THE costs to the Exchequer of providing tax reliefs to encourage investment in film making have far outweighed the benefits, a new report has found. And although it praises the scheme, known as Section 35, for boosting the film industry, it proposes a series of radical changes to improve it.

The study, carried out by Indecon economic consultants, estimates the Exchequer benefited by between £11 million and £13.5 million in the 1945/95 period.

However, the cost of providing the incentives actually amounted to around £19.4 million. Even taking into account the additional unquantified tourism benefits, the consultants concluded that "on economic criteria it would be very hard to justify continuing the incentives in their present form".

The report was commissioned by the Department of Arts, Culture and the Gaeltacht.

The report recommends a reduction in tax relief for investors and a drive to encourage a greater level of interest by corporate investors in the market.

Indecon says that if its recommendations for modifying Section 35 had been introduced the tax cost to the Exchequer would have been reduced from £19 million to £9.8 million.

Following a study of the report, the Government did announce changes to Section 35 relief in the Budget. The main change was restricting the relief to 80 per cent of the amount invested and increasing the amount corporates could invest while availing of the relief to £2 million.

The Minister for Finance also reduced from three years to one the period for which the shares had to be held to avoid capital gains tax. Mr Quinn also retained Section 35 in respect of up to 60 per cent of projects costing up to £4 million, while reducing it for films with a larger budget

However, Indecon had called for a complete removal of the limit on the amounts corporates could invest and an increase in the investment limit for individuals from £25,000 to £50,000. The Budget made no change in the latter limit.

Indecon had also called for the relief to be more directly targeted at money spent on production in Ireland and for up to 65 per cent of spending to qualify of budgets up to £10 million.

Many of the current restrictions on Section 35 have limited the potential pool of investors and resulted in no Exchequer savings, the report claims.

It calls for the requirement that investment must be made at the investor's risk to be relaxed, but that investment must be made via a subscription for shares to continue.

The report says the Revenue Commissioners should reconsider the corporate tax regime for the film sector. Some activities qualify for a 10 per cent tax rate, but this could be extended.

The report warns that the Irish film sector is facing a number of challenges, including cost competitiveness, a limited pool of senior talent which would influence location, an absence of a film industry orientated community, labour market inflexibilities and crew shortages.

It also recommends that the industry and the Film Board try to encourage film distribution companies to locate in Ireland.