John Buchanan is a Canadian film finance consultant based in London.

When the Blair government put an end to tax relief for television series and TV movies and tightened the rules on deferrals in 2002, roughly £2.5 billion ($5.6 billion) was being sheltered annually.

Faced with private-investor demand exceeding feature film supply, the talented squad of U.K. film scheme promoters and professionals went back to the drawing board, and created a panoply of new film partnership products designed to stimulate production. Inland Revenue, for its part, suspected of being allergic to the relief, will not as a matter of policy issue advance rulings; hence creativity has been given free rein.

There are now no less than six or seven different structures, and perhaps 15 operators vying for investor coin and producer product. The new structures create a 100% write-off during production (by a production partnership), followed by a traditional sale-and-leaseback once the film has been completed. A bona fide double-dip, which can be coupled with incentives from other friendly regimes (the Irish s. 481 comes first to mind) to create an impressive amount of tax-assisted film investment.

The purpose of this article is to give a brief overview of the U.K. structures and how they contrast with Canada’s quaint content rules.

Canadian producers have been active participants in the sale/leaseback scheme for many years through official coproductions, and enjoyed significant financial rewards while retaining Canadian tax credits.

The production partnerships, which fund and oversee the production of British qualifying films, raise new issues. The partnerships actually ‘produce’ films, generally through a separate production services company or by commissioning coproducers.

Leaving aside certain technical issues which are still being debated, the use of a production partnership allows the producer to do a follow-on sale/leaseback with the same film, creating a combined 200% write-off and initial tax savings for investors of 80% of a production budget.

The various structures on offer differ dramatically in how they carve up this coin.

The first U.K. production partnerships were blind pools where investors put up 30% or 35% of production budgets in partnerships which leveraged this money and produced a number of films, with the intention of rolling profit back into productions and creating a valuable catalogue. In order for this to work, the initial films had to turn a profit; if they generated only 65% to 70% recoupment (including soft money and subsidies), the investors would lose all their cash investment and retain only the 40% tax savings.

These structures have raised to date close to £100 million ($225 million) – which when leveraged equates to roughly £400 million ($901 million) of production – but there are signs that investor enthusiasm for such a high-risk venture is waning.

The new generation of production partnerships is more creative in their protection of investors from commercial risk.

One structure builds into partnership capitalization a corporate partner backed by financing in the range of 72% lent by the producer, which is combined with net investor cash of about 28% to fund production. A possible follow-on sale/leaseback for the producer can generate further cash, for a total exceeding 40%. These partnerships tend to require significant recoupment rights, which will either diminish the producer’s ability to generate the required ingoing collateral, or reduce significantly the profits if the film is successful.

Another structure offers investors a blended portfolio of development financing, production financing akin to the blind-pool concept, and sale/leaseback tax relief. One such structure claims to have lined up several leading U.K. producers, and is offering over half the budget to them on a per film basis. Latest reports, however, are that investors are not warming up in the same way as producers.

A further structure creates the tax profile of a sale/leaseback by providing investors with a 20-year distribution revenue guarantee which is used to repay investor borrowings. A follow-on sale/leaseback forms part of the collateral used to secure the letter of credit which backs the revenue guarantee. Producers receive net benefit equal to 25% to 30% of the production budget, and the partnership takes a small first-dollar revenue stream of 4% to 5% of all revenues.

This structure is quite attractive to well-heeled producers with commercial projects as there are no other recoupment rights retained by the partnership, and some very serious coin has been raised (your intrepid reporter has consulted extensively on this particular structure).

Finally, as one tends to find in the tax-shelter arena, there are some rogue structures offering investors deals that are too good to be true, offering exit strategies and tax mitigation, which seem to clearly offend the body of English tax jurisprudence and the published rules of Inland Revenue. Although major accounting firms are not putting their clients in these deals, there has been a lot of money raised, and ambitious production slates have been announced.

With so many structures vying for attention at a time when investors are far from focused on their April 5, 2004 tax bill, it is unlikely they will all succeed. For a producer offered money from so many different sources, there is not only the question of which film structure will work for the film, but also the very practical issue of which funds have actually raised investor money.

What does all this mean for your average Canadian feature film mogul seeking to access Blighty coin?

Many of the treaty requirements and tax-credit rules could be obstacles, including:

a) the need for both the Canadian producer and the U.K. partnership to incur for their own account the same production expenses

b) the need to flow all of the money through the U.K. partnership

c) Canadian treaty allergy to American elements (writer, director, actor restrictions). A Canadian involvement in American-led productions often seems prima facie a no-go

d) Canadian rules regarding copyright ownership, equity investors and profit splits.

Telefilm has so far approved a few coproductions using a production partnership structure, but will insist that the project not be ‘made for…’ another entity, and that the Canadian producer keeps his percentage of the rights (script and ancillary rights) and copyright in the project. Telefilm will, however, permit the Canadian producer to license a portion of the rights to a U.K. production partnership, which then cashflows the Canadian portion of the budget.

Interestingly, the DCMS does not really care what happens between a production partnership and a Canadian coproducer, and the real test of whether this works on a case-by-case basis in the U.K. will be debated by Inland Revenue and the U.K. film scheme promoters.

Ergo, for films which have the right creative mix, i.e., a minimal Yankee presence, one can probably successfully carry out a U.K.-Canada triple-dip, provided that Telefilm and tax counsel to the production partnership are happy with the mechanics of getting money to and from the Canadian coproducer.

Canadian producers who have endured the go-slow coproduction approval process over the last year on minority U.K. copros may find some interesting new financing opportunities with U.K. production partnerships, and some welcome relief from the very difficult presale and gap-finance marketplace.

(Buchanan can be reached by email at jbeclectic@aol.com. This article is intended to provide general information and opinions. The views expressed herein are those of the writer and do not necessarily reflect the opinions of the publication, Playback.)