UK games industry wins videogames tax break, faces challenges

The UK government has announced in today’s pre-election budget plans to introduce a tax break for the UK games industry, but there will be real challenges to be overcome before the games industry can take advantage of the new tax relief.
The announcement

As we said yesterday, even up until the announcement itself there was still uncertainty as to whether the government would go for or against the tax break, or adopt a halfway position.  The Chancellor, Alastair Darling, said when announcing the new measure:

I will offer help to the computer games sector, similar to the steps which are helping restore the fortunes of the British film industry…This is a highly successful and growing industry, with half its sales coming from exports, and we need to keep British talent in this country.”
UPDATE: MCV gives Rockstar Games as a good example, suggesting that if the estimated cost of GTA IV was $100m, and given the estimated typical saving for films qualifying for relief is at around 16 per cent of their total production budget, that could mean Rockstar could potentially save around £10.7m if the next game is set in the UK.

Sounds good, eh?  But we’re a long way from those kinds of considerations.  At the moment, nothing really has been given away yet about what form the government thinks the tax break should take.  It’s clear though that there a lot of challenges to be overcome before games companies can take advantage of the games tax break:

Challenge 1  – the election
Obviously, the tax break will need to survive the forthcoming election – whether by way of a Labour win or a new Conservative government also signing up to the tax break.
Challenge 2 – EU approval
The government will need to overcome EU legal issues regarding state aid.  In a nutshell, EU Member States cannot take action to favour their domestic industries over other Member State industries unless they have EU clearance to do so. One of the bases on which this clearance can be obtained are ‘cultural’ grounds – which is how we saw the UK films tax credit being cleared (more on that below). It could potentially take months after the election for this EU approval to be obtained.
Challenge 3 – the structure of the games tax break
This raises a host of important questions, which will have to be dealt with through government consultation with the industry:
  • What form will the games tax break take? The Chancellor has said it should be based on the films tax credit which after a lot of research on the matter, we think is the most efficient way to deliver the tax break.  But how will this be tailored to the unique features of the games industry?  Just as importantly, what lessons can be learned from the implementation of the films tax credit?
  • Given the EU legal considerations (see above), the key test for obtaining the tax break will be whether it would promote “culturally significant video games that might not otherwise be made in the UK“.  The government will need to set out guidance as to what that means for games. 
  • That said, it does not just mean “GTA: Weston-Super-Mare”!  A wider definition of ‘culturally significant’ has become widespread in the films industry and the same logic could be applied to games.  For examples, games which reflect European culture (e.g. Empire: Total War) could qualify or games which are made in the UK and thereby could be said to reflect UK culture even if they don’t specifically refer to the UK (e.g. the forthcoming MMO APB).  In other words, the test could be whether the game is sufficiently linked to the UK and therefore to UK culture, not whether the games are about UK culture.  This will boil down to the government trying to tread a fine line between complying with the law while still making the tax relief useful.  With the films tax credit, the government has adopted a points-based system, which they could also do with games.
  • Who will benefit from the tax break?  There is a good case for arguing that both games developers and publishers based in the UK and overseas (provided the game is made in the UK) should be entitled to benefit so that the relief encourages both inward investment and the UK indigenous games industry to achieve its aims.
  • How will games be defined for tax break purposes?  Clearly, games must be defined broadly enough to encompass the myriad of games currently available (across an array of platforms) and those developed in the future.  There’s lots of talk in the blogosphere about how difficult this could be, and clearly a lot of thought will be needed, but it’s by no means impossible.  Governments and lawyers have to deal with far more difficult drafting exercises all the time.
  • How much will the tax break be worth?  It needs to be high enough to encourage continued game development in the UK by existing players and new companies to start making games here, but not so high the Treasury balks at it.
  • Lastly, what types of development spend will qualify for tax relief?  How will this interact with the research and development tax reliefs?
  • Who will administer the tax break? Will the government set up a new body or use an existing body?  There has been speculation that the Film Council could step in to adminster the games tax break, for example. 
All of these matters can be resolved through sensible consultation between the government and the games industry.  But the point is that it shows there will be a deal of work to be done in scoping out in detail how the games tax credit will work in practice.

What’s next?

The Labour government will need to announce some form of consultation with the industry to discuss these issues further.  In reality, that won’t happen until after the election.  At the same time, the games industry will be looking for some firm commitment from the Conservatives to the tax break in case they win the election instead.  In the meantime, we can expect to see industry figures and bodies making their own proposals as to how the tax break should work.  Anyway you look at it, you’ll be seeing more on the games tax break generally (and on this blog) in the coming weeks and months.

Interested in tax breaks?

In the meantime, if you’d like to discuss the tax break or how it could work for you, you can contact us here.

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