Once again, the tax-credit system that the UK introduced to boost – theoretically – the domestic film industry has triggered controversy, after it was revealed that the Royal Bank of Scotland (RBS) had benefitted by over £1bn after setting up a string of deals with Hollywood studios.
An investigation by news agency Bloomberg has found that between 1998 and 2007 RBS invested in at least 20 blockbuster movies, including two Harry Potters, Batman Begins and Charlie and the Chocolate Factory, which allowed it to defer or avoid tax payments through the system originally set up in 1997. RBS have said that their activities were entirely within the rules. Law changes in 2006 saw the end of the bank’s activities in the sector. Bloomberg claim that at least 10 deals have been investigated by tax authorities. RBS said: “These leases were compliant with tax law”, adding: “We have worked with HMRC to make sure that all our tax obligations in regards to this portfolio have been met.”
The mechanism that RBS used to arrange the deals is a device known as “sale-and-leaseback” – in which an individual company buys up the copyright to a film and then immediately leases it back to the producers for a fixed period (between 15 and 20 years). The tax relief regulations introduced by the Labour government in 1997 allowed this kind of arrangement to flourish, guaranteeing the leaseholders a regular payment from the producers, however the film performs. The movement of money, in the form of loans from the bank to the leasing company, allows the bank to reduce its corporate tax bill accordingly. Moreover, all this happened shortly before the 2008 financial crisis, when RBS went into meltdown and received £45bn of taxpayers money in bailout payment.
RBS didn’t invent sale and leaseback; according to the book Hollywood and the Law, it was pioneered in the early 80s in the UK, before being shut down by tax authorities in 1985. In any case, RBS has been by far from the only player in the field, as a case study of the financing of Lara Croft: Tomb Raider showed. Published in 2005 by Slate magazine, the study revealed that Paramount exploited the tax-credit system in both Germany and the UK to finance the 2001 blockbuster. At the time, German regulations meant that a film didn’t even have to shoot there to benefit; Paramount earned $10.2m profit through a sale-and-leaseback agreement with Tele-München Gruppe, while the latter presumably radically reduced their tax bill by paying Paramount $94m, and receiving $83m in return. The studio entered another sale-and-leaseback agreement with the UK’s Lombard bank to take advantage of Britain’s tax credits – which at least required the film to shoot some portion of it in the UK – earning $12m for the studio in the process.
No wonder they became so popular: a 2002 article in the Daily Telegraph, which explained how people with a tax bill of over £50,000 could get involved, quoted a film-partnership specialist as saying: “Sale and leasebacks are only really for tax relief. The fact we’re investing in films is irrelevant. If we could get the same tax reliefs investing in cauliflowers, we’d do it.” Considering that tax relief was designed essentially to support and encourage the domestic film industry, this naked rush of tax avoidance was clearly not working. The “schemes for scumbags”, as personified by the Ingenious Media episode that caught a number of wealthy celebrities in unwanted publicity, was part of the same pattern.
Hence the rule change in 2006, when the government stopped the tax benefits from films to going to “third parties” – ie the banks and their subsidiaries – and to instead only go to producers. Sale-and-leaseback may have declined as a result, but it hasn’t stopped Hollywood from cashing in. In 2014, it was reported that Disney had taken £170m in tax breaks since the change. Arguments are still raging as to the tax-relief system’s actual benefit to the British film industry, with Kick-Ass director Matthew Vaughn prominent among those asserting most of the profits simply go back to Hollywood. Plus ça change …
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