Support for the creative economy

Written evidence submitted by TIGA [SCE 092]

Introduction

TIGA welcomes the Culture, Media and Sport Select Committee’s inquiry into support for the creative economy.

The Independent Game Developers Association (TIGA) represents the UK’s games industry. The majority of our members are either independent games developers or in-house publisher owned developers. We also count games publishers, outsourcing companies, technology businesses and universities amongst our membership. Between them TIGA members employ over half of the UK games development sector’s workforce.

At TIGA our mission is to represent game developers and digital publishers at all levels to make the UK the best place in the world to do games business. TIGA wants to see a flourishing developer and digital publisher sector based in the UK, with rising numbers of start-ups, growing sustainable studios and above all declining business mortality rates.

The UK games industry

The creative industries have a potentially important role to play in helping to rebalance the economy away from an over-reliance on public sector employment and financial services towards export oriented, high skill knowledge industries. The UK games industry is a vital sector within the digital and creative industries. The games development sector contributes approximately £1 billion to UK Gross Domestic Product (GDP) and employs 9,000 highly skilled development staff, 80 per cent of whom are employed outside of London. [1] The sector is export oriented: 95 per cent of UK video games developers export at least some of their games. The industry is R&D intensive: two-fifths of studios have a budget earmarked for R&D purposes. [2] The video games sector is also low carbon in output. Most of the work in games development involves design on computers, the packaging in games is minimal and box products are relatively light to manufacture and to transport. In the future, video games will become even more low carbon in nature as the industry moves towards digital distribution.

The video game sector offers opportunities for growth and high value, high technology job creation for the UK. Estimates from PWC suggest that the global market for video games will grow from $52.5 billion in 2009 to $86.8 billion in 2014. [3]

The UK Government can enable UK games developers and digital publishers to take advantage of this growing global market by taking action in the areas of finance, skills and support for exporters.

Access to finance

Access to finance is the number one challenge facing games developers and digital publishers. The implementation of an effective Games Tax Relief is a crucial part of the answer to this problem.

a) Games Tax Relief

41 per cent of developers blame a lack of readily available finance as an obstacle to growing their business. [4] UK games development is heavily reliant upon global games companies for finance. 76 per cent of investment in UK games development is derived from global companies. [5] The remaining 24 per cent is self-funded by British games companies, who largely rely upon existing cash resources, including retained profits, and, to a much smaller degree, private investment to fund development. [6] Access to debt, bonds and equity finance is relatively difficult. This is because of the high levels of uncertainty about consumer demand and the intangible nature of IP. Difficulty in accessing finance probably contributes to a high studio mortality rate: 197 games companies closed down between 2008 and 2011 – a number almost equalling the number of start-ups (216). [7]

The UK games industry is currently competing on an un-level playing field in the struggle to secure finance from overseas publishers. Game developers in countries including Canada, France, Singapore and the USA receive significant tax breaks for games production, which effectively reduces the cost of game development. For example, in Quebec in Canada, tax relief stands at 37.5 per cent. [8] A wide range of other fiscal incentives are also available in other territories such as Germany [9] , Australia [10] , New Zealand [11] , Sweden [12] , Finland [13] , South Korea [14] [15] and Japan [16] . No tax break for games production exists in the UK and the country is missing out on long-term investment and employment in the video games sector as a result.

Employment in the UK games development sector has declined by over 10 per cent since 2008. Conversely, the Canadian games industry’s workforce grew by 33 per cent between 2008 and 2010. [17]

The UK games industry is also suffering from a brain drain. 41 per cent of the jobs lost to the UK games development sector between 2009 and 2011 relocated overseas, mostly to Canada, which benefits from massive tax breaks for games production. [18]

Investment by studios has fallen from £458 million in 2008 to £411 million in 2011. [19] Additionally, the UK’s share of global investment (venture capital and private equity) in the games industry declined from 10 per cent in the mid-2000s to 3.5 per cent in 2011. Countries with tax relief for games production are comparatively more attractive to global investors, with the result that the UK is at a disadvantage. [20]

TIGA has consistently campaigned for the introduction of Games Tax Relief, a measure which reduces the cost of games development, to reverse these negative trends and to enable the UK games industry to compete on a more level playing field. In March 2012 the Coalition Government agreed to introduce tax relief for video games, animation and high end T.V. production, with the measure coming into effect in April 2013. This is excellent news for the UK video games industry and ultimately for the UK economy. Games Tax Relief will enable UK video games developers and digital publishers to compete on a level playing field, boost investment and job creation and improve access to finance-assuming that the tax relief is well designed. Games Tax Relief will:

· help support start-ups and small games businesses;

· improve access to finance for independent studios;

