BECTU submission to UK Government film policy review

10 September 1997

Introduction

Inward investment

Film finance - the 100% write-off arrangement

Other fiscal measures

The 'British qualifying film'

Withholding tax

Other issues

Distribution

Broadening the audience

Promoting exports

Introduction

BECTU's submission spans all of the subject areas in which Working Groups have been established, although with a primary emphasis on building our production industry.
We recognise the opportunity provided by the Review to analyse and put forward solutions to our industry's underlying structural problems and we acknowledge the vital importance of drawing-out practical and workable solutions from an exercise which may not be repeated in the foreseeable future.
Our perennial problem is over-dependence on uncertain (though welcome) flows of foreign investment and our perennial aim is to build a stable domestic base, strong enough to operate at high capacity even during troughs in the world market. We support the new fiscal initiatives and argue below for their extension. However, if the Review project is genuinely aimed at restructuring, we suggest that close attention should be paid, at the heart of the debate, to what counts as British/European qualifying films i.e. what kind of productions and what kind of investment do we wish to encourage? As a trade union we are clear that retaining a labour-based component is essential in any definition of a British/European film and we further argue for a quality threshold based on benchmark labour conditions.
This twin track approach of generous fiscal incentives combined with a reciprocal commitment by benefiting producers to sustaining our domestic industry is, we believe, essential. Such measures (with the addition of provisions on training, reinvestment of revenues and distribution) provide a package of proposals with a genuine claim to provide both an immediate stimulus and a medium to a long-term restructuring of our industry.
These arguments, together with many more specific points, are set out below. We hope that the industry will be bold enough to move in a similar direction and, in a close parallel to debates in other areas of the UK economy, to place the long-term interests of the sector as a whole ahead of the short-term self-interest in immediate financial returns.
Inward investment
We note, as has the Review Group, that many of the issues under discussion are closely interlinked. We believe this is particularly true of the debates on Inward Investment and on Film Finances. Rather than state the same case twice, a number of our points relevant to Inward Investment are set out below in the Film Finance section of our submission. We would therefore ask that both sections are read together for a full summary of BECTU's views on these issues.
We strongly welcome the flow of inward investment, especially from Hollywood, that has in the past and hopefully will continue in the future, to provide finance and work for the British film industry. Our problem, as ever, is that such flows of investment are essentially unpredictable and outside British control. Although we have over the recent period benefited from a considerable amount of inward investment including a number of major productions, the signs are that the current strength of the pound may - after a lag - be leading to a reduction in the number of foreign productions and co-productions using the UK as a base. Fluctuations in the exchange rate, combined with centres of decision-making located outside the UK, make it extremely difficult for our film industry to plan for the medium and long term. A further consequence is the UK's recent first-time trade deficit in the film sector, in the context of the massive and continuing audiovisual trade gap between Europe and the US.
A suggested solution to this structural problem will be, as set out in the section on Film Finance, to encourage a stable flow of domestic investment. At the same time, however, we strongly wish to encourage continuing inward investment by giving financial incentives to bring productions to the UK, for reasons over and above any short-term and uncertain advantage based on exchange-rates. In this context we welcome the 100% write-off arrangement as a stimulus to inward as well as domestic investment and as indicated below we urge the Government to remove the £15m budget ceiling in order to allow larger productions (including major Hollywood features) to benefit.
Such fiscal incentives as already exist are limited to 'British qualifying films'. Leaving aside for the moment the vital debate on the criteria for defining such films, we would strongly support in principle the notion of extending the notion of a British qualifying film to a European qualifying film i.e. a film with qualifying 'local' status throughout the EU. This could provide a significant additional incentive for inward investment to the UK, which could become a point of entry to the whole of the EU, without further internal barriers or quota problems.
The difficulty with the proposal will, as ever, be in the detail - and particularly in the need for an EU-wide consensus and reciprocity on this issue. There might also need to be appropriate protections against foreign producers obtaining multiple tax credits in different countries on the same production. Nonetheless, the principle of supranational status is already familiar from the various co-production treaties. We would strongly support close consideration of the feasibility of establishing 'European film' status.
