Patrick McKennaOne of the key questions coming into the Cannes Film Festival is the state of film financiers in the global marketplace. Here’s a profile of one that’s been in the news of late because of Avatar and an ongoing UK tax investigation:

It’s a space-age white reception area, with primary coloured Op Art couches and banks of modish computers. This is the entryway to Ingenious Media, considered the most pukka of all British film financiers. Office space like this, right in the heart of London’s Soho media district, doesn’t come cheap. Then again, Ingenious’ chief executive and owner Patrick McKenna can afford it. According to the Sunday Times, McKenna has a personal fortune of £520 million – up by £200 million over the past year. This soft spoken former accountant’s Ingenious really got going in the late 1990s once the government’s tax break for film investment bedded down. avatar2 narrowThe British film industry, which for years had struggled for cash, found itself awash in green stuff. Ingenious and its film partners alone invested £5 billion over the past 10 years. And just as Ingenious’ reputation was rising, so McKenna’s social stock was soaring, too. This son of a builder and a nurse has dined with the Queen, maintains a vacation home in St Tropez, is chairman of The Young Vic Theatre (there were gasps when he personally donated £1 million during a fundraiser), and was recently shortlisted to be chairman of the influential Arts Council London.

McKenna also has a reputation for being tough. And these are tough times for him and his company. In October 2006, Ingenious set up its own specialist media stockbroking arm which then had the plug pulled on it less than 2 years later. Now Ingenious Media Active Capital, Ingenious’ stock market-listed investment fund, is returning the bulk of its £60 million funds to backers after some bad investments. But that’s not all: Are the wheels wobbly on the film finance side, too?

The British press splashed the disturbing news that Her Majesty’s Revenue and Customs has written to Ingenious’ investors demanding hundreds of thousands of pounds back. Ingenious is confident it can stare down this latest tax investigation. It has told investors to appeal what HMRC is doing. In its letter (a copy of which was obtained by Deadline London), Ingenious describes the HMRC enquiry as “a routine occurrence … we have never had an enquiry close with an unsatisfactory outcome”. My source at Ingenious told me, “The only outstanding point is the commerciality of what we’ve been doing, which we’re convinced we can prove, especially with films like Avatar.”

Ah yes, Avatar. Ingenious and Dune Entertainment, the New York-based private equity firm, put up 60% of that pic’s bloated budget between them. News Corp provided the rest. Ingenious and Dune are expected to earn $600 million between them for Avatar once the film has gone through its pay-TV and DVD windows. But they’re not the only ones who made money off the film. The Sunday Times newspaper ran a piece recently telling readers how much money Ingenious’ investors had made on Avatar. David Beckham, Peter Gabriel, and Guy Ritchie were reportedly sharing a windfall of £250 million between them on an investment of £46 million. This isn’t anything new for McKenna, who set up Ingenious in 1997 to advise sports and media stars how to invest their cash. In those days, Ingenious had to hang up the names of its investors on a wall by law — The Spice Girls, Annie Lennox, David Beckham even back then.

After the Sunday Times, owned by Rupert Murdoch whose Fox studio made Avatar, lobbed that softball story towards Ingenious, the rival Mail On Sunday engaged in some classic Fleet Street hardball. The newspaper claimed that Ingenious’ investors now were facing tax demands running into the tens of thousands of pounds each. One unnamed businessman said he’d received a tax demand for more than £50,000 in the post.  “The financial community understands the complicated issues involved. The tabloids, on the other hand, just see a cocktail of celebrity and alleged tax avoidance,” my Ingenious insider maintained.

If this tax investigation goes south, it could imperil Ingenious’ credibility as a tax shelter while doing good for British film. Until now, the company has enjoyed an enviable reputation. “This is pricking the bubble a bit,” one observer told me. “People believed Ingenious worked closely with tax officials so that everything it did was allowable.”  But a film finance lawyer told me that tax officials have become tenacious. “HMRC will fight, fight, fight,” one rival film financier who’s had his own troubles with the tax man groaned. “Even the most straightforward schemes aren’t getting approval.” Because the cash-strapped British government has ordered tax collectors to claw back every pound they can find. “The days of compromise are gone,” a tax expert told me.

Also impacted by the outcome of the probe could be Fox, which has a loose arrangement with Ingenious to finance between 5 and 10 of the studio’s movies a year. Besides Avatar, Ingenious helped raise money for Percy Jackson and The A-Team. More recent investments include Gulliver’s Travels and Unstoppable.

Ingenious doesn’t just finance Hollywood films. It also puts money into around five British indie movies each year. Ingenious tried to structure some of the cash for Lionsgate’s Kick-Ass which The Guardian noted was “a British action movie with an archetypal American title, set entirely in America, shot at Pinewood and Elstree with locations in Toronto, based on a graphic novel by a British author (Mark Millar), and performed by a seamless Anglo-American cast”. Ingenious advised two private investors on how to get the biggest tax bang for their buck, but couldn’t structure the investment to everybody’s satisfaction. “It was important to get everybody’s tax incentives to add up,” director Matthew Vaughn told me, describing the financing experience as “frustrating”.

Ingenious’ latest UK investment has been Bel Ami, the adaptation of the French classic that has just wrapped in Budapest starring Twilight saga star Robert Pattinson, Uma Thurman, Kristin Scott-Thomas and Christina Ricci. The film is produced by Uberto Pasolini (The Full Monty) and exec produced by Simon Fuller of 19 Entertainment. But James Clayton, COO of Ingenious Media, told me the problem is finding British films which will be released overseas. “If you’re taking an equity risk you need to have confidence it will sell internationally.”

Ingenious is also a shareholder in Protagonist Pictures, the sales agent it owns with Channel 4 and Vertigo Films.