The UK's secret £30m game studio stuck in tax breaks limbo

The UK's secret £30m game studio stuck in tax breaks limbo
Craig Chapple

By Craig Chapple

March 18th 2014 at 12:30PM

We chat with Codec Studios founder David Burns on his ambitions to develop a big budget triple-A game in the UK, and how he plans to fund it

It’s been two years since games tax relief was announced by George Osborne in the 2012 Budget, sparking widespread adulation amongst the UK game industry. Finally, game developers were being recognised for their contribution to the economy and society.

Roll on a year later and the tax breaks were held up by the European Commission, which questioned whether there was a real market failure in the UK. A further year and a few studio closures later, the UK game industry is still waiting.

There are faint glimmers of hope that incentives could finally be confirmed by the government this week after the European Commission allegedly gave approval to give the UK similar incentives that France has been enjoying for years.

The news would delight one man in particular, who is trying to pick up the funds for a new £30 million triple-A game developed by more than 100 staff, right here in the UK.

But he says it will be a lot harder without tax breaks.

Finding finance

“The UK desperately needs it. We will give a lot back if we get it,” says would-be game studio founder David Burns, who has already set up movie studio Eden Films, which is taking advantage of that sector’s generous tax incentives.

He thanks TIGA CEO Richard Wilson for his support help so far in helping the studio raise funds, highlighting the difficulty of finding the money for big budget games in the UK.

“Without Richard, people like me can't get hold of 16 per cent of their budget,” he states.

His new company is Codec Studios. The game, which he wants to be a third-person action title for console, is based on his script for a trilogy of blockbuster films called Redemption: The Challenge that focuses on the story of a fallen angel named Elizabeth Grey, set against the backdrop of a battle between heaven and hell. The first entry in the story is already being made into what Burns calls an interactive motion comic split into four parts, but he has much loftier ambitions than just a comic.

The UK desperately needs games tax breaks. We will give a lot back if we get it.

David Burns, Eden Films

He already has some of his team on board, including former Epic Mickey art director Rolf Mohr and ex-Core Design composer and former City Interactive audio director Nathan McCree.

But even with tax breaks, just how does Burns plan to get the money to finance such a big budget game made by over 100 developers?

“What the government says is that 20 per cent isn't 20 per cent,” says Burns, as an example of the limits of tax breaks.

“By the time you've taken out advertising, insurance, banking charges, it doesn't work out at that and people who work in the film industry like I do know this. So we have a rule of thumb that's about 16 per cent.

“So if you add on top of that a lot of deferred fees and people who want to put their money back into the game, that puts us up to about 25 per cent.

“Now in feature films, you get a thing called Gap finance. Gap is a loan from a bank. And for features less than $10m a bank will lend you 15 per cent. For films above $10m, they're often willing to go as high as 35 per cent, which is a massive chunk of cash.

“Now some of these banks are actually now going into games. So we're currently talking to a load of banks to get a 35 per cent gap loan, which with the tax breaks and deferred fees, takes us up to 60 per cent of our budget. And I have meetings as well with very high wealthy investors who we are looking to for the remaining 40 per cent. So that's how we're hoping to do it.

“My hope is it'll be in place in the next three to six months, it's that kind of time frame.”



He also excitedly explains that he has secured a completion bond for the game, a standard method of financing in his other business, film. He says the completion bond allegedly ensures the project will be completed – once the finance is in place of course – and says all major high-rise building constructions, for example, get them too to make sure they are finished.

“It's an insurance policy, it costs a fortune, where basically they monitor the spend from day one to the end, and insure you against anything going wrong,” he says.

“What it means is the financiers feel safe because once they've put the money in, this company has ensured the game will be finish. And we've got that, it's absolutely fantastic. All the banks immediately started showing interest because I can guarantee it will be finished, on time, on money and to the requisite standard, because I'm paying over £1 million for insurance.”

A £30m gamble?