· improve the UK’s chances of retaining and attracting both investment from and studios owned by global publishers (subsequent to the announcement that Games Tax Relief would be introduced, global games businesses including Activision Blizzard have announced intention to invest in the UK [21] );

· allow larger companies to grow and retain experienced talent that struggles to stay in the UK in the absence of such assistance;

· expand the venture capital market for games companies (just as the film tax credit did for film production companies), which will largely benefit British-owned companies; and

· stimulate economic activity and pay for itself. This has been the experience in France, where, between 2008 and mid-2010 The Centre National de la Cinématographie estimated that the total Government receipts from the video games tax credit were €63.4m versus the cost of the tax credit of €38m, a 1:1.7 return on investment. [22]

Research conducted by Games Investor Consulting for TIGA indicates that over five years Games Tax Relief could generate and safeguard: 4,661 direct and indirect jobs (equivalent to around half of the existing workforce in the games development sector); £188 million in investment expenditure by studios; increase the games development sector’s contribution to UK GDP by £283 million; generate £172 million in new and protected tax receipts to HM Treasury, and could cost just £96 million over five years. [23] Games Tax Relief is exactly the kind of policy measure that the UK needs at a time when the wider economy is struggling.

The precise details governing the design of Games Tax Relief have still to be determined but will almost certainly be based on the Film Tax Credit. TIGA, in response to HM Treasury’s Consultation on Creative Sector Tax Reliefs (September 2012) suggests that Games Tax Relief will give a powerful boost to the games industry and to the wider economy particularly if:

· there is no minimum spend threshold (in order to help small budget games as well as large projects);

· there is a flat rate of relief of 30 per cent on eligible projects;

· the relief is effective from pre-production to post-launch support; and

· educational games are eligible for relief as well as entertainment games.

The requirements of EU law mean that only culturally British video games can be considered eligible for Games Tax Relief. Therefore, studios’ games will have to pass a cultural test in order to benefit from Games Tax Relief. Games will secure points in the test if their content meets fundamental features of the Cultural Test (cultural content, cultural contribution, heritage, creativity, diversity, cultural hubs and cultural practitioners).

The DCMS has published a consultation document on the cultural test (Creative Sector Tax Reliefs: Cultural Test for British Video Games: Consultation, October 2012). TIGA raised a number of issues in response to this consultation exercise. In particular, TIGA believes that the cultural test should:

· award p oints for artistic costs if those costs are more than 25% of the budget rather than 50% as origin ally proposed by the Government;

· award points defined for fictional settings and species to allow sci-fi, fantasy and non-narrative titles to secure cultural contribution points in the test;

· make points available for the use of UK service providers, including motion capture providers;

· award points for key roles defined for cultural practitioners that are not currently represented in the test such as Concept Artist, Producer and Assistant Producer;

· allot multiple points to individuals fulfilling multiple roles at smaller companies; and

· increase the number of points that are available for producing games in the English language (including official Regional or minority languages of the UK).

The Government plans that the BFI will administer the cultural test. TIGA believes that if the BFI is to assume this vital administrative role, then it would need to be properly resourced and should hire experts from the video games sector and consult with experts at TIGA and the wider games industry. A discrete unit focused on video games within the BFI might be the best approach.

Games Tax Relief will provide a major boost to the UK games development and digital publishing sector and will make a major and positive impact on improving access to finance for many studios operating in the sector.

b) Research & Development (R&D) Tax Credits

The UK currently invests a lower proportion of GDP in R&D in comparison to G7 countries such as the USA, France, Germany and Japan.  At the same time, business investment in R&D in the UK is relatively low compared to other G7 countries.  Currently the UK devotes only 1.8 per cent of GDP to R&D.

The UK video games industry is an R&D intensive sector using cutting edge technology to create games for a global market. Many TIGA members do use the existing Small Firms R&D tax credit system.  TIGA campaigned for an increase in the rate of R&D relief and strongly welcomes the Government’s decision to raise the rate of relief to 225 per cent of qualifying expenditure.  The Government could consider expanding the scope of the Small Firms R&D tax credit to include other costs associated with the development of a new game: for example, patent and trademarking costs, and the costs incurred in defending copyright. In France, R&D tax relief includes IP protection costs in qualifying expenditure.

c) Prototype funding

The Abertay University Prototype Fund is supported by UK Government and European Structural Funds (with the Scottish Government being the Managing Authority for the latter funding) and also with Abertay University’s resources. The Abertay Prototype Fund enables developers to apply for grants of up to £25,000 to create prototype games. This scheme should be maintained. The Abertay Prototype Fund has provided prototype funding support for 58 companies to date, amounting to £1.45 million. There have been almost 300 applications to the Fund so far. Game development is a risky venture involving high technological, artistic and business risks. It is consequently relatively difficult to raise external finance and so funds such as the Abertay Prototype Fund can play a valuable part in supporting the sector.

d) Bank finance

Bank loans and bank overdrafts are not crucial sources of finance for most UK games developers. TIGA research in 2011 revealed that just 12 per cent of game developers had a bank loan and only 29 per cent operated a bank overdraft to fund their business. [24] Given the relatively high risk nature of game development, bank lending is unlikely to become the principal source of finance for the industry. Nevertheless, greater choice and competition in the banking market should be promoted. This might improve bank lending to small and medium-sized businesses, including those in the games development sector.

