Jim Henson's Creature Shop, which has produced animatronics for films including The Dark Crystal, Labyrinthand Five Children and It, is believed to have issued notices to staff at the beginning of the month. The company won two Academy Awards for its visual effects and animatronics on the 1996 hit film Babe.
It is understood that the company had to shut up shop partly due to a reduction of foreign feature film work, which has been attributed to last year's tax changes. The shift from animatronics to computer-generated effects, such as the images seen on Walking With Dinosaurs, is also believed to have played a part in the Henson Company's decision.
UK film tax regulations section 42 and 48 allowed for 100% tax relief against production costs on films that cost less than£15m. Films with budgets over£15m could write off expenditure over three years.
When the tax relief rules were withdrawn for review last year it caused US producers - with millions of dollars to spend - to think twice about coming to the UK. Since the changes were made last year there has been a large drop in confidence and the amount of films produced in the UK.
Cinesite managing director Colin Brown, said: "No one's mad with the government. They've said that they want to support a sustainable film industry but we have to remove the uncertainty over the tax breaks as quickly as possible. Decisions will be made in the next 3 to 4 months about where producers will take films which will dictate our business for next year."
Although CGI and digital effects have undoubtedly taken their toll on the physical effects market, industry sources suggest that the company was forced to call it a day because of the combination of the change in film investment tax laws and the weak dollar exchange rate for Hollywood producers.
Mike Kelt, managing director of animatronics and physical effects company Artem, said: "Behind the scenes the tax changes are catastrophic and the entire industry is highly concerned. There will be other companies that go to the wall, without a doubt, because of them. The foreign investment is just not there."
Other post-production bosses say that they have felt the pinch but are "hibernating" and waiting for the news this autumn - when a government discussion document is drawn up - that the tax laws will change for the better.
No one from Jim Henson's Creature Shop was available for comment.