The games tax break doesn’t mean Grand Theft Auto: Weston-Super-Mare!

Earlier today I wrote a quick update on where we are with the UK games tax break.  A few well-intentioned Twitter followers of mine immediately joked that games being required to go through a ‘cultural test’ to gaint the tax break would result in red telephone boxes throughout games, etc etc.

This is a bit like the Guardian’s Charles Arthur’s joke that the games tax break might lead reducing Grand Theft Auto games to using British provincial towns like Weston-Super-Mare instead of New York etc.  All of which shows a fundamental misunderstanding of how the cultural test will work – a mistake which, albeit understandable, is so pervasive in the industry I thought I’d write a quick post about it specifically. Continue reading The games tax break doesn’t mean Grand Theft Auto: Weston-Super-Mare!

The UK games tax break – a quick update

It’s been a while now since the UK government made the surprising but welcome announcement in March 2012 that it would introduce a tax break for the games industry.  What’s happened since then? 
Consultations, consultations, consultations… 
The government announced that it would hold a consultation process with stakeholders, to be split into two parts.  The first, run by HM Treasury, would be a discussion of the overall structure and qualifying conditions of the tax break and the second, run by the Department for Culture, Media and Sport (“DCMS”), would be about the ‘cultural test’ aspect of the tax break.  More below…  Continue reading The UK games tax break – a quick update

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: Continue reading The UK games tax break: opportunities and challenges

US developer sues Michigan over games tax break

Here’s an interesting angle on the games tax break debate: a US developer is suing two branches of the state of Michigan for denying his application for a gamex tax break (via Detroit Free Press)

Nathaniel McClure, CEO of developer Scientifically Proven, said that he moved his company to Michigan to take advantage of its 42% games tax credit, which was introduced in 2008 (although apparently not a single developer has yet to benefit from it).  However, the State offices overseeing the tax credit (the Michigan Film Office and the Michigan Department of Treasury) refused Scientifically Proven’s application on the basis that it did not have overall control of the IP in the game it is developing, Man vs Wild.  Rather, they argued the IP was controlled by the publisher.  Cue lawsuit from McClure (presumably for both a change in the state’s position as well as for compensations/damages).

So, why is this interesting? 

(1) It goes to show, once again, that control of IP is a critical issue in designing a games tax break.  The tax break draftsmen need to think carefully, and the games industry needs to be clear itself, on who should obtain the games tax break and whether it should depend wholly or partly on control of IP.  (Although clearly ofc that will not be the sole test – there would also have to be a range of financial tests etc).

If and when the UK (or any other European) government decides to back a games tax break again, this point would need to be considered as carefully as the ‘cultural test’.

(2) Do the employees or officers themselves have the right to challenge aspects of the games tax break?  The original Detroit Free Press article suggested that McClure might be suing the state himself, which seems a little odd to me – on what legal basis could he argue for compensation from the state based on its refusal to grant a tax break to his company?  The obvious cause of action is the company against the state.  But, given the propensity of litigants to start as many lawsuits as possible when there is money at stake, I wouldn’t be surprised if we did actually see personal lawsuits over tax breaks (US/Canadian readers, have you seen anything like this?)

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UK govt snubs games tax break…again

David Cameron, the UK Prime Minister, has managed to snub the games tax break once again but failing explicitly to answer a question put to him in Prime Minister’s Questions as to why his government had failed to implement the tax break (thanks to Develop for this one).

Dundee MP Jim McGovern (Labour) asked Cameron to explain why, in the emergency Budget last month, the Chancellor George Osborne had (infamously) described the games tax break as “poorly targeted”. Cameron sidestepped the issue altogether and talked about the reduction of corporation tax instead.  He said:

“We believe that what matters is having low tax rates, and what we did in the Budget – which the House voted on last night – was to cut the small company rate of corporation tax back down to 20p from 22p and set out a path for getting corporation tax down to 24% by the end of this Parliament…That would give us one of the lowest tax rates in the G8, the G20 or anywhere in Europe. That is what we will benefit from, but I note that the Labour party voted against those tax reductions”.

That’s unfortunate. It doesn’t seem to bode particularly well for the games tax break (or the games industry for that matter) if Cameron couldn’t even be bothered to pay lip service to the UK games industry. What a wasted opportunity. Still, kudos to McGovern for raising the question.

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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