In our view, however, the criteria used in defining a British and by extension European-qualifying film are central to the whole debate on inward-investment. Given the existence of (hopefully improved) fiscal incentives to invest in the UK, the key issue is what kind of productions, and therefore what kind of contribution to the British film industry, we wish to encourage.
We strongly support the retention of a criteria based on the use of British/European labour. We further support the notion of a 'quality threshold' based on benchmarks no less favourable than the standard terms and conditions already applying to the industry's workforce. Our more detailed arguments on this are set out in the Film Finance section, since this is obviously an issue equally relevant to domestic investment.
In respect of specifically of inward investment we would make the following additional points:
- Given the higher social insurance requirements elsewhere in the EU, such a quality threshold of terms and conditions cannot be presented as a significant disincentive. Furthermore, recent comparability studies by our international organisation (MEI-Media and Entertainment International) as well as other sources, confirm that working conditions in the British film industry already compare unfavourably (from the workforces viewpoint) to a number of other EU countries.
- Such a quality threshold can, by discouraging undercutting and providing a minimum level of certainty in the labour budget, be a direct benefit to foreign producers considering investing in the UK. Informal surveys of opinion among Hollywood-based producers have confirmed that the existence of known benchmarks leading to greater certainty in budgeting is one of the key considerations in investment decisions.
A further point relating to the labour force concerns training. While more detailed points will be made in submissions to the Training Working Group, we wish to emphasise our view that a further requirement in qualifying for fiscal incentives and European film starts status should be an agreed level of contribution to industry training, which is a vital yet seriously under-funded aspect of our overwhelmingly freelance labour market. Since one of the key attractions in bringing foreign productions to the UK in the skills and experience of the labour force, we believe it appropriate that foreign producers should be asked to make some contribution to maintaining and developing skills.
A further and more general point on the criteria for defining a British/European film and consequently for enjoying the related fiscal and other benefits is the argument for a degree of reinvestment in the British film industry out of revenue from previous productions.
The issue of reinvestment from revenue earned in the British film industry is referred to below in the sections on Film Finance and on Distribution, where there is a concern about repatriated profits. We argue in the short-term for voluntary encouragement for reinvestment and for the increased distribution of British films. If, however, voluntarism is not successful, we would support more interventionist measures, not excluding the consideration of taxes, levies or quotas. Such proposals should not be excluded in principle and certainly not by the self-interested arguments of producers or distributors potentially affected. The disincentive affect of any such measures would have to be measured against the costs of the currently inadequate reinvestment levels. This requires dispassionate analysis rather than self-serving protests. However, the best means of avoiding the need for direct intervention will be increased voluntary levels of reinvestment in the UK by foreign producers.
In arguing for increased levels of inward investment we do, however, take seriously the concern that maximising foreign investment might not be the optimum strategy for our domestic industry. Our underlying aim for reasons cited above, must be to develop stable flows of domestic investment. If there is a prospect of such domestic investment being 'crowded out' to the point where facilities and skilled labour become unavailable, this would deal a serious blow to the long term strategy of reducing our dependence on the world market. Domestic investors are likely to be much more wary of making future commitments if they find that the sector we are trying so hard to 'sell' is unable to make use of their investments. We therefore believe that the degree of use of our own production capacity should be closely monitored. If at any point there is serious evidence that potential domestic investment is being frustrated by the over stimulation of inward investment, we should give careful consideration to modifying our fiscal and other incentives accordingly.
We believe that greater consideration should be given to the role of those organisations concerned in marketing the British film industry and encouraging inward investment - including the British Film Commission, local Commissions, the DTI and the British Council. We would support a more ambitions and co-ordinated focus on 'selling' our industry and facilitating investment and perhaps a greater role and resources for the BFC in achieving this. As an additional, practical suggestion, we recommend a role for the BFC, in conjunction with other industry parties (including trade unions) in establishing and running a 'diary service' for the key elements in the labour force. The aim would be to facilitate the use of domestic skilled labour and to avoid or minimise the danger of bottlenecks in availability.
We support the proposal for a UK Film Office in Los Angeles - but with the proviso (as noted below in the short section on promoting exports) that such a body should be staffed and advised by those with practical expertise and experience in the industry.
Film finance - the 100% write-off arrangement
