Video Games Tax Break is axed by UK government

The proposed UK video games tax break is to be axed, according to the Emergency Budget published today by the new UK government.  The announcement follows several weeks of speculation about the new Government’s stance on the tax break, which followed the Conservatives first apparently promising pre-election support for the tax break but subsequently refusing to commit to it in their election manifesto.

Clearly, disappointing news for the games industry – particularly after the previous Labour government had promised to introduce the tax break if it won power for another term (more on that here).  What’s even more disappointing, however, is the Chancellor George Osborne’s comment that the proposed tax break was “poorly targeted“.  That, plus the wider austerity measures being proposed by the Government, drops a pretty heavy hint that the Government is going to take some persuading before it accepts the tax break in the future.

Cliona Kirby, a Tax Partner at Olswang (and expert on the games tax break), wrote on the Olswang Budget Blog about all this:

“After weeks of speculation, the Government has broken its silence on the topical issue of video games and decided to axe the relief announced by their predecessors. At a time when the UK needs to stimulate business in the UK this is very disappointing news. We are surprised that a relief aimed at keeping this growing and innovative industry in the UK was described as “poorly targeted”. The Financial Times recently reported that the global video games market will expand to be three times the size of the recorded music market by 2014. This announcement without doubt puts the UK video games industry on the back foot in terms of competing with other countries such as France and Canada that encourage both games companies and developers to relocate with the offer of targeted tax breaks. The effect of such continued corporate and individual migration will be a loss of revenues derived from the profitable games industry for the Treasury.

It is hoped that the Chancellor’s reference to “their longer term approach to intellectual property” and the “proposals on R&D in the Dyson report” will also benefit video games. We would strongly recommend that the Government looks to continue to develop the UK as a hub for the creative industries through incentives such as lower rates of corporation tax on intellectual property.”

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What the new UK government means for the UK games industry

Wardrox over at Nukezilla has written an interesting post about what the new LibCon government means for gaming, which talks about the new government’s approach to business stability, gaming, games tax relief, education and skills and piracy and crime.  Worth reading – check it out.
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TIGA sets out its games tax break proposals

TIGA, the games industry body, has published its election manifesto for the games industry, in which it sets out its proposals for how the recently announced games tax break should be structured in the next Parliamentary term (via Develop).

TIGA’s tax break proposals are as follows:

“The Government announced in the Budget on March 24 that it would introduce Games Tax Relief. TIGA believes that Games Tax Relief should be introduced as soon as possible.

It should have the following attributes:

1) Eligibility for the Games Tax Relief would cover any company within the scope of UK Corporation Tax.

2) Video games would need to pass a cultural test, scoring against criteria of European heritage and game locations, languages, technical or creative technological innovation, narrative, and location of development and key development staff.

3) The Games Tax Relief would be calculated and applied in a similar way to the existing tax relief for British films. A development company would be entitled to an additional deduction in computing their taxable profits equal to the UK expenditure incurred in developing a game, or 80 per cent of the total expenditure incurred in developing a game, whichever is the lower.

The development company would then be entitled to a tax credit calculated on the amount of the deduction, which it would either be set off against the income from the game or recovered as a payment from HMRC.

4) The Games Tax Relief should have three tiers of benefit: 20 per cent of core expenditure for budgets above £6,000,000, 25 per cent for budgets over £3,000,000 but less than £6,000,000 and 30 per cent for budgets of over £100,000 but under £3,000,000. The three tiers are designed to reflect average production budgets of video games on different games platforms, and correspondingly different sizes of company.

If Games Tax Relief is to assist the production of culturally British mobile games then it would be advisable to extend relief to games with a budget of £50,000 or more.

5) An independent organisation with knowledge and experience of video games production would administer the cultural tests, checking submission criteria are met and policing the Relief. It would issue interim certificates or letters of comfort confirming a product has passed or provisionally passed the cultural test to ensure candidate projects are funded.”

We’ll write a more detailed analysis of these propsals later on, but suffice to say they broadly accord with our views of the issues that the tax break will need to deal with.

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UK games tax break: how big will the pot be?

Develop carries a piece on the UK games tax break which is a useful reminder of how much government cash we’re talking about here.  They say (based on the government’s budget report) that:

Labour will pay £50 million in the 2011 fiscal year for game development tax breaks, and a further £40 million will be offered up twelve months later.”

So, at present, the total games tax pot will be £90m.  Developers (and probably publishers too), you know what to aim at.  Now we’ve just got to get past the election, work out how much the new government is willing to pony up (i.e. would the Tories match the £90m commitment?) and then get the tax break off the ground

On that subject, have a look at this article on the games tax break in Hollywood-focused web site Deadline, which features a comment from Olswang’s Cliona Kirby (who literally knows all there is to know about the films tax break and is helping build the games tax break, too!)

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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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UK games industry waits for games tax break announcement

The UK games industry is waiting to see whether tomorrow the Government will announce a games tax break in its last budget before the forthcoming 2010 general election.

