The Revenue has slammed the door once and for all on tax schemes that allowed private investors to reduce their income tax bill through investment in film.

Legislation in this week’s Budget shut down a number of schemes that worked by creating trading losses that investors could use to save tax on other income. This was an extension to tough measures introduced a year ago, to stamp out widely-used partnership schemes.

Partnership schemes had been used to fund films such as Casino Royale, and had helped investors mitigate or defer millions of pounds worth of tax each year. Some film scheme promoters had found a way around the rules, however, by promoting “sole trader” plans rather than partnerships. These worked on a similar basis but required higher minimum investments.

The latest legislation is wide enough to catch any remaining tax mitigation schemes that were set up to use “sideways loss relief” – the ability to set trading losses against other income to gain tax relief.

So the new rules have hit schemes that were set up by individual traders as well as partnerships. Sideways loss relief is no longer available for any scheme member unless they are “active”, which means spending at least 10 hours a week working for the scheme.

“The new measures are designed to exclude most high-earning people who do not have 10 hours per week to spare,” says Martin Sherwood, director at Smith & Williamson.

Financial advisers had not expected the Revenue to take quite such drastic action.

Richard Rhys, chief executive of MNFA, a financial adviser, says that to some extent the government has already achieved what it set out to do. “The Treasury has already quite seriously reduced tax avoidance – the market is nowhere near as big as it was,” he says.

What really irked the government was the fact that retail investors were gaining access to this type of complex tax planning.

Film schemes and some other similar plans that invested in research and development should only have been available for very sophisticated investors. But some schemes were attracting investors who did not fully understand the risks. The potential for borrowing also meant some scheme members were gaining more in tax relief than they were actually investing.

The obliteration of these schemes now leaves few options for investors looking to mitigate income tax.

Tax experts say the only real opportunities left are the less generous Revenue-approved schemes such as venture capital trusts (VCTs), enterprise investment schemes (EISs) and pensions.

“These are less efficient at saving income tax but are much safer as you are certain to get the tax relief,” says Sherwood.

EISs, which invest in start-ups, were given a boost by the chancellor, who extended the annual contribution allowance by £100,000 to £500,000. Investors receive 20 per cent income tax relief on payments up to this level.

The government is keen to encourage investment into new businesses and is willing to offer tax incentives for the additional investor risk. But in the current market, investors are extremely wary of taking this extra risk.

“It has been a terrible January and February,” says Sherwood. “People have been deterred by the economic uncertainty and uncertainty about changes in the Budget.”

Some VCT managers say the volatile markets and a slower economy will create an opportunity to buy into smaller companies at lower valuations. Mark Wignall, chief executive of Matrix Private Equity, says: “The slowdown in economic growth and highly volatile markets will feed through to ideal conditions for buying into companies at much lower prices later this year.”

Take-up so far has been substantially lower this tax year than last, however. Sherwood estimates that investment into VCTs this year, which offer 30 per cent income tax relief, has totalled around £75m so far. Last year some £260m flowed into VCTs, which was low compared with the previous year.

Sherwood hopes investment into EISs will pick up in coming weeks. One benefit EISs have over VCTs is that they allow investors to defer capital gains tax on previous gains. These schemes could therefore see a burst of demand from investors who have paid 40 per cent on gains in the past three years. These gains could be effectively recycled into an EIS and, following the confirmation in the Budget of the new lower rate of CGT from April, would only be liable for 18 per cent tax on exit.

But Stephen Herring, tax partner at BDO Stoy Hayward, still doesn’t think the changes have gone far enough to stimulate investor demand. “It was hoped the EIS income tax relief would have risen to 30 per cent to compensate investors for the higher risk they are taking and match the relief given to VCT investors,” he says.

The government has launched a consultation into how EISs can be improved.

Andy Gadd, head of research at Lighthouse Group, the financial adviser, says he was cautious about whether sole trader-type schemes would ultimately be accepted by the Revenue. However, he does not rule out the emergence of new schemes to help investors to mitigate their income tax burden.

“Until the dust settles, we won’t know exactly what is left for investors,” he says. “But there will always be a clever accountant who will come up with some sort of scheme. We could see new schemes coming to market after April that try to turn income into capital gains, for example, to benefit from the new 18 per cent CGT rate.”

Dean McCarthy, associate partner at Cobalt Capital, believes strong demand from high earners will lead to further opportunities opening up in the next tax year.

“Demand for tax mitigation is very much there from bigger earners in City,” he says. “Bonuses are down this year so investors will be looking for ways to increase their cash flow.”