Lightning flashes across the screen at the start of the latest Harry Potter film as the Death Eaters swoop over London. Their speedy destruction of the Millennium Bridge sets the tone for the darkest instalment yet of the boy wizard film franchise.

The image of London at the mercy of Hollywood is an appropriate one for the film industry. Yet although the money and influence in movies remains on the west coast of America, in the past decade the Potter effect has helped London to become a world leader in special effects and post-production.

“Potter has been the cornerstone in building the London market,” said Matt Holben, chief executive of Double Negative, which provided the visual effects for the Death Eater sequence. “Having that franchise based here means we have been able to invest in research and development.”

As the spell-binding Warner Brothers series nears its eighth and final film, due out in 2011, the industry faces the challenge of continuing the magic without Harry. And with Hollywood studios tightening their budgets, London also has to stave off competition from Indian and Chinese rivals that claim they can do the same work for less money.

For now, everything is rosy. Double Negative, which is working on the sequel to the superhero thriller Iron Man, has projects confirmed until summer 2011 and is looking to expand. Sir William Sargent, head of Framestore, a rival effects studio that worked on Where the Wild Things Are, Spike Jonze’s screen fantasy, also expects the volume of work to rise.

The Disney film John Carter of Mars will keep London busy in 2010. Depending on box-office performance, it could be the first of at least three movies adapted from the Edgar Rice Burroughs science fiction novels.

About a third of the typical $150m (£94m) budget for a big feature film is spent on effects and post-production. With the move into 3D, that spend is only going to increase.

UK revenue from visual effects rose fourfold from 1997 to 2004, with staff levels rising at a similar rate. Helped by tax breaks and the weakness of sterling, income increased by another 17% from 2006 to 2008, according to a forthcoming report from the UK Screen Association. Today the sector has sales of £376m and 5,000 employees, most working in and around Soho.

Sargent believes the growth can be sustained as UK players have the scale to invest in leading-edge effects and also the skilled workforce required to turn films round.

“When you are of a certain size, you can handle three or four big projects at once,” he said.

“It is not so different to a construction company. What we don’t have are contracts that are long-running.”

It is this unpredictability that led The Mill to pull back from feature films in 2002 despite winning a visual effects Oscar for its work on Gladiator. Today the bulk of its business is advertising, although television such as Doctor Who accounts for 10% of income.

“Our first love is advertising and we concluded that it’s difficult to serve two such different sectors equally well,” said Robin Shenfield, the chief executive. “The skills and technology are similar but the business models are completely different.”

The company, backed by Carlyle, the private equity group, had earnings of £10.5m last year on sales of £50m. Despite rising sales, margins are being squeezed in advertising as well as film.

Attempts to move effects work to cheaper markets have had teething troubles. “There are people out there doing good things whose ability to work in harmony with the US studios is not entirely clear to me,” said Colin Brown, the British film commissioner, who promotes the industry overseas.

Foreign companies are working on getting it right. Three years ago Prime Focus, a post-production house controlled by the Malhotra family of Mumbai, bought 55% of the London special effects firm VTR. To protect their position, UK firms are also investing in low-cost offshoots. “The London firms can still thrive,” Brown said. “They have phenomenally good personal relationships with senior people at the studios.”

It seems that even without Harry Potter, Britain can still make a spectacular impact on the big screen.

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