Hollywood film-makers are threatening to snub Britain after the Government’s decision to withdraw tax breaks for films that are not “culturally British”.

The Times has learnt that new rules imposed by the European Commission would mean films such as Star Wars, Caligula and Batman Begins — which were all made in Britain — would not qualify in future for a tax break because the storyline is not set in Britain.

Now all films hoping for a subsidy from the Treasury must pass a test set by the Department for Culture, Media and Sport and approved by the European Commission. The test examines where the action is set and whether it is based on a British story. Under the changes insisted on by Europe, the actual location of the filming is of comparatively little importance in deciding whether a film is British and can receive a share of the £120 million offered by Government.

The Conservatives said last night that the situation was ridiculous and blamed the French for arm-twisting the European Union to protect their national interest.

The move has also provoked a furious response from the film industry. Critics say that the market is saturated with films of British novels, such as Philip Pullman’s His Dark Materials and the Harry Potter series. Both the adaptation of the Pullman novels and the Harry Potter series would be likely to pass the cultural test.

However, the British industry is still at risk from foreign competition. Other countries offer greater incentives to Hollywood film-makers.

The announcement is being seen as another disincentive for American studios, who already face high exchange rates. Individual states in the US are increasingly making use of tax breaks.

Ian Thomson, a consultant who works with film financiers, said: “My clients are looking seriously at the benefits of making British films. They are very keen to support British film — such as Carry On London. However, if that film is a success, if we then decide to do Carry On Morocco, we’re not going to benefit from the tax credit.

“At a time when British film is at such a high ebb — we’ve got The Queen, The Last King of Scotland, the Harry Potter franchise and Pullman novels — what is the point in doing this?”

Another industry source said: “Although many films will get through the new cultural test, some will not, with direct consequences for employment and the skills base.”

According to the journal Screen Finance, there are already 20 films in production that are relying on receiving the tax credit. The updated “cultural test” will be voted on in Parliament tomorrow.

Ed Vaizey, the Shadow Arts Minister, said that the situation was unsatisfactory. “This is a mess of the Government’s own making. Europe has forced them to adopt the cultural test, which could significantly threaten inward investment into the British film industry.”

Shaun Woodward, the Creative Industries Minister, insisted that the revised scheme would be good for British productions, both independent and large studio. “The cultural test will ensure that every film qualifying for tax relief either reflects or contributes to furthering British culture,” he said.

Cultural imperatives - the Government's criteria

Films must score at least 16 out of 31 points to qualify for the tax break

Cultural content

1 Where is the film set?
4 points if at least 75 per cent of the film set in Britain

2 Are the lead characters British?
4 points if more than two out of the three lead characters are British citizens or residents; 1 point if one of the three lead characters is British

3 Is the film based on British subject matter?
4 points if it is, or is based on a story written by a British citizen or resident

4 Is the original dialogue recorded mainly in English?
4 points if at least 75 per cent of the dialogue is in English; 3 for 66 per cent; 2 points for 50 per cent; 1 point for 25 per cent.

Cultural contribution

Up to 4 points for the promotion and development of British culture

Cultural hubs

Up to 3 points according to how much of the film is made in Britain

Cultural practitioners

There is 1 point available if each of the following are from the EU: the director, scriptwriter, producer, composer, lead actors, key staff, majority of crew.

Source: DCMS