Film productions facing a fall in net returns

 

In the aftermath of Tuesday's Budget, executives may be contemplating whether any opportunity will exist in the lead up to April 5th - incidentally, Good Friday - to avail of good investment opportunities offering the benefit of a tax break.

Over the last three years, many individuals have invested in film companies offering so called Section 35 tax relief. Section 35 has offered individuals a tax write off for amounts of up to £25,000 per year invested in film productions. For taxpayers with sufficient income taxable at 48 per cent, this meant a tax saving of £12,000.

In order to qualify for the Section 35 relief, it is necessary for the investment to be made at the investor's risk. Risk, of course, is inherent in film production. However, the risk can be managed by taking out completion bonds and general film production insurance.

In addition, by pre selling the film to distributors, investors can expect a minimum level of return provided that the distributors' delivery specifications are met. By virtue of pre selling, an investor might typically expect the value of the investment to be at least £21,000 at the expiry of the three year holding period traditionally required under Section 35.

Taking account of the tax break, an investor could expect a net gain of about £8,000, reflecting an annual return of over 18 per cent before taking account of any financing costs.

The principal change to Section 35 announced by the Minister last Tuesday was a restriction in the amount of relief available to 80 per cent of the amount invested. Consequently, the maximum tax saving to an individual in any year reduces to £9,600.

If all other factors remain as before, this would reduce the return to the investor to just over 11 per cent for a three year investment. However, because the requisite holding period has also been reduced from three years to one year, investors can expect their return on a one year investment to be around 18 per cent. In absolute terms, however, the relief will not be as attractive as before.

Pressure will inevitably mount for producers to arrange greater levels of pre sale receipts and whether this will be possible remains to be seen. In general, it can be expected that producers will have to arrange some level of increased pre sale commitment. However, it would be unlikely that a sufficient increase could be arranged to offset the full effect of the tax changes. Inevitably, investors in the post Budget 1996 era will face lower returns than they are used to from film investments.

The resolutions effecting the changes to Section 35 contained transitional arrangements for projects that have already been certified or were the subject of an approval application to the Department of Arts, Culture and the Gaeltacht prior to Budget Day.

Consequently, there may be a limited number of Section 35 opportunities in the period prior to March 31st where 100 per cent tax relief for film investments will be available.

The reduced tax break for investors stems from the Government's desire to lower the overall cost of Section 35 to the Exchequer, whilst trying to maintain the benefit of the incentive for film producers, thereby continuing to stimulate activity in the film sector.