The UK games tax break: opportunities and challenges

The UK government has just announced that it will grant production tax breaks to the games industry.  This was a bit of a surprise: the previous Labour government had agreed to grant tax breaks, but the new Tory/Lib Dem coalition government had frowned on it until this announcement.
This is ofc great news for the UK games industry and I’m sure there’ll be a LOT of discussion about it in the coming days.  There’ll need to be: there are a number of challenges to overcome over the next several months before games businesses can take advantage of a UK games tax break.  I wrote about those challenges the last time a games tax break was approved, and they still hold true now:
Challenge 1 – 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 States’ industries unless they have EU clearance to do so. One of the main grounds on which this clearance can be obtained are ‘cultural’ grounds – which is how we saw the UK films tax credit being cleared when they were introduced (more on that below). It could potentially take months for this EU approval to be obtained.Fortunately, there have been suggestions quite recently from the EU that they might be willing to review how a games tax break is regulated at the EU level, but as I understand it they remain just that – suggestions.  It would still require legal reform for the games tax break to be freed from the current EU legal restrictions – and that will take both political will and time.

UPDATE: it seems as though the government has acknowledged this is an issue and that therefore it’ll take at least a year to get the tax break off the ground from an EU and practical perspective – I agree.

Challenge 2 – the structure of the games tax break
The announcement of a games tax break is good, but implementation will be everything.  Turning the tax break into reality 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? Will it be based on the film tax break or somethng else?  The TV industry is being given tax breaks too – will they have a different format the gamesindustry can follow? In any case, 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 probably 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, maybe games which reflect European culture (e.g. Creative Assembly’s Empire: Total War) could qualify, or games which are just made in the UK (and thereby could be said to reflect UK culture even if they don’t specifically refer to the UK).  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.  In reality of course we just don’t know at this stage how that particular challenge will be resolved, but it 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 when assessing this cultural question , 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.  How will social and mobile games fit into it?  There’s previously been lots of talk about how difficult this could be, and clearly a lot of thought will be needed – but it’s by no means impossible.
  • 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 was previously has been speculation that the Film Council could step in to adminster the games tax break, for example.
No doubt we can expect further details fairly soon from the government regarding how it proposes to tackle these issues, so more news soon I hope.  All of these matters can be resolved through sensible consultation between the government and the games industry, but it is going to take real games industry involvement to turn this tax break into reality.  Let’s get to work…
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