The British film industry's fundamental problem in raising and maintaining an adequate flow of domestic investment is long established and widely recognised. In this context, the Government's recent introduction of the 100% first-year tax write-off for production expenditure on British qualifying films costing £15m or less is very welcome. For films in the relevant budget range, this measure meets a long-standing industry demand and should produce a stimulus to future investment both from financial institutions and from broadcasting and media companies who can offset the write-offs against their ongoing stream of profits. We hope that it is intended to become a permanent arrangement.
We further note that, according to some experts, the measure may have a beneficial side-effect of making sale-and-leaseback deals attractive for some medium budget films (£5m-£10m) which could not previously take advantage of this method of encouraging financial institutions to invest in the industry.
We believe, however, that the £15m budget ceiling on the 100% write-off arrangement should not be regarded as permanent. While the measure as it stands is a welcome first-step - which should justify itself through increased economic activity in the sector - we see no reason why the ceiling should not be lifted in order to allow larger budget productions to share in the advantages of the new arrangements.
We accept that, in the broader economic context which any Chancellor of the Exchequer has to take account of, tax breaks have to be justified rather than demanded as of right. Nonetheless, the structural problems of a high-risk industry operating in an international market dominated by a small number of companies do, in our view, provide compelling reasons in favour of extending the tax breaks in order to unlock domestic investment which would not otherwise be forthcoming.
As it stands the write-off arrangements provide no incentive to invest in the larger budget films which provide such a boost to economic activity in the sector and which are more likely (though obviously not inevitably) to achieve a degree of success on the international market. Sale and leaseback deals for such films may become less attractive owing to the recent reduction in corporation tax (which we accept was a decision taken on broader economic grounds). Having accepted the 100% write-off proposal in principle, we therefore believe the Government should now give early consideration to removing the £15m ceiling and extending its benefits to all productions. The consequent benefit in increased economic activity will, in our view, provide an adequate justification.
Other fiscal measures
We note that, in the lengthy debate on film policy over recent years, many other proposals have been put forward to stimulate or enforce extra film investment - including incentives to external corporate and individual investors (along the lines of the Irish Section 35 and the French SOFICA schemes); specific fiscal or para-fiscal incentives to film investment by existing media companies (e.g. ITV to offset investment against Exchequer payments, C4 against its payment to ITV, BSkyB tax relief, BBC increased grant); and fiscal compulsion (e.g. blockbuster tax on US distributors and producers, blank tape levy, film depository receipts for major distributors, producers and pay TV companies).
We take the view that if the write-off arrangements were extended to films with budgets in excess of £15m, there would be a less immediate and compelling case for an additional Section 35-equivalent or specific additional incentives for media companies. This should, however, be kept under review. In particular, there is an argument that the write-off arrangement specifically benefits existing media companies with a regular flow of profits, who can take direct advantage of these provisions. Independent producers and potential outside investors who operate on a project by project basis and who do not necessarily have a regular profit stream, may find the write-off less attractive than a Section 35 scheme. While accepting the write-off approach as the most effective single measure that the Government can take, we believe that additional future measures should not be ruled out if continuing problems in raising investment can be demonstrated in particular areas.
We further believe that 'compulsory' reinvestment in film production by means of taxes and levies should be considered only if voluntary incentives demonstrably fail, but that this should not be ruled out in principle and that self-interested arguments against such measures - e.g. by the American majors - should be treated with due caution rather than accepted at face value.
The 'British qualifying film'
At the heart of the debate both on inward investment and domestic film finance is, in our view, the notion of the 'British qualifying film'. The underlying economic rationale for encouraging a regular and health flow of foreign and domestic investment in the British film industry is surely to build and maintain a high level of economic activity in a sector which, despite the structural problems referred to above, is one in which the UK has a worldwide reputation for its skills and facilities. If we fail to target British economic activity as our key goal, and fall back on a less rigorous definition of the films we are trying to encourage, we are in danger of a strategy which delivers nothing more than a tax haven for productions which are only notionally British.
We are therefore in fundamental disagreement with those who argue that even the current definition of a British film - for purposes of legislation and financial incentives - is somehow too complicated or restrictive.
