2 A Games Tax Relief
Background to the proposal for
a games tax relief
31. In August 2009, the Independent Game Developers'
Association (TIGA), a trade association representing the UK games
industry, submitted a proposal to the UK Government to introduce
a games tax relief.[43]
Dr Richard Wilson, Chief Executive of TIGA, told us that "we
want to be able to compete on a level playing field and the best
way to do that would be with the games tax relief."[44]
32. TIGA proposed a tax relief that would cover any
company in the UK paying corporation tax, and with a budget of
£100,000 or more. They calculated that:
[...] over a five-year period a games tax relief
would more than pay for itself. It would generate £415 million
in tax receipts for the Treasury, from an outlay of £192
million [...] it would also lead to additional investment in the
sector over a five-year period to the tune of £457 million,
and it would create about 3,500 graduate-level jobs.[45]
33. However, HM Treasury disagreed with some of these
figures. We were told that the Treasury's calculation of the cost
of the relief was:
[...] broadly consistent with the level of tax relief
which TIGA had asked for in its submissions. The question of what
the fiscal impact would be of any relief [...] is more difficult
[...] the assumptions on which they are predicated we would disagree
with [...] the assumption about the creation of a job actually
being an addition to the UK economy and hence an addition to our
revenues we just do not accept.[46]
Supplementary evidence from HM Treasury argued that
"it is likely that the estimates provided in the research
commissioned by TIGA, at the very least overestimate the impacts
of introducing a sector specific incentive for the video games
industry."[47]
CULTURAL TEST
34. Dr Wilson explained that, due to EU rules, applications
would need to pass a cultural test in order to benefit from a
games tax relief:
You would, for example, get points for using new
technology, for having your production staff based in the United
Kingdom, for if your game was a new game rather than a sequel,
for using new technology, or for basing it on an aspect of British
or European heritagethat could be a book, film, historical
event or sport.[48]
35. He also told us that TIGA:
[...] ran a test involving 18 games last year, just
to see how it worked out [...] we found that out of those 18 titles,
about 44% passed [...] we imagine that if the games tax relief
was introduced, clearly games companies would try to make sure
that they could benefit from the tax break and pass the cultural
test, so we think that a higher proportion would pass eventually.[49]
IMPACT OF TAX RELIEF IN OTHER COUNTRIES
36. Several countries currently offer a tax relief
for this sector, notably Canada, France and the USA. The NESTA
report, The Innovation Game, looked in-depth at the tax
breaks offered in Canada and France:
Montreal has a tax credit for the production of multimedia
(rebate up to 37.5% on 90% of all eligible expenditure) and France
has a production tax credit for cultural video games of 20% of
qualifying labour expenditure for projects that pass a cultural
test. France spent 170 million in 2008; Montreal spent £500
million between 2004 and 2008 (including tax credits and other
grants.)[50]
37. Other countries such as Japan and Finland do
not offer tax credits but do offer other financial incentives.
NESTA said:
[...] many territories provide additional incentives
for video games development: they entice foreign experts with
tax holidays, support independent video games studios with Intellectual
Property Development Funds and directly subsidise publisher investments
in their territories. In some cases, such as British Columbia,
they also favour investments in the sector through tax incentives
for venture capitalists.[51]
38. Looking at the impact of the tax relief, TIGA
note that "in the mid-1990s, Canada was a minor video games
development location, only just starting to benefit from its location
next to the world's largest video games market [...] by 2006,
Canada had leap-frogged Britain to take third place in the global
sales rankings."[52]
This significant change has been attributed to tax relief.[53]
POTENTIAL BENEFITS OF A GAMES TAX
RELIEF
39. In 2009 NESTA commissioned It's Time to Play:
A Survey on the impact of a tax credit for cultural video games
in the UK development sector. The report surveyed 30 leading
British video games developers, publishers and sources of funding.
It found that: "most respondents to the survey believe that
a tax credit for cultural games would benefit the UK video games
industry in a number of ways, principally by improving growth,
widening investment prospects, and supporting creativity and innovation."[54]
Dr Wilson argued that: "with games tax relief in place, there
are powerful incentives for overseas publishers to invest in Scotland
[...] or the rest of the UK. There are strong financial measures
in place, flowing from games tax relief, to enable indigenous
developers to grow their firms."[55]