Encouraging exports

The games development sector is export oriented: 95 per cent of UK developers export at least some of their games. The introduction of Games Tax Relief should power the games’ industry propensity to export. Other things being equal, it should have the effect of enabling many UK owned games businesses to expand their operations and export still more content. In addition to introducing Games Tax Relief, the Government should reform the UKT&I’s Tradeshow Access Programme (TAP). UKT&I works with accredited trade organisations such as TIGA to operate the TAP. The scheme supports UK businesses looking to exhibit at overseas trade shows by providing eligible firms with grants of £1,000, £1,400 or £1,800, depending on the location of the trade show.

Accredited trade organisations such as TIGA should be allowed to use UK Trade & Investment (UKT&I) grants to cover travel and accommodation costs as well exhibition expenses. This would enable more eligible SMEs in general and games businesses in particular to attend trade shows, thereby enhancing their potential to export. The principal of using public funds in this way has previously been conceded: some of the now defunct Regional Development Agencies helped businesses in this way.

Skills

a) Skill shortages

The UK video games industry needs a highly educated and trainable workforce in order to compete successfully. The industry relies on highly creative, technical people with skills and qualifications in areas such as design, programming, artificial intelligence, animation, mathematics and physics. UK games businesses increasingly recruit graduates in a range of disciplines, although employers typically place most emphasis on portfolio work rather than qualifications. The video games sector’s workforce is highly qualified. TIGA’s research shows that some studios have 80 per cent of their workforce qualified to degree level.

TIGA’s research indicates that, on average, 18 per cent of the graduates that developers employ hold a degree in a games course. [25] Game developers recruit graduates from a wide range of disciplines in addition to games, including: design, computer science, art/animation, mathematics and physics.

 The skilled people that the games industry needs are not always easy to find. TIGA research in 2011 revealed that 35 per cent of developers had experienced difficulties in filling vacancies while recruiting over the previous 12 months. Developers reported have difficulty filling vacancies for designers, artists and managers and above all high quality programmers.

Difficulty in recruiting programmers is probably due in part to the decline in the supply of high quality graduates in computer science. The number of students taking a first degree in computer science (full and part-time) has declined from 106,770 in 2004-05 to 65,515 in 2010-11. [26] The situation has been exacerbated by the fact that the UK games industry has suffered from a brain drain. Additionally, a report by the House of Lords Science and Technology Committee on science, technology, engineering and mathematics (STEM) education in the UK in 2012 noted that many undergraduates in traditional science subjects have not studied A level maths, while those that have done so often lack sufficient mathematical knowledge for their chosen course. Good mathematical skills are vital for programming.

Policy makers should continue to focus on raising standards in maths and the sciences at GCSE and A level and promoting the uptake of these subjects by students in order to increase the potential supply of graduates available to work in the industry. There are encouraging signs. 2012 saw an increase in the numbers of STEM students at A Level and GCSE, with maths and physics now in the top ten A level subjects. The Government’s decision to withdraw the ICT national curriculum from September 2012 and to give schools greater opportunities to teach computer science is sensible. In the medium to long term, this could help to increase the supply of computer science graduates.

c) Leadership and management

Businesses in the creative industries sometimes lack the strategic skills necessary for high and sustained growth. [27] The Government might therefore want to consider measures to promote training amongst managers and leaders. For instance, a training fund could be established for SMEs in the creative industries including the video games sector, whereby every pound spent on training programmes could be match funded up to a level of £1,000 in order to put higher level training within reach for more SMEs. [28] Such a scheme could incentivise firms to invest in higher level training, with positive consequences for the relevant businesses.

d) Migration

There are currently plans to eliminate the Shortage Occupation List on the UKBA website (see www.ukba.homeoffice.gov.uk/sitecontent/documents/workingintheuk/shortageoccupationlistnov11.pdf). The Shortage Occupation List enables games developers to fill vacancies for software developers (Shortage Occupation Code 2132) and for producer and production manager roles (Shortage Occupation Code 3416) relatively quickly.  This is because the Shortage Occupation List enables employers to look outside of the UK/EU labour markets for staff without having to advertise within the UK/EU.   Unfortunately, the Government plans to eliminate the Shortage Occupation List. This will eliminate the existing fast track recruitment process and instead force employers to advertise for 28 days in the UK/EU market before looking outside of these markets. Additionally, employers are required to advertise on the Job Centre Plus website, which is not an effective route for finding personnel to work in the games industry. This policy will have a negative impact on some games businesses because it could slow down their recruitment process.

