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How British Taxpayers Have Saved Movie Studios $5.8 Billion

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How British Taxpayers Have Saved Movie Studios $5.8 Billion

Grateful winners at tonight’s Academy Awards are once again battling the clock to thank as many people as possible when they give their acceptance speeches. However, there’s one organization which few, if any, winners think of namechecking even though many of them wouldn’t be on the stage without it – the UK government.

Movie-goers may not realize this but many of the biggest blockbusters are filmed in the UK. They include all of Disney’s Star Wars movies, The Batman, the two latest Jurassic World and Fast & Furious films as well as independent pictures such as The Banshees of Inisherin, which has been nominated for Best Picture at tonight’s awards. There is good reason why they were all made in the UK.

The country is home to top creative talent from cinematographers and set dressers to directors and post production firms like Framestore, the visual effects giant behind Top Gun: Maverick which is up for six awards tonight.

Infrastructure is another draw as the leading studios, Pinewood and Shepperton, are a short drive from London’s Heathrow airport and Farnborough private aviation terminal that is favored by Hollywood’s top talent. The use of English makes it easy to work in the UK, as does the convenient time zone which enables executives to liaise with their colleagues in Asia in the morning and the US at the end of the working day. Important as these advantages are, it is another benefit which has made the UK a dream ticket for film makers.

In 2007 the UK government rolled out the red carpet to movie studios by offering them one of the most generous fiscal incentive programs anywhere in the world. It enables them to claim cash reimbursements of up to 25% of the money they spend in the UK and since this Film Tax Relief scheme was introduced in 2007, $5.8 billion (£4.8 billion) has been paid out with $437 million (£362 million) handed to studios last year alone. It led to a record $7.5 billion (£6.3 billion) being spent on film and high-end television productions in the UK in 2022 compared with only around $143.4 million (£120 million) annually in the early 1990s.

As we recently reported in The Times of London, a staggering $6.5 billion (£5.4 billion) of the money spent on filming in the UK last year came from overseas, with the US being one of the biggest contributors. Although the financial benefits have cast a powerful spell on the UK film industry it takes much more than the wave of a wand for studios to access them.

To qualify for the reimbursement, production companies must spend at least 10% of their expenditure in the UK and must pass a points test administered by the British Film Institute (BFI). Movies earn points depending on their level of UK content, how much they promote UK creativity, heritage or diversity, how much filming was done in the UK and how many of the cast and crew are from the UK. That’s just the start.

In order to claim the reimbursement, the studios have to follow a careful process which begins at the very start of the film making process. Let’s say a US-based movie studio buys a script from a screenwriter and green lights a film about it. If the studio decides to make the film in the UK it will then set up a subsidiary company there which buys the rights to the script from its US-based parent.

Acquiring the rights to the script gives the UK company the rights to the movie it makes. The company must be responsible for everything from pre-production and principal photography to post-production, delivery of the finished film and payment of goods and services in relation to it. The companies tend to have code names so that they don’t raise attention when filing for permits to shoot off-site. Then comes the hard part.

If the companies make a profit, the financial benefit comes in the form of a reduction to their tax bill. However, if they make a loss, the benefit is paid in cash so studios fund the companies in a way which engineers this.

The studio buys the rights to the movie from the UK company for 75% of the projected cost of making it. The remaining 25% of the production cost is provided by the studio in the form of a loan. This gives the UK company 100% of the production budget for the movie and it sets the scene for the cash reimbursement.

Loans are not counted as revenue for accounting purposes because they need to be repaid. As a result of this, the UK company makes a loss equivalent to 25% of the movie’s budget. That is when the UK government steps in as it reimburses this loss. As the amount is equivalent to the loan that the company owes its parent, the cash can be passed on to the studio and, voila, UK taxpayers cover 25% of a movie’s costs.

It gives studios a happy ending but theaters haven’t been so fortunate. They typically keep half of the proceeds from films with studios retaining the remainder. In July last year, Europe’s biggest privately owned operator, Vue, resorted to a debt-for-equity swap to stay afloat in the face of competition from streaming sites combined with tightening purse strings.

Two months later the curtain came down on the US operations of the world’s second-largest cinema chain, Cineworld. Weighed down by $8.9 billion of debt and lease liabilities, the US arm of the London-listed company filed for bankruptcy protection and has set an April deadline for offers to buy its assets.

Their plight raises questions over whether UK taxpayers’ cash would be better spent on stricken local companies than profitable foreign studios. However, unless the government has a change of heart the UK seems set to stay center stage when US studios film abroad.

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