The current definition, as set out in the Films Act 1985, includes requirements on EU labour content and the use of UK studios. We are strongly in favour of maintaining the labour content provisions. In a labour-intensive industry with a high premium on creative and technical skills, the labour force available to the UK industry is a key asset - indeed perhaps the single most important asset we have in the long-run. The skills base built up over time is not internationally transferable or replaceable - whereas flows of investment readily across national boundaries. We need, as an industry, to preserve this asset and to ensure that measures to stimulate film investment are targeted at productions that will use and develop the skills and experience of the UK labour force.
The precise definition of EU labour content is open to argument - and in the context of the European Commission's Audiovisual Green paper there was an extensive debate, contributed to by ourselves and others, on developing a more rigorous labour-based notion of 'European works' based partly on the UK legislation and partly on an amended version of the Council of Europe's Convention on Cinematographic Co-productions. We do not propose to reopen such a detailed discussion - merely to reinforce the point that removing or watering down the labour content provision goes against the grain of much recent European thinking on how to support and encourage such a labour-intensive industry.
We do, however, wish to recommend an additional dimension to the notion of a 'qualifying film' - one that is relevant to both the inward investment and film finance debates. We believe that the fiscal benefits attendant on being a qualifying film should additionally rest on a quality threshold which includes a requirement to follow good industry practice in respect of the terms and conditions of the workforce.
By this we mean that if producers with to take up the financial advantages of qualifying films, they should have the reciprocal obligation of offering terms and conditions which are no less favourable than those obtaining in the sector - as recognised in standard collective agreements. This would not require a producer to join any particular trade association nor to follow a rigid set of practices - it would merely set out a minimum level of terms and conditions which are already recognised by employer associations and trade unions in the industry as benchmark standards. These standards include the typical employment contract issues (pay, hours etc.) but may also make reference to health and safety, training and equal opportunities matters.
We emphasise that this could not be presented as a rigidly prescribed or restricting set of conditions. It is a set of minimum conditions below which no responsible employer should attempt to operate. The rates of pay involved would, in a great number of cases, be below the 'market rates' that actually prevail.
If the underlying aim is to develop the British film industry, and if this labour-intensive industry's future is closely bound with the skills base among the domestic labour force, we believe that the above notion of a 'quality threshold' encompassing minimum terms and conditions currently prevailing in the industry is a reasonable and in no way onerous requirement on potential investors. Indeed, if fiscal incentives attract investors not prepared to meet even minimum industry standards on this area, we believe it will in the medium and long-term prove counter-productive. The industry's future vitality will depend to a significant extent on maintaining a skilled and experienced labour force. 'Short-termism', i.e. a preoccupation with immediate financial returns rather than building a long-term base for the industry, is no more desirable in the film industry than in any other sector.
Withholding tax
The tax treatment of short-stay visiting artists has often been commented on as a disincentive to bring large budget productions to the UK. Given that US personal taxes (even allowing for state taxes) are lower than the top UK rate, the current insistence on taxing American stars (on whom the success of a production may depend) at the higher UK rate - by means of the withholding tax - can have a negative effect on investment in the UK. Almost certainly, the producer will be asked to gross up the artists' fees (possibly by over 12%) to compensate for the extra tax. Additionally, the claims involved can take a significant time to be resolved by the Inland Revenue. The net effect is a disincentive to bring the production to the UK in the first place.
While acknowledging that for many ordinary tax payers, the increased financial demands of Hollywood stars - already perceived by many as obscenely overpaid and ludicrously greedy - would not meet with a sympathetic response, the real issue is the potential loss of investment and work for the British film industry. If we note that the withholding tax brings in relatively little revenue to the Exchequer (approximately £20m in recent years across the board) and that the earnings of foreign recording stars on UK record sales are not similarly subject to withholding tax, the case for maintaining it in respect of visiting film stars seems extremely weak.
We therefore believe that, rather than set it at a lower rate, the most appropriate solution would be to abolish the tax in respect of the visiting artists in the film industry. In the long term, the Exchequer should gain more from the increased economic activity than it loses through abolition of the tax.
Other issues
In addition to the above measures:
1. We support the creation of a forum, under Government auspices, to bring together representatives of the film and financial sectors on a regular basis. The underlying aim would be to increase the financial institutions' understanding of and confidence in the British film industry and to discuss future measures to increase the availability of domestic film finance.
2. We support the European Commission's proposed Audiovisual Guarantee Fund and regret the problems in achieving agreement on implementation at the Council of Ministers. We urge the Government to support this proposal as a measure which is valuable and appropriate at EU level and would not require a large or unsustainable amount of public funding.
3. We welcome the decision to rejoin the Council of Europe's Eurimages programme and look forward to the UK's full participation in the future.
Distribution
One of the most remarked on but so far unresolved structural problems facing the British film industry is the lack of any significant UK presence in distribution - with the international and UK markets totally dominated by the US majors.
The US distributors are in fact Hollywood-based, vertically-integrated transnational companies with interests in every sector of film production - studios, production, distribution, exhibition and film libraries. The film industry is just as much a high risk sector in Hollywood as in the UK, but with their stranglehold on distribution, the US majors can spread their risks over a range of film releases in a way the largely one-off, production-led British industry has been unable to match. This is reinforced by the fact that in all normal circumstances, distributors will recover their investment in a film before the producers. The end result is that the US majors are immensely more attractive to investors and simply do not face the crippling financial uncertainties that bedevil the British industry.
The majors have and will continue to distribute UK films. But the balance of advantage in such deals, the relative priority given to the distributors' own product and the problem not just of getting a film on screen but keeping it there means that the UK industry is at a severe structural disadvantage in the world market. In addition, the US distributors are in a position to earn and then repatriate very significant profits from markets such as the UK, without any remotely equivalent reinvestment in the local production industry.
We also have to accept that as well as the structural problem described above, the UK industry has - by comparison with Hollywood - paid far too little attention to marketing. Partly through lack of resources, but partly perhaps through a misunderstanding of what makes a film 'successful', the UK industry has never remotely matched the resources which the majors put into marketing - which can be on a par with spending on the production itself.
The results speak for themselves. Only an estimated 70% of British films receive any form of UK distribution and only 30% receive nationwide distribution. On one calculation, the average US film is up to 10 times more likely than its UK equivalent to get a circuit release (of 100+ screens) in British cinemas. Of the top 20 grossing films in the UK in 1996, only 3 were distributed by European companies. It is not surprising, as the film policy initiative has made abundantly clear, that British films only achieve a 10% market share in their own country - a proportion which all of us should find unacceptable.
In this context, the original thrust of some of the thinking behind lottery funding for film production - that a single distribution-led studio should be developed - was in our view welcome. In the event, while the lottery funding is a welcome development, the split into three franchises will make a distribution-led approach that much harder to achieve.
We accept that making an impression on - much less matching - the US dominance of distribution is a long-term and very ambitious project. We further recognise that by providing at least some stability and focus, the three franchises might begin to develop a spread of rights which will begin to give the UK a foothold in the international marketplace. We still fear, however, that on present trends we risk stimulating a mini-boom in the production of films which will have severe struggle to find exhibition space.
We recognise that attention to distribution strategies was an element in awarding the franchises. We believe, nonetheless, that more active encouragement by Government for the formation of a single joint venture in distribution among the franchise winners would be justified. Decisions on which individual films to produce and distribute would be taken on strictly commercial criteria, but the structural imperative of building a British presence in distribution is such that it cannot, in our view, be left entirely to the market.
In addition to positive encouragement for a UK distribution initiative, there should also be consideration of what leverage can be applied to the majors to encourage the distribution of a higher proportion of British films. If the majors wish to benefit directly and indirectly from the new fiscal incentives available in the UK, they should also be prepared, in our view, to consider reinvesting a greater proportion of their profits from the UK market in new UK productions.
One way of giving focus to this would be to set a voluntary target for the increased distribution of British films and/or the reinvestment of a proportion of UK revenue in UK production. If this manifestly failed or was ignored, consideration should be given to a more interventionist approach to secure the distribution of UK products (not excluding quotas) and/or to fiscal measures to ensure the reinvestment of a fair proportion of otherwise repatriated revenue in the UK. A voluntary approach is preferable but intervention should not be ruled out in principle nor should any such proposal be allowed to be drowned-out by the self-interested protests by those with most to lose. The issue should be decided on the facts - including the relative success of the French in sustaining their domestic industry - and not on special pleading disguised as economic analysis.
