The British film industry will suffer a "dramatic" fall in output if the chancellor, Gordon Brown, today closes down a tax relief used by film-makers, the independent production community warned yesterday.

The Treasury is expected to end the practice of "double dipping", whereby film producers claim tax relief twice on the same production. The Inland Revenue warned film-makers in a meeting last week that it was "exasperated" by the practice.

Pact, the trade body representing independent television and film producers, said it understood the outlawing of double-dipping will be announced today and implemented immediately, throwing the industry into "chaos".

"The independent sector is not well placed to weather this attack and the further uncertainty and instability that will be created. There is likely to be a dramatic reduction in the production of indigenous British films," Pact said in a statement yesterday.

Film producers are anxious to avoid a repeat of events in February, when the Inland Revenue shut down a tax loophole that triggered the collapse of several British productions, including an adaptation of the novel Tulip Fever.

Double dipping is used extensively in UK film production and was a crucial component of the funding for a forthcoming screen version of Phantom of the Opera, a film shot in Britain.

The practice, in which tax relief is claimed on the production cost and the sale and leaseback of the final print, can account for up to 40% of a film's budget.

Double dipping is not illegal, but the Revenue believes it is not in the "spirit" of tax law. Producers were hoping the chancellor would announce a crackdown on the more extreme practices of double dipping but it is understood the loophole will be closed entirely.

Tax relief is accessed through the section 48 code, for films with budgets under £15m, and section 48 for UK-filmed blockbusters. Section 48 will be replaced by a new tax credit in 2006.