In his December 2009 pre-budget report, the Chancellor Alastair Darling failed to make any formal announcement introducing a games tax break, despite significant industry support and lobbying for the measure.  At the time, the Government said it felt there was insufficient evidence in support of the benefits of the tax break, particularly in the current recession.  Then, early this year, Conservative MP Ed Vaizey suggested that a games tax break would not be a “top priority” if his party won the election.  That seemed to be an end to the matter.

But, in fact, green shoots have been growing since then.  In February 2010, Labour MP Tom Watson (well known to gamers and this blog as a champion of the games industry) filed a Parliamentary motion requesting the Government to pass a games tax break.  Also in Febuary 2010, the Prime Minister Gordon Brown said that the UK games industry was “leading the way” in Europe as “by far the biggest producer of computer games”. He also added that “there will be new commitments of investment” off the back of this week’s Global Investment Conference in London.

Then, earlier this month, Stephen Timms (Minister for Digital Britain) said to that the Government would “be able to provide an update of where we’ve got to” regarding tax breaks for the industry on March 24th.  According to the Telegraph, he also said that the government was looking to support businesses that could drive Britain out of recession and that there was “no doubt that the computer games sector is one part of the economy where we can see very good prospects for growth in the future”.

So, hopes are mounting that there may be something in this budget for the games industry.  Really? Fundamentally, there doesn’t appear to have been a sea change in the facts since the Govt last rejected a games tax break, but perhaps there has been enough movement in the right direction (and we are close enough to the election and the consequent need for good news) for the Government to feel able to announce a tax break, the details of which will have to be worked out later on.  Or perhaps it will simply announce a formal consultation into setting up a games tax break, which is perhaps more consistent with Stephen Timm’s quote about providing “an update of where we’ve got to” and reports that the Chancellor has no giveaways in this budget.

Well, we’ll know one way or the other by tomorrow afternoon, so stay tuned.  In the meantime, if you are interested more generally in the budget then tomorrow afternoon you might like to keep an eye on Olswang’s budget blog here (admission: I work for Olswang!)

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Thoughts on the Westminster eForum

The Westminster eForum discussion in London on 20 January 2010 went over a lot of ground, from digital distribution to games education to tax breaks. UK games classification got a special mention, with Keith Ramsdale of EA Northern Europe making a special plea to the government to “just hurry up and make PEGI law” (the current UK games rating system is being reviewed at the moment and may or may not become law before the next election).

It was well attended by industry figures, including David Braben (of Elite fame) and Ian Livingstone of Eidos as well as representatives from EA, Codemasters and Unity to name but a few. Also attending was gaming champion Tom Watson MP (Labour), who chaired the first half of the session, and Ed Vaizey MP (Conservative), the Shadow Minister for Culture and the Creative Industries.

My thoughts on the highlights below…

Tax breaks

There was a lot of discussion about the need for a tax break for the UK games industry. Richard Wilson of TIGA in particular put forward a strong argument for the tax break (and separately Mike Rawlinson of ELSPA has done the same). Keith Ramsdale of EA Northern Europe argued that last year games made 44% more than films and music put together, but attract far less government support. Overall, the consensus was that the UK games industry punches above its weight, but without government tax breaks to match those being offered in competitor countries like France and Canada, it will decline (some predict that the UK will drop from its current place as the third-largest producer of games to sixth in the coming years).

There was also an interesting presentation from Dustin Chodorowicz of Nordicity regarding the Canadian experience of games tax breaks and the lessons the UK could learn from it. Unfortunately, with the present Labour government having refused a games tax break in this term, and Ed Vaizey’s rather blunt assessment that a future Conservative government would not introduce a games tax break in the next 2-3 years, all of this will have to remain on the backburner for a while to come.

Digital Distribution

The discussion about digital distribution was interesting, if not ground-breaking. The discussion ranged back and forth regarding the pros and cons of digital distribution, the consensus from the industry bods on the panel being that digital distribution would continue to expand rapidly in this and coming years, but there will still be a place for the retail market for some time to come.

One crucial issue which wasn’t discussed at all though is the secondary market in retail games and the total absence of a secondary market in digital distribution (or, put simply, I can buy Half Life 2 boxed second hand but I can’t buy it off Steam second hand). There is a lot of money to be made in second hand sales – for example, the UK’s only games retail chain GAME reported in 2008 that fully a quarter of its income derived from second hand sales.

All of this fundamentally derives from (i) gamers wanting to play games but not wanting to play full whack for them; and (ii) gamers wanting to make some money back from games they have played but don’t want to keep. So it seems likely that sheer consumer demand will mean that at some point a secondary market in digitally downloaded games will have to develop. Obviously though, this presents real commercial issues (why allow a digital game to be sold secondhand online for $10 when you can sell it firsthand online for $30?) – so whether or not a digital second hand sales market will survive is another question altogether.