I hope that you find this information to be of use.

February 2013


[1] Gibson, N., Gibson, R. and Wilson, R., Making Games in the UK Today (TIGA, 2012).

[2] Wilson, R., State of the UK Games Development Sector (TIGA, 2011).

[3] PWC Global Entertainment and Media Outlook 2010-2014 , published June 15 th 2010.

[4] Wilson, R., State of the UK Game Development Sector (TIGA, 2010).

[5] Publishers fund game projects according to two main models: (a) work for hire, whereby a publisher commissions a studio to develop a video game for a fee; (b) royalty advances, whereby a studio pitches a project to a publisher with whom it agrees to share royalties generated by the game in exchange for an advance that funds development activities. Once the game is released the publisher recoups the advance from the sales receipts of the game, after which it shares royalties.

[6] Gardner, P., Gibson, R., and Wilson, R., Investing in the Future: a Tax Relief for the UK Video Games Industry, second edition (January 2011).

[7] Gibson, N., Gibson R., Wilson, R., Making Games in the UK Today (TIGA, January 2012).

[8] Studios in receipt of public support in Canada are receiving support equivalent to 23 per cent of their turnover, giving them a significant competitive advantage. See e-skills, the Sector Skills Council for Business and Information Technology. The Report, Technology Insights 2011: The Games Development Sector .

[9] Germany’s Culture Minister introduced a national video games development competition for culturally German video games Deutscher Bundestag, Drucksache 16/7116, 14 November 2007.

[10] Prototype funding from Film Victoria www.gamesindustry.biz/articles/australian-developers-awarded-USD240-000-prototype-funding

[11] www.gamasutra.com/php-bin/news_index.php?story=23495

[12] Gotland Game Awards www.gamesindustry.biz/articles/gotland-game-awards-offers-300-000-prize

[13] www.develop-online.net/news/32323/Finnish-Government-devotes-10-million-to-game-development

[14] www.gamasutra.com/php-bin/news_index.php?story=21368

[15] www.gamasutra.com/php-bin/news_index.php?story=23510

[16] www.guardian.co.uk/world/2009/apr/10/japan-manga-anime-recession

[17] Gibson, R., Gibson, N., and Wilson, R., Making Games in the UK Today (TIGA, January 2012).

[18] Ibid.

[19] Ibid.

[20] Ibid.

[21] See ‘Konami to open London studio for PES’ (MCV, July 2012) ( www.mcvuk.com/news/read/konami-to-open-london-studio-for-pes/0100040 ); ‘ UK chancellor Osborne toasts British video games’ (MCV, August 3 rd 2012) ( www.mcvuk.com/news/read/uk-chancellor-osborne-toasts-british-gaming-excellence/0100688 ); ‘Activision Blizzard opening new UK mobile games studio’ (Digital Spy, May 21 st 2012) ( www.digitalspy.co.uk/gaming/news/a382806/activision-blizzard-opening-new-uk-mobile-games-studio.html )’ ‘New Xbox studio to open in London’ (MCV July 26 th 2012) (www.mcvuk.com/news/read/new-xbox-studio-to-open-in-london/0100177).

[22] Source: pp47-53, “Evaluation des dispositifs de credit d’impôts ” – Centre National de la Cinématographie , France 2010.

[23] Gardner, P., Gibson, R., and Wilson, R., A Video Games Tax Relief: An Incentive to Build a Sustainable Games Development Sector (TIGA, February 2012).

[24] Wilson, R., State of the UK Game Development Sector (TIGA, 201 1 ).

[25] Wilson, R., Games Businesses and Higher Education (TIGA, 2010).

[26] www.hesa.ac.uk/index.php/content/view/1973/239/

[27] Carr, J., Creative Industries, Creative Workers and the Creative Economy: a Review of Selected Recent Literature (Scottish Government Social Research, 2009), p. 13

[28] In other words, if an employee or manager attended a £2,000 training course, the training fund would pay £1,000 towards the overall costs, while the business would pay the other £1,000. Similarly, if the course cost £1,500, the training fund would pay £750 and the business the remaining 50 per cent. Apparently while such management and training schemes exist for film and t.v ., no such publicly funded scheme exists for the video games industry.

Prepared 28th February 2013