Montreal: In the April 17 U.K. budget, Gordon Brown, chancellor of the exchequer, restricted the application of tax-based film relief to feature films, effectively eliminating a vital financing mechanism for U.K. television productions and coproductions.

The development could have a devastating impact on the U.K. television production industry and, by extension, on the important business of Canada/U.K. coproduction.

PACT, representing 600 U.K. producers, is actively lobbying government with the immediate goal of rescuing current TV projects in production or in commission and contract. The association is also talking to the authorities about alternative tax-based incentives designed specifically for producers, a process which includes a close look at Canadian production tax-credit models, says John McVay, CEO of PACT.

McVay says a definitive transitional ruling from the British government on current television productions and coproductions anticipating tax relief, mainly through sale-and-leaseback benefits, may be announced during his stay at the Banff Television Festival, June 9-14.

PACT delegation at BTVF

In an interview with Playback, McVay said there are ‘over 50 U.K. projects with a total value of about £200 million [$444 million] that will be adversely affected by the changes.’ The sale-and-leaseback benefit on average makes up about 9% to 10% of the production budget.

According to McVay, ‘Any [official coproduction] project which filed for the coproduction treaty would be covered. So if you filed for a coproduction with either Telefilm Canada or the Department of Culture, Media and Sport [the U.K. certification authority] by the 17th of April, then you would be okay. We [PACT] will argue on a purely domestic agenda for our member companies that are affected in terms of the financing and the way projects were put together.’

PACT has argued to the British authorities that producers who have already committed finances based on an expectation of securing a sale-and-leaseback benefit should be taken into consideration.

The U.K. government’s initial (1997) cost estimate of the tax-relief benefit was in the £70 million ($155 million) range, but the actual overrun in budget terms in 2001 was closer to £275 million ($611 million), says McVay.

CFTPA takes action

In a May 6 letter to Dr. Kim Howells, DCMS minister of film broadcast and tourism, CFTPA president and CEO Elizabeth McDonald writes, ‘The proposed changes have created serious concern among our members and their U.K. partners. Many television projects at various stages of production or post-production are facing a very uncertain financing reality, and many in advanced stages of development may now not happen at all. The economic impact of this potential collapse in activity, in terms of wasted investment and lost employment, will be major for the production industries in both countries.’

Guy Mayson, EVP of the CFTPA (the Canadian producers association), says an initial, informal survey of CFTPA members indicates Canadian coproduction projects with aggregate budgets of $200 million face some degree of uncertainty, including TV productions, MOWs and movies not necessarily destined for theaters. Mayson says the identified projects are either in production or have incurred significant costs and, in both instances, anticipate sale and leaseback as part of the financial structure. The estimate is extremely conservative, he says, and ‘the real number is almost certainly higher.

‘We are not trying to meddle in British finance or tax policy,’ says Mayson. ‘Our issue is productions that are caught in some state of transition created by [this] uncertainty. Our issue is very much just clarifying the transition regime and hoping as many projects as possible would be eligible.’

The potential shortfall has left producers (in drama and animation mostly) on the edge in terms of how to proceed – call a halt to production or quickly scramble for alternative or interim financing, which almost certainly will entail higher costs.

‘There is a cutoff as well for leaseback. From a practical point of view, it doesn’t pay to do a production which is under $3 million cash Canadian. The gross benefit goes down exponentially,’ says Sandy Mackay-Smith, president, Invicta Capital Canada, a specialist in Canada/U.K. coproduction financing.

Mackay-Smith says some of the alternative vehicles (German media funds, financier equity-participation deals) to the sale-and-leaseback option do not have a particularly good track record. ‘When you are dealing with offshore money, etc., a track record is so essential.’

Sheila de La Varende, director of Telefilm’s European office in Paris and newly named interim director, international relations, says Canadian industry lobbying efforts are primarily aimed at ensuring coproductions filed before the April 17 deadline are eligible for relief. ‘Like any tax measure, it is [subject] to the flow of national economic policy on a greater level, but certainly the producer voice is being heard through the strong PACT lobby and, by proxy, the CFTPA, which has been in very close liaison with PACT in terms of Canada/U.K. coproduction.’

The Canadian High Commission in London is also closely monitoring developments.

Telefilm wrote a letter expressing its concern to the DCMS minister, but had not received a response by the end of May.

Mackay-Smith says ‘The City’ is rife with rumors suggesting a revised tax-relief announcement will rule in favor of TV movies and dramatic one-hours budgeted at £600,000 ($1.3 million) or more, while the many productions under that budget threshold will not qualify. PACT, which is in direct contact with U.K. tax authorities at Inland Revenue, has heard similar broker-based rumors citing a £1-million ($2.2 million) threshold.

Canada/U.K. coproduction

Canada is the U.K.’s biggest coproduction partner, a trend that consolidated in the past two years primarily because of sale-and-leaseback benefits.

Canadian coproduction activity in the first five months of 2002, as represented by advanced ruling decisions from Telefilm’s international relations department, stands at just over $289 million (aggregate financing), $184.8 million of which is Canada/U.K. coproduction (19 TV and six film projects), or more than 60% of this year’s coproduction activity.

In 2001, 41 Canada/U.K. coproductions (27 in TV and 14 in feature films) were certified, representing cumulative budgets of $248.7 million, with $146.9 million, or 59% of the financing, from Canada, $88.3 million from the U.K. and $11.9 million from third-party countries. Overall in 2001, coproduction in Canada represented production financing of $792.8 million (107 projects, 83 in TV and 24 in film), with the Canadian share of financing at $432.9 million, or 55%.

De La Varende says there is no clear indication of a drop in coproduction to date in 2002, although the uncertainty in U.K. financing and the near total absence of projects with Germany will impact on overall 2002 activity.

Banff Television Foundation president and CEO Pat Ferns, a pioneer in Canada/U.K. coproduction, says when one financing option in the production business disappears, savvy producers and programmers look to another. Among possible developments, Ferns anticipates a return to more twinning coproduction activities in tandem with a deepening of the creative partnership between CBC and BBC.

‘I think we’ve also seen a huge rise in factual coproduction between Canada and the U.K., and that has not been driven by sale and leaseback,’ a trend Ferns says is underscored by Alliance Atlantis’ (AAC Fact) investment in the U.K.’s Cafe Productions.

‘Canada has a terrific record in documentary production. So there is a lot of potential good news mixed in with this surprise on the British side,’ says Ferns.

The motive for this year’s BTVF British tribute, says Ferns, is the consistent high quality of production, underscored by the fact U.K. productions or coproductions have won 12 Grand Prize Rockie Awards in the past 22 years. This year, the U.K. has the largest number of Rockie Award nominees, 31 out of a total of 82 program nominations.

Ferns expects between 75 to 100 U.K. producers and programmers at BTVF2002. One of the program highlights is a ‘facilitated series of one on one meetings’ on June 11 with 10 British commissioning editors and representatives from 15 major British companies. ‘Those 25 people will each have six meetings, all meant to encourage like-minded producers,’ says Ferns.

-www.pact.co.uk

-www.cftpa.ca