Video games industry in Scotland - Scottish Affairs Committee Contents


3  Adapting and extending the support currently available to the industry

Research and Development tax credits

58. Research and development (R&D) relief is a corporation tax relief. There are two schemes for claiming relief, depending on the size of the company or organisation:

  • The Small or Medium-sized Enterprise (SME) Scheme
  • The Large Company Scheme

A company or organisation can only claim for R&D relief if it is liable for corporation tax and if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty—and not simply an advance in its own state of knowledge or capability.[82]

59. We endorse the view of National Endowment for Science, Technology and the Arts (NESTA) that:

The Research and Development (R&D) Tax Relief scheme needs to be made more relevant for UK video games companies: Innovation in technologies, content and business models can make UK video games companies more productive and efficient, and enable to develop the new products and services to stay ahead of the international competition. By supporting the innovative activities of UK video games companies, policy can help the sector to step away from an unsustainable 'race to the bottom' on the basis of costs, and instead continue at the top through the creativity and technical excellence that drove it there on the first place.

The R&D Tax Relief scheme is one of the main mechanisms through which the UK government encourages innovation in the private sector. However, many innovative video games companies are unaware of its existence, or face substantial barriers in benefiting from it. The way that the credit is configured means that it is particularly hard for video games companies with distinctive innovation processes to prepare claims, or get them approved; these companies usually lack the scale or in-house resource to access the legal and tax-related expertise required to prepare their claims.[83]

60. Several other submissions to the Committee's inquiry focussed on the R&D tax relief. Dundee City Council recommended an "extension of the current R&D Tax Credits system to include 'the creation of intellectual property suitable for export'";[84] UKIE suggested a "modification of the R&D tax credit to ensure that the video games industry can make full use of it,"[85] and TIGA stated that "R&D tax credits should be retained and enhanced."[86] Dr Wilson from TIGA told us that:

[...] at the moment, R and D tax credits [are] very much focused on technological improvements, and they are designed to give tax relief to technological or scientific improvements... [what TIGA would like to see] is the R and D tax credits being made more generous. At the moment, for every £1 of qualifying R and D expenditure, you can get £1.75 back. For example, you could—the Dyson report suggested this as well—raise the qualifying amount to £2, so that for every £1 of qualifying expenditure you might get £2 back in R and D tax relief.[87]

61. Edward Troup, Managing Director, Budget, Tax and Welfare, HM Treasury, explained that:

[...] of the R&D tax credit, in the most recent year for which we have got data, about £50 million of the £700 million or £800 million of support went to software development. So it is not as if the industry isn't already able to access some support. But we do see this as an important broader plank in supporting a whole range of industries but particularly in the intellectual property field.[88]

62. On 18 October 2010, NESTA published The Innovation Games: Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, which recommended:

[...] modifications to the R&D tax credit that would remove unintended obstacles that make it harder for UK video games companies to benefit from the scheme. By grounding our policy recommendations in the distinct nature of the industry's R&D processes, we ensure that they have only limited implications for other sector—and hence the Exchequer—but at the same time promise to significantly boost innovation by video games companies.[89]

The report recommended specifically:

  • raising the profile of the R&D tax credit in the eyes of video games companies, and improving access to information about how to apply;
  • clarifying the status of important innovation expenditures for video games development;
  • using data collected as a by-product of development to assess R&D Tax Relief Claims;
  • providing R&D specialist units with video games specific expertise; and
  • improving access to data on the R&D Tax Relief scheme for evaluation and assessment purposes.[90]

Dr Wilson described R&D tax credits as "very much a second-best measure for the video games industry [which] would not draw in those overseas publishers to invest in the United Kingdom or stimulate new investment in the UK games industry."[91]

63. Research and development tax credits already provide an incentive for innovation. These credits could be adapted and enhanced, at little cost to the Exchequer, but with great benefit to video games companies. We recommend that the Government set out in its response to this Report how it plans to work with NESTA on adapting the research and development tax credits as soon as possible so that video games companies can make full use of the scheme.

Taxation of Intellectual Property (IP)

64. The 2009 NESTA report, It's Time to Play, noted that "nearly three quarters of our respondents believe that original Intellectual Property (IP) generation in the UK has been in decline or stopped altogether in recent years [...] this trend is particularly worrying for the UK video games sector which has traditionally relied on its creativity and capacity to innovate as a differentiation factor against cheaper development territories."[92] Furthermore, "retaining ownership over successful original IP [...] would enable UK video games developers to hold on to the asset and cash flow value generated by their creations [...] helping them to adopt more sustainable business models, and reducing their reliance on overseas publisher funding sources."[93]

65. Ensuring companies create and retain IP is a priority, and Mr Rawlinson, Director General, Association for UK Interactive Entertainment, noted that "if the Government could produce something that links IP to this country, or makes it beneficial to keep the ownership of the IP in this country, along with the tax receipts from the worldwide exploitation of that IP, it would be very beneficial."[94]

66. The Government has announced a review of the taxation of IP, which Mr Vaizey told us would be completed in time for the 2011 Budget.[95] The creation and retention of intellectual property is a priority issue for the UK video games industry. We welcome the review of the taxation of IP currently being undertaken by the Government. We expect the Government to set out a timetable for the implementation of the recommendations of the taxation of IP review in its response to this Report. We will monitor its outcome.

Measures announced in the June 2010 Budget

67. On 22 June 2010, the Chancellor announced as part of the Budget that:

[...] from April 2011, the threshold at which employers start to pay national insurance will rise by £21 a week above indexation [...] next year we will cut corporation tax by 1%, to 27p in the pound, the year after we will cut it again by 1%, and again the year after, and again the year after that—four annual reductions in the rate of corporation tax that will take it down to just 24%. That will give us the
lowest rate of any major Western economy, one of the lowest rates in the G20 and the lowest rate that this country has ever known [...] we will also reduce the small companies tax rate [...] to 20%, [...] I will extend the enterprise finance guarantee scheme, which supports small and medium-sized businesses' access to lending.[96]

The 2010 Budget also abolished the condition applying to small or medium (SME) companies requiring any intellectual property deriving from the research and development to be owned by the company.[97]

68. The measures announced in the 2010 Budget will have a positive impact on start-ups and small and medium sized businesses, and we welcome the Government's actions. However, these proposals are not specific to the video games industry. We recommend that proposals for more targeted support be set out by the Government in its response to this Report. Those proposals should be accompanied by a clear and costed action plan.



82   HMRC, Research and Development (R&D) Relief for Corporation Tax, www.hmrc.gov.uk Back

83   Ev 52 Back

84   Ev w1 Back

85   Ev 49 Back

86   Ev 55 Back

87   Q 6 Back

88   Q 174 Back

89   NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010 Back

90   NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010 Back

91   Q 43 Back

92   NESTA, It's Time to Play, A survey on the impact of a tax credit for cultural video games in the UK development sector, August 2009 Back

93   Ibid. Back

94   Q 71 Back

95   Q 197 Back

96   HC Deb, 22 June 2010, col 174 Back

97   HM Revenue and Customs, Budget 22 June 2010: Business Taxes, www.hmrc.gov.uk` Back


 
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