UK games tax breaks: Your essential guide

UK games tax breaks: Your essential guide

By Will Freeman, Rob Crossley, Mich

April 5th 2012 at 10:05AM

With the celebrations over, what happens next? The Develop team finds out

INSTANT reaction to the 2012 UK Budget, which announced plans for a games production tax break, was of course jubilant.

But across the swathes of quotes and testimonials the Develop team collated in the days following March 21st, one lingering question remained for most in the industry: what happens next?

And then, as many said to us: “The Devil’s In The Details”.

A tax break for video games made in the UK has been long fought for. While Canadian provinces have exploded off the back of state subsidies, British games development has fractured and shrunk. We are still strong, but we are weaker than we once were.

So can a tax break rejuvenate the United Kingdom’s games industry? What has to happen to get the tax break from proposal to law? And how will it be implemented?

Develop, with help from the Department for Culture Media and Sport, UKIE and TIGA, plus studios large and small from across the UK, has some answers. You might not like all of them, but you need to know.

FIRSTLY: WHY DID THE GOVERNMENT CHANGE ITS MIND?

The industry was told it was getting tax breaks back in 2010 by the eventually outgoing Labour government. Then the Lib Dem/Conservative coalition government cancelled that. Why the U-turn?

The question is answered best by Ed Vaizey, Minister for Culture, Communications and Creative Industries at Westminster’s DCMS.

He says that along with mounting lobbying from the games industry, “some big companies made it quite clear they would seriously consider investing heavily in the UK if there was a tax break. Big TV companies on the West Coast of the US said they would be interested too, as did the animation outfits.

“So it has been a coalition of the willing, that put together a very convincing case to the Treasury.”

Plus, the Chancellor saw the opportunity for something bigger than ‘just’ a games tax break, says Vaizey. When the coalition first pushed aside Labour’s tax break, it was described as poorly targeted. The new one should coincide with similar tax credits for animation and TV firms.

“Two years ago the Chancellor’s other concern was 'can you give a tax break to one sector when the converged world of TV, film, games and animation is much bigger?’

"One tax break for games – he just wasn’t convinced. But also the economic climate at the time was on his mind. The bigger win, the bigger tax break we are moving towards, is much more attractive to him.”

Other motivations came into play, too, says Vaizey: “A lot of studios in the US and Canada said to us that they are still interested.

"Even though they are in Canada, they see the UK as a potential European hub. That all adds to the attraction of the tax break. It’s a great incentive for companies to know that they will get all that support, plus access to Europe.”

Certainly, the bosses of entertainment and games firms were delighted by the news:

“This announcement is great news for the UK’s creative industries,” said Josh Berger, president and managing director, Warner Bros. Entertainment UK, Ireland and Spain.

“As major investors in UK TV, film and video games production we welcome all measures aimed at supporting the UK to further develop and sustain its strong position in these key creative sectors.”

Ubisoft was likewise delighted - it has built many of its studios in regions with Government subsidies, and has a UK studio ripe for expansion.

“We’re delighted that the Government has announced its intention today to provide production tax credits for the UK games industry,” said Rob Cooper, UK MD.

“This gives recognition to the wealth of creative development talent in the UK and will allow publishers to continue to support UK studios.

"The UK has always been a leading market in gaming, and with this support from the Government, we can continue to be competitive within the global landscape.”

And then there’s the big one – Bobby Kotick, the Activision Blizzard boss who publicly dressed down the coalition Government for its initial U-turn and hinted that his entire UK operation could move elsewhere in Europe.

“This is a great first step and should put the UK in a stronger position to compete with other countries offering incentives for video games production,” he said.

“The UK is an important centre for development talent, employing 9,000 people in the video games sector, and anything that promotes further investment should be welcomed.”

HOW DOES THE CONSULTATION PERIOD WORK?

The proposed tax break would be part of the 2013 Budget – it’s not a process that happens overnight, and takes 12 months to implement.

In the meantime the Government will open a consultation period to allow the games industry to help shape the resulting subsidy.

Vaizey says that, broadly, this is to “put a realistic case to Government and have to show how the tax credit can work in practical ways”.

But he points to the already existing Film Tax Credit as the direction to take. Proposals from trade bodies and other lobbyists have cited the Film Tax Break as the model to adopt too.

