: Section 48, which was introduced in the 1997 Finance Act for budgets up to £15m, which covers most British films, and Section 42, which dates back to the 1992 Finance Act, for projects in excess of that figure.

They have cost the Government an estimated £2bn in the past seven years and were the only ones that were legitimate, she said. "The message is clear. There are two tax breaks so don't go trying to make any more. If you do, you risk losing all the money that investors have put up. I'm asking the Film Council to be my eyes and ears... and to alert me to any new scams. The excellent work of hundreds of smaller producers is being ruined by a few rogues."

There was uproar in February when the sudden closure of one tax loophole, involving investment partnerships, put a spate of films with stars such as Jude Law, Johnny Depp and Keira Knightley in jeopardy for a saving of £100m a year.

But many privately conceded their rapid growth had prompted cavalier investment by wealthy individuals who routinely pulled out of the projects before they could make profits so as to maximise their eligibility for relief.

Tessa Jowell said people knew the partnership deals were "a scam that was skating on the edge of what was permissible. I have no regrets about the way it was done. I hope the effect will be salutary."

The Government is also reviewing the terms of co-production deals with other countries to crack down on abuses whereby some producers allegedly inflate the budget spent in Britain to qualify when most of the work is really done overseas. Co-production treaties should not be "a way of using taxpayers' money to fund films that are essentially made in other countries," she said.

They were keen to advertise that the UK was one of the best environments in the world to make films in terms of tax and facilities.Section 48 runs out in summer 2005 and Gordon Brown announced in March that it would be renewed.