Opposition to a tax relief
40. A games tax relief is not universally supported.
Ed Vaizey reminded us that "not everyone in the video games
industry necessarily thought the tax credit was a good idea."[56]
41. One criticism of the proposed tax relief is that
it would mainly benefit large, multi-national companies, with
the added risk that these companies would leave if and when the
tax break was removed. Linked to this is the argument that start-up
companies would not benefit from the relief. Mr Paul Durrant,
Abertay University, said that "one of the challenges with
a measure such as games tax relief is that it sometimes comes
in a little way into the development cycle. It is a retrospective
benefit that does not always bring the immediate cash-flow benefits
that a SME games developer, particularly a smaller micro-business,
might seek."[57]
42. It has also been argued that a tax relief would
not help in either the generation or retention of intellectual
property, which are priorities for the industry. In 2008, NESTA
commissioned a report assessing the competitiveness of the UK's
games development sector and the impact of governmental support
in other countries. Their report, Raise the Game, noted
that "while tax incentives have been very effective in encouraging
investment into Quebec, they have not been targeted at the creation
of new intellectual property by Canadian-owned studios, whose
original ideas remain weak."[58]
43. The call for a games tax relief in the UK is
a response to the effects of subsidies in other countries. The
Minister told us that "if you take a step back to how we
got in a position where we are effectively talking about tax breaks,
it was all effectively down to Canada. So if Canada wasn't doing
what it was doing I am not sure it would be so high on the political
agenda."[59] The
introduction of tax relief to compete with other countries is
not guaranteed to succeed and has inherent risks. The Treasury
do not think that "it is efficient on either a global or
a national level to enter into economic competition [...] orthodox
advice would be not to seek to retaliate simply because you get
into mutually assured destruction territory."[60]
The UK's fall to possibly sixth place in the global games rankings
puts the country behind Japan and South Korea, both of which:
[...] are still at the top of the global rankings
without bespoke, large-scale support for video games companies.
German studios too have attained healthy rates of growth in spite
of their government's apathy [...] towards video games. Similarly,
the Nordic countries and Australia have established themselves
on the global map of video games development, and attracted substantial
levels of foreign investment, without the sort of measures available
in Canada and France.[61]
The NESTA report, whilst generally in support of
tax relief, concluded that "the tax credit is no panacea
to the problems faced by the UK video games sector."[62]
It was also argued that the
'cultural' element to the proposed relief could produce commercial
incentives for companies to produce games to qualify for the credit
instead of games which consumers wanted to buy.[63]
44. There
are also concerns over the benefit of such a relief for smaller,
indigenous companies, and how it would impact on intellectual
property creation and the skills shortage. A tax relief is not
the sole factor for investors; other cost factors and skills are
also crucial elements in deciding where to locate a business.
We accept that it is impossible to guarantee the impact that a
tax relief would have in the UK.
Government position on a tax
relief
45. Before the 2010 general election, the Conservative,
Liberal Democrat, Labour and Scottish National parties all signalled
their support for a games tax relief. The then Chancellor, Rt
Hon Alistair Darling MP, stated in the March 2010 budget that
"our creative industries are also a huge source of jobs,
wealth and pride. I will offer help to the computer games sector,
similar to the steps that are helping to restore the fortunes
of the British film industry."[64]
46. On March 29 2010, Ed Vaizey, the then shadow
Minister for the Department for Culture, Media and Sport, told
Develop magazine that the Conservatives "are going to support
tax breaks for the industry."[65]
On April 26 he added that "we are fully behind game tax breaks.
This is my unequivocal statement [...] it's been approved by [then
shadow Chancellor] George Osborne."[66]
On April 30, Don Foster MP, the then Liberal Democrat shadow Secretary
of State for Culture, Media and Sport, said in a statement to
TIGA that "Liberal Democrats support the introduction of
a games tax relief. Following consultation on the details, we
would implement the relief as soon as possible."[67]
The Rt Hon George Osborne MP, Chancellor of the Exchequer, announced
as part of the Budget on 22 June 2010 that "we will not go
ahead with the poorly targeted tax relief for the video games
industry."[68] On
27 October, the Prime Minister was asked why the Government reneged
on their promise to introduce a games tax relief. He replied:
"we had to make difficult decisions about tax relief [...]
I am afraid that that tax relief, which was not particularly successful
or well targeted, must go."[69]
47. We asked Mr Vaizey why support for a tax relief
was expressed before the election and opinion changed so quickly
after the election. Mr Vaizey replied that "to put it completely
bluntly, as far as I am concerned, after the election all bets
were off in terms of the financial situation and in terms of how
the Chancellor wanted to approach his budget."[70]
He added "do I, as a matter of principle, think that tax
credits are a good thing? Not necessarily. Did I, as shadow Minister
[...] take a view that we were effectively in tax competition
with other jurisdictions? Yes quite possibly."[71]
48. The Association for UK Interactive Entertainment
told us that "no detailed explanation has been given to date
for why these tax breaks are now considered to be 'poorly targeted'."[72]
In evidence, Edward Troup of HM Treasury, said "I am not
sure I would say [a games tax relief] was poorly targeted. It
was targeted at the video games industry."[73]
We asked Mr Vaizey why the tax break was described as "poorly
targeted." He replied "I can't clarify the position
for you. I didn't get a chance to lobby the Treasury directly
on the video games tax break. I lobbied indirectly and made my
views known, but I wasn't aware the Treasury regarded the tax
break as poorly targeted."[74]
UK FILM TAX RELIEF
49. In the 1990s the UK Government introduced a tax
credit for the film industry. This tax credit currently costs
£110 million per year.[75]
The games tax relief is estimated to cost £192 million over
five years. Although the Government decided not to proceed with
the games tax relief, the film tax relief will not be abolished.
