House of Commons - Scottish Affairs Committee

Video games industry in Scotland - Scottish Affairs Committee Contents

Written evidence from TIGA

EXECUTIVE SUMMARY

Video game developers in Scotland and the UK are at a competitive disadvantage. Many of our key competitors provide tax breaks for video games production. No such tax breaks for games production exist in the UK. Investment and jobs are drifting away to other countries. TIGA's proposed Games Tax Relief would create a more level playing field and boost investment, job creation and innovation. Other financial measures should be considered to strengthen the industry but Games Tax Relief would have the most positive impact on the Scottish games industry.

THE CONTRIBUTION MADE BY THE SCOTTISH VIDEO GAMES INDUSTRY TO BOTH THE SCOTTISH AND UK ECONOMY[34]

1. Scotland has produced some of the world's most successful video games including Grand Theft Auto, Lemmings and Crackdown. This has reinforced Scotland's image as an innovative place to work. The Scottish games sector is diverse, with companies working in mobile, online, casual and console markets.

2. The presence of a strong Scottish games industry strengthens the appeal of Scottish universities, providing direct employment and business start-up opportunities for graduates in suitable disciplines. The video games industry sustains a "digitally literate" workforce whose skills are valued in other sectors including health, education, film, TV and music.

3. Scotland has 46 development companies, representing 10.8% of the UK total.

4. Scotland's games development sector supports an additional 1,190 indirect jobs.

5. Annually, Scottish games companies are estimated to invest £30.2 million in salaries and overheads, contribute £27.5 million in direct and indirect tax revenues to HM Treasury, and make a direct and indirect contribution of £66.8 million to the UK's Gross Domestic Product (GDP).

TIGA'S GAMES TAX RELIEF

6. In August 2009 TIGA submitted a proposal to the UK Government to introduce Games Tax Relief. It was envisaged that Games Tax Relief would be calculated and applied in a similar manner to the existing tax relief for British films; video games would need to pass a cultural test to benefit from the tax break; there would be tiered rates of relief to reflect a range of development budgets; any interactive product, including entertainment, educational and commercial products, could potentially benefit from the relief.

7. Over a five year period Games Tax Relief was expected to: create or save 3,550 jobs, increase and safeguard £457 million in new and saved development expenditure, cost £192 million in tax relief but generate £415 million in new and saved tax receipts.[35]

What consultation was held by the UK Government with the industry before the decision was made to abolish a Games Tax Relief

8. There was no consultation by the UK Government with TIGA before the decision was made to abolish Games Tax Relief. TIGA wrote letters requesting meetings with Vince Cable MP, Secretary of State for Business, Innovation and Skills (1 June), Danny Alexander MP, Chief Secretary to the Treasury (3 June), David Gauke MP, Exchequer Secretary to the Treasury (3 June) and to Ed Vaizey MP (3 June). None of these requests were accepted prior to the Budget on 22 June 2010.

9. On 29 March, Ed Vaizey MP, the then Shadow Culture Minister told Develop that the Conservatives "are going to support tax breaks for the video game industry" in the Conservatives' first budget".[36] On 26 April he added that "We are fully behind game tax breaks. This is my unequivocal statement," he said. "It's been approved by George Osborne."[37] On 30 April, 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."[38]

THE LEVEL OF TAX BREAKS OR INCENTIVES OFFERED IN COMPETITOR COUNTRIES

Canada

10. In 1997, revenue generated by Canadian made video games were well below those of the USA, Japan, UK, France, South Korea and Scandinavia. By 2006, Canada had secured third place in the global sales rankings, partly because of significant tax breaks for games production.

11. The main type of relief are tax credits for games companies' staff salaries and other costs, which are set at 37.5% in Quebec, 30% in Ontario, 35% in Prince Edward Island, 45% in Manitoba, and 35% in Nova Scotia. In addition, British Columbia offers a 30% tax credit for investment in new media projects.

12. Canada's provinces and territories offer a range of additional measures to support the video games industry. Quebec offers income tax holidays for foreign experts of 75% for five years. Ontario offers grants and prototype funds.

13. Quebec is estimated to have spent the equivalent of over £500 million in tax credits and grants between 2004 and 2008 on Ubisoft, Electronic Arts and Eidos, generating £1 billion in net investment.[39] Canada's studio staff overall have grown 43% between 2006 and 2008. Montreal's development community has grown by 960% from 500 to 5,300 in 10 years. Investment in development in Montreal has grown by 1,280% in 10 years from £21 million in 1999 to £290 million in 2008.[40] Games businesses have an incentive to invest and locate where there is access to talented staff and generous tax breaks.[41]

France

14. France provides a tax credit which rebates 20% of production costs on games that pass a cultural test. France also has the National Video Game Fund which funds up to 35% of game prototypes and R&D tax credits which rebate 5% of R&D expenditure.[42]

