Treasury: Tax breaks argument is not valid

Treasury: Tax breaks argument is not valid
Michael French

By Michael French

November 18th 2010 at 11:00AM

UK exchequer secretary finally reveals justification for putting kibosh on games dev subsidies

The coalition government's decision to follow through with a tax break for games developers was a sting to many in the UK.

But the bigger point of umbrage came with the vague suggestion that the proposed tax credit was 'poorly targeted', with no other reason given.

Last week, the Government gave its first deeper explanation of why it isn't convinced that a tax break will work - with the Treasury explaining it 'does not accept the validity' of claims by Tiga of how such investment will work.

During a House of Commons debate last week, David Gauke, Exchequer Secretary at HM Treasury and South West Hertfordshire, Conservative MP, said: We have heard the figures quoted by TIGA, but we do not accept the validity of that analysis because we feel that some of the assumptions underpinning those estimates are erroneous. The research commissioned by the industry implicitly assumes that the investment incentivised by the subsidy is entirely additional to the UK economy. In reality, it is likely that the relief will displace investment from elsewhere in the economy, so the net impact on total UK investment could be limited. For example, it is possible that such a tax subsidy would divert investment from more productive sectors to the detriment of the productivity of the UK economy as a whole.

He added: "If Opposition Members are making the case that lower taxes always result in growth in the economy, I would listen with great interest and it would - my Rt Hon friend Mr Redwood made this point - be an interesting conversion to supply-side economics.

"I do believe, however, that the strongest economic case can be made for lower tax rates as a whole, across a broader base, as opposed to targeting some sectors, unless there is a strong case that there is some kind of market failure. We have not yet heard such a case being expressed in a way that we find persuasive, and that is why we decided not to proceed with video games tax relief.

"That is not to say that we do not wish to support British businesses - far from it; we do. It is vital that we have a strong private sector to drive the recovery, but we must support that growth in the right way. In the emergency Budget, the Government announced a major package of reforms to the business tax regime with the aim of creating the most competitive corporate tax system in the G20."