Consideration should also be given to more modest measures to support the marketing of British films - including funds for audience previews, encouragement for regional and not just London-oriented marketing (including regional publicity tours by key talent), support for co-operative initiatives on marketing bringing together distributors and exhibitors and funds for cinema poster sites.
Finally, although the discussion rightly has a focus on UK film policy, we should not lose sight of the possibilities of action at EU level. The debate stimulated by the EU audiovisual Green Paper several years ago brought to the fore some well-considered proposals for the development of European distribution consortia supported by EU soft-loan finance. The aim would be to offer transnational outlets for European producers able to produce material with commercial appeal beyond their respective national markets. It would offer a significant incentive, via market mechanisms, for European producers to gear themselves to producing for an international audience. An estimated ten-year timeframe might be necessary to develop such consortia, beyond which EU funding - if the project was successful - should no longer be necessary.
We would therefore wish the Government to reconsider the issue of distribution at EU level, building on the more modest but valuable work of Media II in this area.
Broadening the audience
The Film Policy Review is right to draw attention to the need to broaden the UK cinema audience. The BFI's analysis has shown that 5% of the population (young people) account for 60% of cinema tickets sold. The highest proportion of frequent cinema-goers is in the 15-24 age group, allied to which is a strong recent rise in cinema-going among the 7-14 age group. Older age-groups, which in previous generations would have been a staple part of the cinema audience, need to be attracted back.
The exhibition sector itself has been transformed in recent years with the growth of multiplexes. The number of cinema screens grew from 1271 in 1984 to 2019 in 1996, but all the recent growth has been in the US dominated multiplex sector (which now has a 39% share of screens, compared to 0.7% in 1985 and with plans for further expansion over the next 2 years). The exhibition sector as a whole remains concentrated in the hands of a small number of chains, although this has not so far proved to be against the public interest.
As a number of commentators have pointed out, the expansion in the number of screens cannot continue indefinitely. On some forecasts, the overall multiplex market may become saturated by the year 2000. This provides the opportunity, in our view, for the consideration of factors other than the sheer size of the audience - and indeed brings into focus precisely the sort of qualitative audience issues encompassed by the need to broaden the age profile of the cinema-going public.
We believe that the recent focus on big-city sites should in future be complemented by developments in small-to-medium sized catchment areas throughout the country, catering for a broader range of the local audience. In addition, competition in the number of sites and screens should increasingly be replaced by competition in marketing and customer services - which gives cinema operators the incentive and the opportunity to build and respond to the needs of a broader audience base. Local planning authorities can play their part by insisting on facilities (e.g. good public transport, adjacent shopping developments) that may help to attract back older cinema-goers.
Useful additional initiatives worthy of further consideration include school and college based educational projects geared to broadening young people's appreciation of the cinema (with the aim of providing at least some counter-balance to the overwhelming marketing and merchandise-led pull towards Hollywood products); the extension of the successful National Cinema Day initiative (with a greater emphasis on British films); a greater willingness to extend price concessions to segments of the population (e.g. the unwaged, pensioners) who might otherwise not attend cinemas; and dedicated multiplex screentime for British films.
Promoting exports
A key point, already referred to in the discussion on distribution, is the need for greater emphasis on the marketing of British films. We remain a production-led industry which consistently fails to learn from the priority which the majors place on this actively - to the point where they may spend as much on promoting a film as they do on production.
While we cannot hope to match the sheer scale of Hollywood marketing budgets, we can certainly begin to pay much more attention to this area - both in terms of fiscal incentives for investors and of industry/public bodies which promote British films abroad. A rigorous examination of the effectiveness, for example, of the DTI and the British Council in this area would be of considerable interest. We would certainly support the establishment of a permanent promotional presence in Los Angeles - as long as this was staffed and driven by those with practical expertise and experience in the industry. We would further support the establishment of an export credit guarantee scheme.

Last updated 1 December 1997

BECTU submission to UK Government film policy review

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