For many years, the use of generally accepted accounting principles ("GAAP") has been a popular method for funding film productions in the UK. GAAP, when referred to in the film financing context, allows producers to obtain additional funding from investors who rely on this financing technique. Specifically, investors use GAAP to write off costs of a particular production as a tax loss.
The controversy around GAAP financing arises because it is not a funding technique that is sanctioned by the government. In fact, the government in many circumstances already provides structured tax incentives to support the film industry. For this reason, many opponents of GAAP financing are concerned that the tax authorities will challenge investors making these claims on their tax returns. In an article written by Adam Dawtrey in Variety magazine dated May 21, 2006, he states that there is a real concern that the government will be alarmed into action once they become aware of the magnitude of the financing dollars that are generated by GAAP methods of financing. His article reports that GAAP financing for film productions accounted for an estimated $1.24 billion, approximately 30% of the funding in the UK alone.
In light of the fact the UK government changed its Film Tax Relief program effective April 1, 2006, for the main purpose of ensuring that incentives are "effectively targeted and less vulnerable to manipulation and avoidance" it seems more likely that this form of funding mechanism may become susceptible to government attack since it is clearly not a permitted incentive that is outlined in the proposal for reform.
What the proposal does say is that the new tax incentive regime will not be extended to companies whose purpose is to arrange finances for film production companies. Presumably, this can be interpreted to include companies currently providing financing techniques to investors. Nonetheless, despite the possibility that this position can be challenged at any time, this method of financing continues to grow in popularity as film companies struggle to remain competitive with other film companies that make use of this incentive. Query whether the British Tax authorities will take sympathy on these producers by viewing GAAP financing as inevitable in the free market economy or treat is as a significant threat to the government coffers.
For an outline of the proposal visit http://www.hmrc.gov.uk/pbr2005/film-tax-relief.pdf