On Feb. 10, Chaos was thrown into chaos. Financing for the Wesley Snipes-Jason Statham action-thriller, produced by Vancouver’s Rampage Entertainment, was tied to a U.K. coproduction deal with Grosvenor Park – one of that country’s equity suppliers hit last month by a sudden crackdown on U.K. tax shelters.

The move has jeopardized some 40 U.K. films and as many as 10 Canada/U.K. copros, say sources, and prompted a sternly worded letter to British culture-crats from Telefilm Canada head Richard Stursberg.

Britain’s tax agency has accused outfits such as Grosvenor Park’s First Choice fund and Ingenious Media’s Inside Track fund – which use a Generally Accepted Accounting Principles formula to write off production costs as tax losses – of unacceptable tax avoidance tactics and shut them down.

‘These schemes exploit tax reliefs that are intended for people who risk their own money in running genuine businesses,’ says the Inland Revenue office. ‘But the [film sector] schemes manipulate tax relief to create claims for losses in excess of the capital at risk. Schemes like this undermine the true purpose of tax relief and we are determined to take all appropriate action to counter them.’

At press time, interventions by the U.K. film industry and others had not reversed the decision nor had secured a grandfathering clause for productions already underway, but lobbying continues.

The popular sale-and-leaseback option used by many Canadian coproductions is still intact, however, as are equity programs that use other sections of U.K. tax policy.

Movision/Spice Factory continues to raise U.K. money through the film-specific Section 48 of the tax policy, and has stepped in to save Chaos, says Vancouver producer Gavin Wilding. Production is expected to begin later this month in Vancouver.

His other U.K. copro, Bob the Butler (with London’s Baker Street Films), avoided the crackdown. Production on the comedy with John Cleese, Brooke Shields and Tom Green is expected to go ahead in Victoria in April.

‘The [U.K. tax shelters] are a great source of soft money, but they are extremely volatile,’ says Wilding. ‘It’s not unique to the U.K., either. You just have to take advantage of them when they are around and be inventive when they disappear.’ He was expecting 25% to 35% of his budgets from U.K. sources.

Sandy Mackay-Smith, president at Invicta Capital Canada in Toronto, says the U.K. government expressed dissatisfaction with the GAAP funds 18 months ago. He isn’t surprised by the crackdown.

‘There is still smoke in the air,’ he says, referring to confusion about how the U.K. industry will react. ‘In fact, Movision/Spice may be the only U.K. equity provider left. It is early days at the moment and time is needed to sort out who is still around.’

Invicta, says Mackay-Smith, deals only in leaseback funding and has done about 20 features with Movision/Spice Factory, including the upcoming Charlize Theron-Remstar production of Head in the Clouds.

Telefilm exec director Stursberg criticized the crackdown in a Feb. 23 letter to Andrew Ramsay, director of creative industries at Blighty’s Department for Culture, Media and Sport.

‘These sudden changes have raised great concern and uncertainty among the Canadian film community [which] is actively seeking to build a stronger and more balanced Canada-U.K. relationship since the establishment of the DCMS’ new Guidance rules published in November 2003,’ he writes.

‘Telefilm Canada would like to underline the importance of agreeing upon a sensible and flexible transitional arrangement to protect Canada-U.K. coproduction projects currently going into production where complex cofinancing arrangements have already been put into place. More specifically, we would request immediate clarity on the fate of those projects that are in the final stages of financing and seeking certification from British and Canadian authorities,’ says Stursberg. ‘In these difficult circumstances, we would like to offer our full cooperation with the DCMS in order to help clarify and implement an equitable transitional policy regime that would enable projects to be completed.’

Mark Musselman, VP of business and legal affairs at Serendipity Point Films in Toronto, says Being Julia (starring Annette Benning and directed by Istvan Szabo) used Grosvenor Park financing, but is in post-production. The company’s next productions, including Atom Egoyan’s Somebody Loves You and Jeremy Podeswa’s Fugitive Pieces, include U.K. coproduction elements, but he declines to discuss how the U.K. funding crisis might affect them.

‘There are many projects that are potentially affected, depending on the results of the lobbying effort [in the U.K.],’ says Musselman. ‘There are producers about to start principal photography who have had people on the payroll for months. I have no idea how those producers are managing the crisis.’

Overnight, producers in production faced up to a 45% shortfall in the budgets, he estimates.

‘Serendipity is used to finding ways to finance in an uncooperative market,’ says Musselman. ‘To make the kinds of films we feel are important, we need to make [financing] changes as necessary. We have several strategies in place for funding, but we can’t move forward until we know the final outcome.’