Hidden Tax Rises: The making of the movies

Hilary Clarke meets a film distributor who owes his stab at silver screen glory to a Budget initiative

Simon Franks has had first-hand experience of how government can help business. The 28-year-old investment banker turned film entrepreneur says that without the Enterprise Investment Scheme (EIS), his film distribution company, Quantum Entertainment Distribution (QED), would probably never have got off the ground.

The EIS, set up by former chancellor Kenneth Clarke, gives hefty tax relief to investors in start-up companies.

"We didn't think we'd get the tax break we got: if we hadn't got it, I doubt we'd have been able to go ahead with the company," says Franks. "This scheme makes investment so tax-efficient, it's worth taking that risk. And the rewards for shareholders are massive. Some of them effectively paid 40p for shares worth pounds 1. And any profits are tax-free," says Franks.

Hollywood knows all about tax breaks. It was the generosity of the State of California that enabled the industry there to grow in the 1940s and 1950s. Franks, while not aiming to take on Hollywood, is hoping to build a profitable, UK film distribution company in this country. With an abundance of energy and unflagging confidence in his abilities, Franks might just make it. And he is well used to the cut and thrust of business. He worked for J P Morgan and Paribas before seting up his own business.

This week, QED announced it is selling a stake to Redbus Investments - the venture capital company set up by internet entrepreneur Cliff Stanford - and is changing its name to Redbus Film Distribution.

"Once you are an investment banker, you understand how debt and finance works," Franks says, "so it doesn't matter if you are financing a building, a supermarket or a film - it's all the same thing. I can get the money and I know how to structure the deal so that investors can see there will be a good return and not too much risk."

For financial inspiration, Simons need look no further than through his Hampstead flat window. The apartment looks down on the offices of hedge fund guru Nick Roditi, George Soros's main man in Britain and reportedly the UK's highest-paid executive. Franks named his company after Soros's flagship Quantum investment fund.

Franks's partner in the business is Zygi Kamasa, a film producer who raised pounds 350,000 for one of his films, The Scarlet Tunic, by offering investors the chance of appearing as an extra. Redbus Film Distribution's chairman is Larry Chrisfield, a partner in Ernst & Young and chairman of the British Film Commission. With such a team, Franks can't see how the business can fail.

"If you speak to independent US producers, they all say: `At last there will be somewhere we can go, apart from entertainment films.' There are so few people in this country they can go to. Big companies, like hundreds of millions of dollar companies, still have problems distributing films. The UK is one of the hardest territories to sell a film to."

That might be so, but, according to Franks, the fact there are so few film distributors (two of them, Rank and First Independent, closed down last year) presents a great opportunity to build up a substantial film library. The Hollywood majors have their own distribution network through their joint venture, United International Pictures, but the company rarely takes on an independent UK film. Neither is the distribution arm of PolyGram (recently bought by Seagram, owners of Universal studios) considered an independent distributor, because most of the films it distributes and markets are in-house productions.

"We will certainly be the second largest independent distributor in the country right away in terms of the money we have," says Franks. "The beauty of that is that film rights in this country are cheap and the value of those rights will grow as we see a greater saturation of pay-per-view television and the advance of digital television.

"We still have low saturation in this country, compared to America. There will be more and more demand for film products and that pushes up the value of the rights. We've seen that in America, where people like Ted Turner have spent $1bn (pounds 625m) on MGM's film library and everyone said he was crazy. Three or four years later, it's yielding 40 per cent. A film library is like a bond. You have an income stream coming in every year and you can sell it and sell it again."

Redbus Film Distribution plans to look at several acquisitions leading up to the Cannes film festival in May and plans to release five films before the end of the year.

"We hope to become the first port of call for every UK film producer," says Franks.

He says the thing lacking in the UK film industry is a company that has managed to stay around for more than five years. "The sad thing about the British film industry, if you look at companies like Goldcrest [Chariots of Fire], is that they do some great films and then go bust."

So how does he intend to stay the course? "All I have to do is prove that we are sensible and clever in running a business. That means not going crazy with a lot of expenses, like having plush offices or doing parties for hundreds of people I don't care about. And saying no to projects sometimes," he says.

If these disciplines are adhered to, then Franks believes "going to the City and raising another $50m shouldn't be a problem."

Let's hope for his sake that he's right.