British film productions face the final cut after taxman's sudden move wipes out vital funding

Silence could fall today on the sets on some of the highest profile movies to be made in Britain in recent years.

Despite the fact that 2003 was the British film industry's best ever year a financial crisis threatens to pull the plug on projects starring Jude Law, John Malkovich and Johnny Depp.

Ten days ago, out of the blue, the Inland Revenue changed the rules by ending tax relief on money invested in films and, at a stroke, wiped out millions of pounds on which producers were depending. The impasse remained unresolved last night.

Desperate pleas from the Film Council for interim support for film-makers expecting to go into production in the next few days have fallen on deaf ears.

Up to 20 films are thought to be under threat in the coming weeks. And the jobs of an estimated 230 people are on the line immediately as payday falls for the two most pressing projects.

Alison Owen, a producer who has spent six years raising £45m to film Deborah Moggach's book Tulip Fever with Jude Law and Keira Knightley - adapted by Tom Stoppard and to be directed by Shakespeare in Love's John Madden - has said she will have to give notice to 80 people today if no last-minute reprieve is forthcoming. The Libertine, a £12m production starring Johnny Depp, John Malkovich and Samantha Morton, faces a more precarious fate. About 150 people were due to be employed on filming in the UK for eight weeks - starting Sunday.

The scrapping of tax equity funds is to stop City firms using the British film industry to avoid paying tax through the formation of investment partnerships which promise tax-free profits if a movie project is successful.

Insiders warn that the potential long-term damage will be worse. Big players, such as the American producer Harvey Weinstein of Miramax, looked genuinely perplexed that such peremptory action was possible when they arrived for the Baftas on Sunday. Some warn that foreign investors have been shaken by the notion that British tax rules can be changed, without warning, in this case removing 30 per cent of a film's budget.

Colin Leventhal, of Grosvenor Park, which is investing in The Libertine and other films through one of the tax partnership schemes the Inland Revenue outlawed on 10 February, said the move was a body blow to the industry because so many films were due to start shooting. He said: "In the long term, it is serious because it doesn't exactly create stability."

The statement from the Inland Revenue said: "This legislation will not prevent film-makers benefiting from film tax relief ... Any legitimate film-makers who have not sought to avoid tax have nothing to fear."

But Mr Leventhal said it had left many baffled. The list of big names attached to threatened projects would appear to make them "legitimate" to any lay person.

The partnership set up by Grosvenor Park was investing in seven films due to start shooting before 7 April and a further 15 were in planning. They included On A Clear Day, a story in The Full Monty mould starring Peter Mullan and Brenda Blethyn, which was to start shooting on 1 April; The River King, a thriller featuring Ed Burns, which had been slated to start a week on Monday; and The Truth About Love, a romantic comedy with Jennifer Love Hewitt, Dougray Scott and Jimi Mistry, due to begin filming in Bristol, the constituency of Dawn Primarolo, the Paymaster General who announced the change on 22 March.

One production, Man To Man, went ahead on Wednesday anyway because Kristin Scott Thomas, Joseph Fiennes and the entire crew were already in South Africa. But the project, which was also to film in Scotland, could now collapse.

Part of the problem appears to have been the tendency towards late paperwork in film production. Tulip Fever would not be in limbo had the Inland Revenue made their announcement on Wednesday as the deal would have been signed. "It is highly unusual in the film business for all the financing documentation on a complex film to be signed much before the start of principal photography," Mr Levanthal said.

The films are unlikely to be able to replace the lost investment. One source said: "The reason people are using the tax partnerships is because there isn't an infinite pool of money." But Mr Levanthal said: "We can't put our private investors' money into the production in the knowledge that the basis on which they gave us the money has changed."

Film is now a major money-spinner for Britain with £1.17bn spent on nearly 180 movies last year, yet one producer pointed out bitterly that film was to be the loser. "They want to punish rich people avoiding taxes, but don't these people always find a way of avoiding taxes?"

The issue is particularly sensitive for the film industry because leaders do not want to jeopardise a much bigger long-term prize, which is the extension of Section 48, a tax relief for films with budgets of less than £15m. It is due to expire in 2005 and the Government has been encouraging about the likelihood of renewal.

Besides, many regarded the tax relief now ended by the Inland Revenue as ineffective and accepted it was open to abuse. What they wanted was help targeted at film - possibly linking production to distribution to create a quality threshold as no one can distribute a dud.

David Thompon, head of BBC Films, said: "We feel very strongly about the lack of notice. To get a film going, people have to spend money and they do so on a certain basis." He said it was "pure good luck" that they themselves were not being hit by the sudden change.

Russ Smith, The Libertine's producer whose previous films include Ghost World and The Man in the Iron Mask, was unwilling to comment. But he admitted: "This is the most screwed up situation I've ever seen in 15 years of movie-making."