Reeling in work

The credits are rolling at the end of the government's tax scheme which was designed to attract investment in UK film and television.

Yet Emma Vere-Jones finds that despite fears of piracy on the net, lawyers predict the bigger picture holds much promise for the industry

Gordon Brown's Budget contained some rather unwelcome news for television and film production companies last month - and for their solicitors.

Without warning, the Chancellor announced that the 'sale and leaseback' tax-break scheme, offered as an incentive to generate investment in UK film and TV, was being cut for all TV productions.

'The effect of the budget could be catastrophic,' says Renos Antoniades, partner at London-based entertainment specialist firm Lee & Thompson.

The introduction of the tax break has had 'huge impetus and effect'.

He explains: 'It's brought a lot of production to this country.

Now it's taken TV out of the equation - it's a big blow to TV producers.'

'I've heard that companies are already talking about laying off staff,' adds Leon Morgan, partner at London niche entertainment firm Davenport Lyons.

The legislation was initially introduced in 1997 to provide financial incentives for growth in the industry.

It allows 100% write-off of production costs in the year of production or acquisition, and gave rise to the sale and leaseback of film and television programmes - a scheme which has not only brought a great deal of work and funding to the industry, but also to their solicitors.

The introduction of the 100% tax relief under the 1997 Finance Act meant not only that production companies could write off costs incurred in the year of production, but also that a purchaser could write off the acquisition cost of a 'qualifying film'.

In a typical transaction, a purchaser acquires the film to take advantage of the tax relief, and then leases it back to the production company, which then reacquires the distribution rights.

Under the sale and leaseback arrangement, the producer also secures a financial advantage - the difference between the purchase price and the deposit required to secure the lease payments.

This benefit often accounts for up to 10% of the drama budget.

In the long run, the removal of the scheme will not stop a large proportion of the drama made in this country.

'Sunday-night dramas or programmes like "The Bill" are not that dependent on leaseback money,' says Abigail Payne, senior associate in the TV and film department of London firm Harbottle & Lewis.

But, she says, it may affect the number of shows co-produced in this country, purely because overseas production companies take advantage of such tax breaks.

It is also bad news for shows currently in production or in the pipeline.

Details are still a 'little sketchy', says Neil Gillard, an assistant in the media and entertainment department of City firm Richards Butler, 'but the government has made it quite clear that the concession has gone for good'.

Programmes in production and those in the pipeline have 10% set aside for sale and leaseback - with a 10% shortfall, he says, those productions are really going to struggle.

'Even if a project is one week from completion it's not going to receive anything,' says Ms Payne.

'It's a dead duck.'

'There are no transitional provisions [in the budget,]' says Chris Hanson, partner in the media and entertainment department at City firm Denton Wilde Sapte.

The industry is lobbying to resolve issues regarding those productions underway at the moment.

'It impacts producer, financiers, banks - not just the producers themselves.'

It is bad news for an industry that has already been struggling because of a downturn in advertising revenue.

And it is also likely to affect the amount of money brought in from overseas co-production projects.

This in turn will affect the solicitors.

'All firms specialising in media and entertainment will be adversely affected,' says Mr Gillard.

Mr Hanson says: 'It will hurt the smaller firms in the West End of London who do a lot of leaseback work.

For firms working at the top end, it won't make much difference.' These firms tend to be working for the big Hollywood studios.

Last year, for example, Dentons worked on such titles as 'The Mummy Returns', 'Harry Potter', and 'About a Boy'.

Indeed, it is not all gloom for media and entertainment practices.

While lawyers in other practice areas may have been bemoaning the economic downturn over the past year, for those in film things have been pretty rosy.

'Crisis? What crisis? We've had the busiest 12 months ever,' says Mr Antoniades.

'It's been an absurdly mad time.

And for lawyers it has been a staggeringly vibrant market.'

'The rest of the economy has little effect on the amount of films being made,' agrees Richard Philipps, a media partner at Richards Butler.

Cinema admissions were up last year, with exhibition and distribution unaffected by economy.

'It's consumer driven,' explains Mr Hanson.

'Like grocery shopping, going to the cinema is something people will continue to do even in an economic downturn.'

The tax incentives provided by the government in the past few years have served the industry well.

'They have encouraged overseas investment and as a result, the market has significantly matured in recent years,' says Mr Hanson.

Thus movies coming out of Britain have enjoyed greater success at the box office.

And for the film industry, the sale and leaseback incentive was last year extended until July 2005.

In this area, growth looks set to continue.

The only issue on an otherwise untroubled horizon seems to be the question of the Internet.

While it is having no effect on film distribution, Mr Antoniades says that will change 'when American studios want it to change'.

At the moment, the industry lacks the technology to ensure that films can be distributed safely over the Internet.

'As a general rule, most producers are advised not to part with Internet rights,' says Mr Morgan.

'There's no territorial control, and territory is terribly important - it's the absolute essence of the business.' For example, a film distributed only to certain countries could be easily accessible to people worldwide if the film is distributed over the Internet.

Also of concern are issues of payment, and of course piracy.

'The industry is eager to prevent that,' says Mr Philipps.

'Currently, it's not such a serious concern as it is for the music industry because downloading is still slow.

However, as Internet access speeds up, this may change.'

'Piracy is the main problem,' agrees Mr Morgan.

'The Napster case has been awful for the music industry, which is why no one will allow distribution [of films] on the Net.'

In fact, in the US, the film and TV industry has undertaken a Napster-like battle of its own.

In October last year, The Motion Picture Association of America (MPAA), which represents all the main studios, filed a suit against MusicCity and other Internet companies for copyright infringement.

MusicCity and the others named in the action - which include Grokster and Consumer Empowerment - are alleged to have operated a service which provides users with movies, TV programmes and music, including big-budget US movies 'Legally Blonde', 'Planet of the Apes' and 'The Princess Diaries'.

After a pre-trial hearing in March, the trial is scheduled to begin on 1 October this year.

According to the MPAA, around 11 million Americans are now swapping TV and films on-line, and are downloading an estimated 350,000 movies from the Internet every day.

However, one UK film lawyer says at the moment this kind of piracy is not an issue in the UK: 'We still don't really have the big blockbuster movies of the Americans and that's the stuff people want to download.' But as the industry in Britain matures, this looks set to change.

It is questionable to what extent piracy on the Net will affect the distribution of film.

It may not be as great as some predict.

In essence, it comes down to human nature.

Ms Payne explains: 'People will always want to go to the cinema.' Ultimately, there's nothing quite like the big screen.

The film studios - and the lawyers who work for them - will be hoping that stays true.Emma Vere-Jones is a freelance journalist