Finland

15. In 2008, Government technology funding body Tekes provided the games industry with

10 million.[43]

Japan

16. Japan has funded a stimulus package which includes the promotion of the export of video games.[44]

Nordic region

17. The Nordic Game Programme (2006-11) supports work bringing games from concept to a level needed to secure the necessary production funding. Six million Danish crowns have been granted for development support to Nordic game companies in 2010.[45]

Norway

18. The Norwegian Film Fund distributes funds for film, TV internet and games projects, of which approximately £1 million is available for video games in 2010.[46]

Singapore

19. Substantial grants are given to games companies locating in Singapore.

South Korea

20. In addition to R&D funds, in 2008 South Korea announced a $200 million programme lasting until 2012, aimed at expanding the country's game exports.[47] In 2009 South Korea announced the creation of a $144 million agency to promote video games, animation online and television content.[48]

USA

21. The following states provide tax credits for games production: Louisiana (20%); Wisconsin (25%); North Carolina (15%); Georgia (20-30%). Connecticut offers 30% tax credit for production of digital media including games. Florida, Hawaii, Maine, New Mexico, Rhode Island and Texas offer a range of incentives and grants to film, TV and games companies.

22. The EU has a games support programme called Interactive Works. Grants range from 10,000 euros to 150,000. The total budget for 2010 is two million euros. The criteria have been changed and an applicant now needs a film IP in order to apply for a game grant.[49]

What potential impact the decision to abolish Games Tax Relief will make on the video games industry in Scotland

23. Video game developers in Scotland and the UK are at a competitive disadvantage. Investment and jobs are drifting away to other countries. Over the period July 2008 to July 2009, 15% of UK video games firms went out of business. Between July 2008 and March 2010, 7% of the development workforce lost their jobs. This decline has been driven by a powerful force: many of our key competitors provide national or regional/state tax breaks for video games production. No such tax breaks for games production exist in the UK.

24. Removing Games Tax Relief will accentuate this trend. Between July 2009 and September 2010, the UK games industry workforce declined by 4.4%. Scotland has suffered a deeper fall than the rest of the UK, due to the collapse of Realtime Worlds. Scotland's games development workforce has declined from 798 in April 2010 to 651 by September 2010, a fall of 18.4%. Over the same period, Scotland's share of the UK developer headcount has fallen from 8.7% to 7.2%.[50]

25. Some Scottish developers are putting expansion plans on hold or investing abroad: one Scottish developer is opening two studios outside of the UK over the next 12 months; if Games Tax Relief was in operation he would be tripling his existing Scottish studio. There is a risk of a brain drain of talented game development staff leaving for other countries.

26. Other things being equal, in the absence of Games Tax Relief, over the next five years a further 150 development jobs could be lost and investment by games companies in Scottish jobs could fall by £21 million. Over the same period, the Scottish games industry's contribution in tax revenues is predicted to fall by £19 million and the industry's contribution to GDP by £47 million.[51] Without Games Tax Relief it will be harder to attract talent and investment to Scotland.

27. Conversely, estimates suggest that Games Tax Relief over five years would create 130 new development jobs, trigger £16 million additional investment in Scottish development jobs by games businesses, fund 31 game projects, result in £14.5 million in new tax revenues and contribute £35 million to GDP.[52]

28. If Games Tax Relief was implemented it would also forestall the predicted decline, so the net position is that the tax credit could safeguard or grow a net 273 jobs, £37 million in investment, £33.7 million in tax revenues and £82 million in GDP contributions. Games Tax Relief would enable companies to take more risks and create more new and original titles. The tax break for Scotland would cost £13.8 million.[53]

ALTERNATIVE FINANCIAL INCENTIVES FOR THE INDUSTRY

29. R&D tax credits should be retained and enhanced. Existing R&D tax credits only support research that has a technological focus. Some developers have called for a new R&D scheme which is aimed at the creation of new IP and original game content, which would encourage new studio formation and stimulate creativity.

30. Scotland should be marketed aggressively as a place to do games business. Dundee lost out to Galway for the Big Fish Games European QA and localisation base in April 2009.[54]

31. Start up developers should receive business mentoring and advice on how to create and retain IP. Abertay University is offering up to £25,000 of support for applicants to create a prototype of their own IP. Funding should encourage developers to move away from the work for hire console teams and instead try new business models (online/mobile and perhaps console download) which enable developers to create their own routes to market.

32. New graduate start ups should be encouraged by providing business incubators (eg waive commercial rates for 24 months), legal assistance and business mentoring. This could stymie the emigration of educated people and help regenerate the economy from a proven base.

33. A pilot SME Training Tax Relief could be introduced so that SMEs could offset expenditure on training, supporting student placements and education outreach activities against corporation tax.

10 September 2010