“The Treasury will be concerned about tax avoidance, so that must be addressed – but I think the film credit works extremely well, so the industry should look to the film tax credit and how that works.

"The games industry needs to look at that and say ‘how can we take that model and apply it to our industry?’. The latest version of that is four or five years old and works incredibly well as it has prior approval from the treasury, and that avoids those tax avoidance schemes and means all projects that benefit get prior approval from the treasury.

"There are cultural tests in there which stipulate production in the UK. It’s important people understand there is a cultural test element and that they can start making games with a British flavour.”

In the meantime, there is a good chance that a games industry working group will be established to shape the proposal for the EU. European Commission approval is needed for any law like this, as they otherwise have strict rules on state aid.

So, taking cues from the Film Tax Break, the group will write up a comprehensive proposal that covers a range of elements; What is the legal definition of a game?

What kind of studios should benefit proportionally from the tax break pool? Under what grounds should the DCMS apply for a derogation to the EU treaty on state aid?

THE CULTURAL QUESTION

Debate rages as to whether or not the cultural element will play a serious part in defining the new tax break.
At the time of going to press, the cultural exemption with regards to games no longer actually exists in France or Europe.

Back in 2007 game tax breaks were recognised as an exception to state aid until 2012, paving the way for France’s own games tax break, but earlier this year the ruling expired.

A reintroduction of the measure in France must be approved by Wouter Pieke, the European Commission Directorate General for Competition, but discussions between Pieke and French officials are thought to have tangled over several issues.

The European Games Developer Federation is hopeful for a resolution. Develop has heard there is a chance this will not materialise.

But if it does, the sometimes thorny issue of what makes a game cultural is raised. In separate instances legal firm Olswang and trade body TIGA have submitted proposals that outline how a game could be subject to a ‘cultural test’ to prove how British it is.

Points would be awarded for various aspects such as:

- Is the video game based on locations or historical events in Europe/Britain, or material or activities (a film, a book, an artistic work, a sport) that originated in Europe/Britain?

- Is the game in the English language?

- Is it an original game that contributes to British culture?

- Does it have a strong British story?

- How innovative is the game?

- Does the game reflect British culture, creativity and/or heritage?

- How much of the game is made in the UK?

- Are the staff directing the project British or British citizens?

After that, the points are totted up and either an exclusive yes/no or a sliding scale could decide how much qualifying projects get.

It’s hard to know exactly how this works at this point – that’s what the consultation period should help hammer out. But pre-written proposals – plus the Film Tax Break – already exist, and will point the way forward.

ONCE IT’S LAW, WHAT WILL WE GET?

First, let’s talk money.

Preliminary figures from the Treasury say the games tax break fund will be £15m in year one and £35m in year two.

However, can the industry argue for more cash during the consultation period?

Vaizey isn’t sure. “Those numbers are rough costs and they will be honed down during the consultation period so that the Treasury is confident about the cost implication of the tax credit.

"But people need to be realistic about what the Government can afford and what we can get out of the Treasury – we mustn’t ask for the Earth.”

Most in the industry will argue that still, £50m in two years isn’t much for video games – a couple of large-scale projects from big publishers would eat it all up.

But the tax break would hopefully be balanced enough to ensure that businesses of all scale get a crack at the applying for funds. Indeed, it’s likely the Government will know that this part will be closely watched and will have to support new businesses as well as incumbents.

Indeed, TIGA says that the Government will get hundreds of proposals a year from studios big and small.

TIGA’s proposal also draws a line in the sand for big and small projects. It suggests a 20 per cent tax relief on production costs for games costing more than £3m to produce and 25 per cent on games costing between £50,000 and £3m. Expect this kind of reasoning to find its way into the final implementation of the Finance Bill next year.

As for how the money is handed out, Many in the industry predict a creative industries council would be established.

This would be a group working with the DCMS, and perhaps including a few of its civil servants, that would organise where the money goes. TIGA of course wants its members in such a council. So does UKIE.

Olswang, which was one of the organisations lobbying for the tax break, may do too. The creative industries council would cover TV, animation and film all together. It would probably fill a quango hole left by the now abandoned UK Film Council.