In fact, there have already been a few isolated instances of gamers trying effectively to establish their own second hand market in digitally downloaded games (for example, last week
a guy tried to sell his Steam account for $1,000), but they are pretty much doomed to failure as long as download platforms stick to their current legal structure in which they can stop and unwind any attempt to sell to someone else any games downloaded them from.

It seems to me that the change could come in one of two ways. Firstly, a legal challenge against the Terms of Service/Subscriber Agreements that the current download platforms make gamers agree to at the outset, on the basis that such contracts contain numerous unfair contract terms which should be struck down by the court (which I’m going to blog about separately). Secondly, and probably more likely, someone figures out a new model for profiting from digital second-hand sales and make a popular download platform out of it.

Games education

The discussion regarding games education was also interesting. The consensus from industry figures in the panel discussion was that the UK’s universities are not doing enough to prepare students for entry into the games industry. For example, David Braben of Frontier complained “we are getting far fewer people with computer science skills. We’re having to recruit people from abroad” and Ian Livingstone of Eidos worried that university courses have “dumbed down” recently (a constant refrain in UK papers for some time now).

But there were no figures from the education establishment on the panel to respond to those complaints. If there had been, I think they would have said that the issue is complicated and affects multiple industries, so a simple claim that universities don’t do enough isn’t particularly productive. But one big problem which does affect the games industry specifically is the perception among universities that universities simply don’t take games-focused courses seriously (according to one university lecturer who I spoke with) . That, it seems to me, is something that the games industry can and should help to remedy. (Clearly there is enough for a forum discussion on this issue alone!)

And, yes, Keith Vaz didn’t show up

Lastly, and most infamously, there was gaming opponent Keith Vaz MP’s no show. More on that here.
All in all, a great session, and I look forward to the next gathering on Monday 25th Jan at the Houses of Parliament for “Taking Games Seriously”…

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UK games tax break not Tories’ top priority

At the Westminster eForum meeting in London yesterday on the state of the UK games industry (which I attended), Ed Vaizey, Conservative shadow minister for culture and the creative industries, made it quite clear that if a Conservative government comes into power this year the UK games industry is unlikely to see any movement towards a UK games tax break for 2-3 years.  He said that a tax break for the UK games industry is simply not one of the Tories’ top priorities, compared to the challenges presented by the present recession.  (In December 2009, the present Labour government confirmed it has no plans to introduce a UK games tax break in this term).

In a wide-ranging panel discussion, Ed Vaizey also covered:

  • his hopes for the industry bodies TIGA and ELSPA to work together, or even be merged, in the future
  • the controversial possibility that the UK Film Council could adopt a role in representing the games industry (and possibly the games industry could thereby obtain access to National Lottery funding – an important source of film financing)
  • Conservative plans for broadband penetration in the next few years (he compared the current Labour plans of universal 2mbps by 2012 rather unfavourably to curren broadband already available in Asia)

My thoughts more generally on the Westminster eForum, which went over a lot of ground from digital distribution to games education to tax breaks, are here.

Confirmed: UK Govt rejects games tax break

UK Chancellor Alastair Darling has rejected granting a tax break to the games industry. It had been hoped that his Pre Budget Report (more on that here) would introduce the tax break, which has been the subject of substantial lobbying from the games industry and has received cross-party political support. This result will of course be disappointing to the industry, but not entirely unexpected.

Cliona Kirby, a Tax Partner at Olswang who has advised the games industry regarding the proposed tax break, said (over at Olswang’s Pre Budget Report Blog) said:

“It is incredibly disappointing that after months of lobbying from the games industry the Government has rejected our calls for a tax break to incentivise games development in the UK. The UK’s position as a world leader has been eroded as other countries such as France and Canada encourage both games companies and our creative talent to relocate with the offer of targeted tax breaks. The effect of such continued corporate migration would be a loss of revenues derived from the profitable games industry for the Treasury. In my view we should be encouraging new and innovative games to be made in the UK. Cross party political support for this area remains strong and I will continue to lobby alongside the industry to keep this on the political agenda. I hope that we will be able to persuade the Government to extend the existing film tax credit regime to games on the basis we described in our recent paper.

There was a small piece of good news for the industry because changes have been made to the R&D rules which remove the IP ownership requirement for SMEs which should make it easier for games companies to claim R&D tax credits on their development spend.”

UK to refuse to grant games tax break

The Guardian reports that the UK Government is expected to reject including a tax break for the UK games industry in its Pre-Budget Report to be published today (the Pre-Budget Report has become in recent years one of the best indications as to the Government’s proposals for the next year’s budget – if it is in the Pre-Budget Report, chances are it will be in the next Budget too).

This is a bit of the shame, as other countries’ governments have really boosted their national games industries through tax breaks (akin to tax breaks for other creative industries such as film) – industry bodies such as TIGA and ELSPA had lobbied hard for a similar tax break for the games industry.  Still, it’s always possible that things might be different if a new government comes in after the general election next year.

Olswang has done a lot of work advising the industry on the proposed games tax break/how it could work, and has put together a Pre-Budget Report blog which they’ll be updating as the report comes out.  Here it is: