BRITAIN’S film industry last night gave warning that it will suffer a severe fall in income this year because of confusion over lucrative tax breaks that persuaded Hollywood studios to spend almost £500 million in the UK last year.

Industry executives told The Times that they expected “a huge drop” in film production because of uncertainty caused by the Treasury’s overhaul of financial incentives meant to promote local production.

One UK film industry financier said: “Hollywood studios are now saying that England is not the place to be shooting films, and they’re now looking back to the US, to Canada and places like Eastern Europe and Australia.”

Barnaby Thomson, head of Ealing Studios, where films such as Notting Hill and the forthcoming Valiant were shot, gave warning that the ambiguity surrounding the future of the tax breaks would hit business.

He told The Times: “There is huge uncertainty. England is not a cheap country, and particularly because of the weak dollar it has become even more expensive. Tax incentives are an important encouragement for all types of films to come here, and with this uncertainty we are going to lose a lot of business.”

Even Working Title, producer of British romantic comedies such as Four Weddings and a Funeral and last year’s Wimbledon, is now scouring low-cost production locations in Eastern Europe.

Tim Bevan, co-chairman of Working Title Films, said: “Working Title is committed to shooting in Britain whenever possible, but in terms of running a business the company is having to look elsewhere to see what opportunities exist in markets such as Eastern Europe.”

During the past two years it has become 25 per cent more expensive for Hollywood studios to make films in the UK because of the dollar’s depreciation against the pound.

The slowdown in film production in Britain has already begun. According to the Film Council’s own statistics, last year production in Britain fell by 30 per cent to £800 million as the number of indigenous films that started shooting in Britain dropped from 45 the previous year to 27.

The Treasury wrought havoc across the industry by announcing a year ago this week that it would end section 48 tax breaks, which are available for films with budgets of less than £15 million. Section 48 will be replaced by production tax credits, but the industry remains confused about how they will work.

More recently the Treasury launched a review of section 42 incentives, which are used by major studios to offset the cost of much larger productions by as much as 20 per cent.

“An announcement (about section 42) will be made in due course,” a Treasury spokesman said. Meanwhile, the uncertainty has given Hollywood studios and film financiers a bad case of stage fright.

“If you are an indigenous British producer right now you will not get financing for a movie, it’s as simple as that,” said John McVay, chief executive of Pact, the trade body for independent producers.

Senior Hollywood executives are understood to have urged the Treasury to maintain its support for UK film production through tax breaks.

The Film Council believes that local production will ride the drought. “We shouldn’t underestimate Hollywood’s desire for quality film-making. Cheap labour isn’t a substitute for quality,” a spokesman said.

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