Building up the requisite funds through various loans and tax incentives for such a big budget game sounds like a big risk though, even in the face of Burns’ obvious enthusiasm and drive to get the studio off the ground.

When I tell him so, he counters that it’s not that high risk; it’s just finding the sources available to fund the studio.

“If the tax break comes in we'll be able to benefit from it. If it hasn't come in I will have to raise more private investment,” he says.

“Banks won't loan against anything where the general public buys an item, that's not how banks work. They loan against land, property, huge developments. But they won't loan against intellectual property. They never have and they never will because it just seems too high risk.

“The only area where there would appear to be a loophole in that is Gap loans. And the Gap is something that's come in in feature films, which I've used several times, because it enables the Gap lender to have first position of the waterfall. This means if you make something for £10m and the bank lends you around £1.5m, they charge you 18 per cent, but they get the very first £1.8 million that comes in from the film. Which in other words, are they expecting this film to at least make 18 per cent, and the answer is yes. Very few films make less than 18 per cent.

“So that's how they gear it. On much bigger projects where you're expecting much higher returns, they're willing to go up to 35 per cent. We have two film projects at the moment, one which is going for 15 per cent Gap, and one which is going for 35 per cent because it is over the £10m mark.”

The government must understand that this is crucial. But even then it's a token gesture I can assure you

David Burns, Eden Films

Burns clearly has the business know-how to find the right funding sources, in part thanks to his history in the film industry where he has been picking up project finance for years, and it’s a model he wants to bring to the game industry.

As well as his team being staff by industry veterans, Burns himself appears to have some knowledge at least of how games work, even if his planned three year development cycle may not take into account the true nature of game development, which can often result in delays in big projects in particular. Just look at Ubisoft’s Watch Dogs delay as an example.

From a structural standpoint though, Burns knows the big differences between film and games, and why the two don’t always successfully crossover.

He uses the example of a character entering a building with the goal to get to the top. In a film, the edit would often cut straight to the top to keep the plot moving forward, while a game is about the journey to the top.

Ambitiously though, he describes the planned game as a cross between Tomb Raider and Batman. “Think Lara Croft with wings,” he says, explaining the title will take players on a trip around the world, weaving in action, puzzle and exploration elements together.

“The joy of Tomb Raider when it was at its best is you're going from location, to location, to location and it's a very nice balance between a shooter, puzzle solving and exploration. And that's what we're doing. We're continuously rolling where the weights lie. So in a particular level it might be more shoot ‘em up, and another it's more exploration and puzzle solving. And we're trying to get a balance there in these different environments so that each level feels like a new and interesting experience.”

Give entrepreneurs a break

Burns says he has now identified the perfect location near Woolwich, and is clearly keen to make the game, which if successful he hopes to develop a full trilogy of titles while also expanding into the development of smaller mobile games.

But this may not happen without games tax breaks.

“The government must understand that this is crucial. But even then it's a token gesture I can assure you,” he says.

“In New Zealand and Australia they get 40 per cent tax credit on feature films. Imagine making a £10 million film knowing you've already got £4m in place before you've even started.

“We have to do it. If the government wants someone like me to employ a hundred people for three years to build something that has the potential of making an absolute fortune, they have to support it. They're making a ton of money out of it, the least they can do is support getting the games out.”

Tax breaks won’t change the inevitable for those studios out of sync with the modern industry. But they could put the UK on a level playing field with nations like Canada, home to super studios such as Ubisoft Montreal and EA Vancouver.

And who knows, maybe the UK will attract these publishing giants and ambitious businessmen and women who want to take advantage of the UK’s vast talent base.

Burns concludes with a message to the European Commission: “It will change everything once we know we've got it. Because at the moment it is a proviso that I'm having to find an extra 16, 17 per cent from private investors. It's a huge chunk of cash, £4.5 to £5m, it's a lot of money.

“The less money I have to raise privately, the faster the game will get off the ground. Simple as that.”