Kick Ass director-producer Matthew Vaughn proposed an interesting spin on UK tax credits last week that puts a fresh (albeit French) spin on the UK’s tax credit programme.  In short, he proposes keeping the current system in place, but removing the charitable, “government works” aspect of film tax credits by making them recoupable within the film’s waterfall structure.  In his missive, which was posted online this past weekend on Deadline: London, he suggests that the UK tax credit contribution recoup in last position and take an equity stake (profit participation) in the film.  The logic being that that the potential for recouped monies will make for a more sustainable programme, while the potential for profits will help expand it.

Over the past several years, we’ve all observed the rapid proliferation and and continuous one-upmanship of the world wide production incentive programs.  Unabated, this race for the largest percentile, has lead to a cannibalization of tax credit programs that many states and countries cannot sustain.

Vaughn makes the valid point that while the UK may not have the largest credit, they are one of the few world class production centers that share not only a common language with the US, but have an A-list talent pool, crew base, and infrastructure for both production and post.  As such, they are uniquely positioned to leverage their assets for a more favorable government program that stands to benefit the taxpayers that support it.  He further proposes that the government’s share of profits from successful films be split with the UK producer in the form of matching funds alongside the equity investor for their next film; the UK’s deal would be most favored nations (MFN) with the other equity investor and recoup pro rata, pari passu in the waterfall.

I think Vaughn is correct that the UK is one of the few territories that could conceivably make this work; however, I do not foresee the same success for any other territory that offers less that a 30% incentive.  It’s no secret that Michigan’s program is not sustainable in its current form, but I think Michigan’s (up to) 42% rebate is aggressive enough to make studios and producers suck-up the “losses” they would suffer by having to settle for super cheep money, in lieu of free money.  Louisiana, Illinois, Massachusetts, and Canada could (and should) also modify their programs accordingly.

Free money is great, but nobody wins if these programs go under.  If studios and producers are going to accept tax payer dollars, then they need to view these jurisdictions as partners, not just as blank-check locations.  By the same token, the governments need to act like financiers if they want to be treated as such.  He who has the gold, makes the rules.


  1. To be truly fiscally responsible, the incentive should be a combination of secured debt and equity. This would ensure at least some return on tax payer’s money before profits were disbursed to equity participants within the waterfall agreement.

  2. Another great post, Jeff. Thanks so much.

    After 4 years of hard nose persistence, we’ve finally been able to start some sort of screen tourism program here in Japan. While embarrassingly small in its current form ( and somewhat narrow in its scope ), it’s a step in the right direction.

    But, I can promise you that no country’s bureaucracy is as bad as Japan’s. The war stories I could tell ( and probably should ).

    • Every culture has to start somewhere and fortunately Japan has the domestic infrastructure (talent, finance, and audience) to support its screen tourism. It’s a work in progress, give it time.

  3. I found the article very interesting and on the money. We should have people like you in charge of the incentive programs. After all, it’s all about the money, if you don’t have the money, you can’t make the art.

  4. I am not sure I follow this proposal. I turned 12 this week and am failing in math. The gist, I gather, is to have tax rebates converted into equity investment by the state to prevent the state from running out of money? As soon as any level of government complicates a simple transaction it justifies expanding the civil service to manage the complication and then they’ll run out of cash that much faster. Or am I getting this totally mixed up?

    • Your skepticism is understandable, and not unfounded. It could be outsourced. But ultimately it’s just comes down to the agency having a security interest and being a signatory to the bond/intercreditor and Collection Account.

  5. You know Jeff, Louisiana some years ago (I think well over 25 years) was looking at building a set of sound stages in New Orleans using something similar to this principle/business model.

    If I recall correctly, the state was going to provide matching funds up to US$10MM for a prospective total of US$20MM to build this studio.

    Apparently, the businessman involved could not raise his portion and the project died in the swamp.

    If the states are going to take an equity position, recoup funds to go exclusively back into the tax credits structure and keep their programs afloat, I think it will have to take a studio tent pole project to get the ball rolling.

    It’s my guess the politicians will want to see megabucks come in as opposed to hundreds of little profit participations. I’m not sure.

    I agree with the comments above that the potential for expanding government agencies to manage this model, could lead to the same problems we’re having today in the U.S. gov’t./economy.

    So, I’m a producer who wants to shoot in Louisiana and take advantage of the tax credits program, let’s say on a small budget of US$10mm. Now I know I have to monitor my profits structure once the film gets distributed and the state comes along and says, “If you want to play, you gotta pay (us).”

    Then, I think the argument comes down to what percentage works for the state program to be ‘profitable’ (and I use this word in a narrow sense) and myself (as the producer) to be profitable (I guess NOW in a more narrow sense)?

    I would surmise the state will be in first position, after the distributors. How does that effect my profit participants? How does that effect me making enough so I can eat another day?

    It’s clear to me the politicians will have no clue as to what percentage would work for the state program. Hell, I wouldn’t have a clue. It would all be an educated guess. Would the first state to try this and it fails, kill off their tax incentives program?


  6. [cont]

    At first blush, I do like the idea. The states don’t have to provide these incentives. Some states have fought over budget matters. Some see it as an industry-builder, such as Louisiana.

    But, then again. I think I would certainly want to try this idea.

    • Thanks Stan. Certainly, when it comes to dealing with governments, anything is possible. As I said above, most incentives started as a form of marketing for potential tourism, but have since migrated over to industry building, immediate short term job creation, and overall public works. We all know that there’s no such thing as sustainable free money, and regrettably, many producers feel a certain entitlement to this free tax money. I think some form of this solution can potentially sustain the programs, which benefits both sides.

      The success of a program like this lies in management of the governments’ expectations. As I mentioned in my initial post, I think for now it is best suited for states that have unfair competitive advantages like CA, NY, MI, and LA (and maybe Chicago/IL, if they increase their credit or offer a buyback like LA.) Perhaps it might be easier if the state just takes a 20% return on their money — that basically removes any ROI issues from the equation.

      • Interesting idea there — 20% ROI for the states.

        Man. “Coming to America” is flashing back for me. The studios could quite possibly get into a fight with the states over what point the state comes into its money. Or, vice verse I suppose.

        Right now, Louisiana is claiming a 1.6:1 ratio multiplier, if you will, on dollars spent by productions in the state. La. relies on research, for every dollar spent by the productions, 60% more is realized by other businesses, employees, etc. throughout the state.

        Let’s say a film production budget of US$1B (don’t laugh; gawd forbid we all live long enough to see that kind of budget from a studio one day) is claimed and a 30% tax credit is claimed with the state. I figure, with my New Orleans math, that is US$300M. Now, let’s say that movie tanks and doesn’t make anywhere near it’s budget (forget about marketing/advertising), then the state would certainly run dry — sooner rather than later.

        However, according to Louisiana’s research, US$1.6B was generated in the state’s economy. It seems only through increased tax revenues generated by these spends would more than make up for the US$300M tax credit.

        I’ve rounded a lot here, left out marketing & advertising, interest and discounts. And five-finger discounts were left out. Wait. We already sent those guys to the Federal pen.

        Which leads me back in a circle — is the current system in place, adequate to sustain itself?

        Or, do the producers eat all the beignets until they’re all gone?


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