When this issue was raised with the Minster, he replied "I
think it is a historic issue [...] I think an existing tax credit
is in a stronger position than one that doesn't exist."[76]
50. A games
tax relief would cost less than the tax credit currently awarded
to the film industry. The Government has tried to explain away
the existence of a film tax credit in contrast to the resistance
to a games tax credit as a matter of politics and history. This
is a poor argument for seemingly favouring a mature industry over
an emerging one. Inertia is a poor justification for the status
quo. We highlight the inconsistency in the Government's approach
to the two industries and draw this anomaly to the Government's
attention. We believe that a cost benefit analysis should be done
of the video games industry and the film industry to see which
gives the better value for money.
Consultation
51. A major issue regarding the Government's decision
to abandon a games tax relief is that of consultation. Dr Wilson
was "disappointed that we weren't able to have meetings with
Ministers, even for just five minutes, before the Budget, which
I think was unfortunate,"[77]
and Edward Troup confirmed that between March 2010 and the June
2010 Budget, "the industry spoke to Treasury officials, but
there were no meetings."[78]
52. Ed Vaizey described his job as being "to
support this industry as much as I can."[79]
In relation to the games tax relief, however, Mr Vaizey told us
"I didn't get the chance to lobby the Treasury directly on
the video games tax break. I lobbied indirectly and made my views
known."[80] It appears
that Mr Vaizey was not consulted by the Chancellor before the
proposed tax relief was abolished. When pressed on this issue,
Mr Vaizey replied "I am quite low down on the food chain."[81]
53. Prior to
the general election the Conservative, Liberal Democrat, Labour
and Scottish National parties supported the principle of a games
tax relief. Given this consensus across the political landscape,
the industry could have reasonably expected the introduction of
such a tax relief, and would have planned accordingly. However,
in its first budget, the Government changed its position.
54. The Minister
responsible for the video games industry should make representations
at the heart of Government on behalf of this economically and
culturally important industry. We are surprised and disappointed
that the Minister was only able to lobby the Treasury indirectly
on the games tax relief. We expect the industry to be better represented
in future within Government. We invite the Government to explain
in its response to this Report how it will ensure that the voice
of the industry is properly represented in future and give an
undertaking that this experience will not be repeated.
The future of tax relief
55. The
Chancellor described the proposed tax relief as "poorly targeted",
prompting debate over the meaning of the phrase. The proposed
tax relief was specifically targeted to the UK video games industry;
in this sense, it was well-targeted. The real issue is whether
the tax relief is value-for-money and would alleviate many of
the structural problems in the UK sector; those being generating
and retaining IP, self-publishing and aiding start-ups.
56. There are
both compelling arguments for a tax relief, most notably in the
lessons of the effect such a relief has had in Canada, and real
concerns. The Committee is divided over the issue of tax relief
for the industry and we are unlikely to come to a consensus on
this issue. There is disagreement between HM Treasury and games
industry representatives over the financial benefit of a games
tax relief. We recognise, however, that the UK Government has
ruled out a tax relief for the foreseeable future, and the current
fiscal environment means this view is unlikely to change in the
short-term.
57. We recommend
that the possibility of introducing a tax relief be kept under
review, and the health of the industry be monitored for the potentially
malign effects of uneven international competition. We recommend
that the Government, meanwhile, undertake a full and comprehensive
assessment to determine the benefits of such a relief, as well
as examining those countries whose industries continue to flourish
without Government support.
43 TIGA, Investing in the Future: a Tax Relief for
the UK Video Games Development Sector, August 2009 Back
44
Q 43 Back
45
Q 8 Back
46
Q 159 Back
47
Ev 59 Back
48
Q 83 Back
49
Q 32 Back
50
NESTA, The Innovation Game, Adjusting the R&D Tax Credit:
boosting innovation in the UK video games industry, October
2010 Back
51
Ibid. Back
52
TIGA, Investing in the Future: a Tax Relief for the UK Video
Games Development Sector, August 2009 Back
53
Q 67 Back
54
NESTA, It's Time to Play, A Survey on the impact of a tax credit
for cultural video games in the UK development sector, 2009 Back
55
Q 8 Back
56
Q 205 Back
57
Q 94 Back
58
NESTA, Raise the Game, December 2008 Back
59
Q 217 Back
60
Q 162 Back
61
NESTA, The Innovation Game: Adjusting the R&D Tax Credit:
boosting innovation in the UK video games industry, October
2010 Back
62
NESTA, It's Time to Play, A Survey on the impact of a tax credit
for cultural video games in the UK development sector, 2009 Back
63
Ev w13 Back
64
HC Deb, 24 March 2010, col 261 Back
65
"Tories: We'll offer tax breaks in our first budget",
www.develop-online.net. Tuesday 30 March 2010 Back
66
"Tories: you have to trust us on game tax breaks",
www.develop-online.net. Monday 26 April 2010 Back
67
Ev 55 Back
68
HC Deb, 22 June 2010, col 175 Back
69
HC Deb, 27 October 2010, col 311 Back
70
Q 185 Back
71
Q 187 Back
72
Ev 49 Back
73
Q 138 Back
74
Q 186 Back
75
Q 143 Back
76
Q 202 Back
77
Q 89 Back
78
Q 150 Back
79
Q 211 Back
80
Q 186 Back
81
Q 213 Back
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