That said, the Government may hand over ruling power to an industry group Ian Livingstone chairs – there’s a chance this could be used to determine who gets what to avoid the formation of an extra body.

But maybe thinking about the tax break in purely fiscal terms is mistake. The Government has chosen the subsidy as part of an overall – and hugely Conservative-themed – strategy to ‘earn’ the country’s way back to the top of the world power league.

“Do we watch the Brazils and Chinas of the world power ahead of us? Do we want to be left behind?” said Chancellor George Osborne in his Budget speech. Indeed, the tax break is as much a statement of intent as it is an actual pot of gold.

“That’s an important point and why I’ve always supported a tax break,” Vaizey tells Develop.

“There are some people that argue a tax break is not fundamental to their business or it might not have an impact for online games forms, or so on.

"What it does definitely do over and above for all of the games industry is prove that we have policy showing the UK government takes the games industry seriously and wants to see investment there."

BRILLIANT! SO THIS WILL HELP US SEE OFF THE CANADIAN MENACE, THEN?

Well, no. The tax breaks won’t be as rewarding as they are in Canada.

“We’ll never quite get to the level Canada has,” says Vaizey. “If you did a line by line analysis to see you might be a little better off in another jurisdiction.”

But he pushes that question back to the wider point – a tax break for games can offer a halo effect for the entire games industry.

“If you add the UK tax break to our mix of skills and creativity, plus the fact that a lot of studios in the US and Canada said to us that they are still interested in the UK… It’s a great incentive for companies to know that they will get all that support, plus access to Europe.”

INDUSTRY OPINION

Pete Samuels,
CEO, Supermassive Games

"In terms of what it means for the industry in the UK, it’s great to get some help to level out the internationally competitive marketplace. It’s no silver bullet though, and the inherent challenges of a sector changing so rapidly will continue to drive the successes and failures along the way.”

Trevor Williams,
CEO, Playground Games

"Any type of funding or financial help coming into the UK has to be a good thing. But more than that though, the government formally recognising the games industry is a fantastic breakthrough.”

Richard Leinfellner,
CEO, Babel Media

“The Devil is in the detail; unless the incentives are of a similar scale, easy to administer, applied fairly to both production and services as they are in Canada, I fear that this will just end up as more talk than action, and fail to reverse the brain drain.”

Imre Jele,
Creator-In-Chief, Bossa Studios

"This tax break provides an immediate boost to active businesses, whilst also supporting the long term development of the industry as a whole. Arguably, this decision has arrived late. We’re still confident though that with close cooperation between game developers and the government, we can re-establish the UK as a leader of the video games industry.”

Torsten Reil,
CEO, Natural Motion

“This is a big and important step towards allowing the UK to compete on a level playing field with heavily supported countries such as Canada.”

Jas Purwal,
lawyer, Osborne Clarke

“The games tax break will open up new avenues of games financing for developers and publishers. However, it’s at least a year off yet: the government needs to consult with the games industry about how to solve the significant legal and practical issues in order to make the tax break a reality, as well as obtain EU legal approval – which could take some time.”
Jasper Smith,
CEO, PlayJam

“While there is more to do, this is a critical first step and reassures UK-based games businesses that the Government is serious about securing, protecting and creating further high skilled jobs in this important sector, which now represents the largest entertainment industry sector in the world.”

Sue Crawford,
Partner and Head of the Tax Group, Wiggin LLP

“Accessing the tax relief will help a games design business more efficiently manage its development plans: many designs obviously never get off the ground and so companies face long periods of expenditure without, until now, any income.”

Will Luton,
Creative Director, Mobile Pie

“For me, the money would be best spent on new start-ups at seed stage, not on allowing ageing corporates to tread water as their market share declines. The industry is at an incredible juncture right now and we have the potential to create large disruptive companies on our own soil that will go on to be world leaders, employ many and put big chunks of tax back in to the state”

Ian Kelso,
CEO, Canadian interactive Alliance

“Tax breaks can certainly be very effective tools for growing a games industry. They are also important signifiers that governments are actually supportive of the industry. But with tax measures, the Devil is in the details. Their utility really depends on how well they are set up, how easy they are to access, and how much flexibility is allowed anticipating future shifts in the ever changing nature of the industry.”