The British film industry’s renaissance was thrown into confusion yesterday after the Government effectively killed off one of the most popular tax breaks used to bankroll productions.

In a move that took film-mak-ers by surprise, HM Revenue and Customs said that it was severely restricting “sideways loss relief”, which allows partners to use losses in one business to set off against income derived elsewhere for tax purposes.

The decision appeared to hit schemes set up to exploit losses resulting from film production, which rely on basic accounting rules known as “generally accepted accounting principles”.

Martin Churchill of Tax Efficient Review, a specialist adviser, estimated that the ruling would affect about £2 billion of income this year. He said: “I think they have done it now because contacts in the industry will have warned them that sales of these schemes pick up in the last few weeks of the tax year and if they didn’t act now they would be in danger of losing £800 million in tax.”

The move has also thrown into doubt other schemes used to defer tax. Industry observers said that there were now risks surrounding about £200 million of investment outstanding under “sale and leaseback” schemes. These officially sanctioned tax breaks were being phased out.

Mike Warburton, senior tax partner at Grant Thornton, the accountancy firm, calculated that about £300 million of investment in the carbon trading scheme, whereby industry can buy credits to offset carbon emissions, would be lost. Others said the ruling would also affect wind farm investment.

Martin Taylor, managing director of Scion Films, a promoter of film financing schemes, said that the decision had already caused the financing of several films to fall through.

A spokesman for the Revenue said: “Any genuine movie industry scheme will not be touched by this. This is to catch blatant tax avoidance schemes.”

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