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Video game tax breaks: Short term gain for long term pain?

By on July 13, 2010

Now that the UK Coalition government has nixed tax breaks for the video games industry, perhaps it is time to step back and ask what the objectives of video game tax breaks were – and whether they would ever be able to achieve them.

It’s all about Canada

The UK is reeling from Canada’s ascent up the global developer rankings. Despite the UK’s track record of development and rich creative heritage, Canada is overtaking us as a developer of AAA boxed products.

Canada has generous tax breaks. The logical response is for us to have generous tax breaks.

I have two issues with this argument. The first, as I argued last week, is that tax breaks may doom Canada to second-class status. The second, as set out by Jason Dell Rocca in GamaSutra, is that it is not all about tax breaks: it is much about infrastructure, education, a benign funding environment and being a good place to run a company. A number of US states have started to offer tax breaks, but without the additional elements seem unlikely to enjoy the success that Canada has to date.

It’s about protecting jobs

This, to my mind, is where the argument starts to fall apart. I fear that tax breaks are about protecting *companies*, not jobs. The long term future of games is not in AAA development. There will be a few studios making blockbuster titles for major publishers, but the majority of game development will be online, service-based developers creating games on the web, smartphones, the iPhone and, possibly, downloadable console platforms.

These companies are the companies we need to support. We need to help the next generation of games companies, not the last generation. If they can’t help themselves, then, in the spirit of Schumpeter’s creative destruction, they need to adapt or die.

The most exciting companies in the UK games sector right now are Playfish, Jagex and Mind Candy. Games like Restaurant City, RuneScape and Moshi Monsters are the future of our industry. We need to help them. It is conceivable that tax breaks will help new, innovative companies to create unthought-of business models.

It is more likely that they will help entrenched companies whose business models are failing, but who can get the ear of government.

It’s about the little guy

I don’t think I can make the counter-argument any better than Cliffski from Positech, the indie developer of Gratuitous Space Battles.

“Today was budget day in the UK. The Chancellor abolished the plans of the last government to bring in some vague idea of subsidies for UK game developers working on ‘culturally british’ games.

Instead, amongst other things, he reduced the rate of company tax by 1% from next year.

I’m pleased. Even if my games were clearly ‘culturally british’, I’d have to have applied for the subsidy, no doubt by filling out forms that would take days, then probably have to meet someone and pitch for the subsidy, involving me travelling, then debating and arguing, and hoping that some stuffy civil servant in a suit doesn’t assume I’m some dodgy shyster just because I wear jeans and work from home. I bet I’d never have earned a penny from it, although administering the system would doubtless have kept a few civil servants busy.

On the other hand, cutting taxes for all businesses, just makes Positech games 1% more competitive automatically, without any effort involved by anyone. It’s the smarter move, in my opinion. This seems to be a minority view, there is much gnashing of teeth by ‘industry spokespeople’. I’m surprised anyone thought that a pre-election promise to cut taxes would be honored by a different government.”

It’s about fairness

Canada offers tax breaks. France offers tax breaks. So the UK wants to offer tax breaks. Pretty soon, every economy in the world offers tax breaks.

Civil servants are employed keeping score, but the truth is that money that flows from taxpayers via bureaucrats to companies is money that is leaking out of the productive economy. Do we really want to encourage that? Especially when everyone else is doing the same thing. It’s just an increased tax burden, not a competitive advantage.

It’s all about the future

The tax breaks will be locked in time. They will be relevant to the games market as it is today (or perhaps yesterday) not tomorrow. Can you imagine any political party having the will to revisit the tax breaks in the next decade? I can’t.

That means that tax breaks will be about games in boxes or games as products. They are unlikely to be suited to agile development, to the emergence of the mobile Internet, to service-based gaming, to a world where consoles are a minor player in the gaming universe. Even if they are, can anyone expect them to be relevant in ten years time? Think back to the gaming landscape in 2000 and consider how much has changed from then.

It’s about games

This, I think, is my final criticism. Tax breaks will, inevitably, administered by civil servants. If you thought that it was bad that publishers were responsible for green-lighting what gets made, can you imagine how much worse it would be if it were civil servants?

Tax breaks tend to make companies develop for the government, not develop for the market. And to my mind that is a recipe for poor quality products that no-one wants, and hence commercial disaster.

Conclusion

Perhaps you can tell by now that I have some very real objections to tax breaks. I’ve kept quiet until now because the industry wanted them, and I have many friends, colleagues and clients in the games sector. I, perhaps cowardly, didn’t want to rock the boat (but nor did I lobby against them in private, unlike the alleged activities of some games publishing companies).

I disagree with tax breaks in principle. They smack of government belief that they can intervene to stem the tide of free markets changes. I am much more supportive of efforts to stimulate start-up activity and investment, particularly by helping with training and networking, and much less so of direct involvement in commercial decisions.

I fear that tax breaks would have helped the UK in the short term, offering publishers a bribe to place their development in the UK. But in the long-term it does not help us innovate, develop new business models and grow. Like Canada, we will become indentured serfs, dispatching our surpluses to foreign paymasters. The long-term is what matters, not attempting to stem the tide of change.

I would rather that the film industry was not subsidised. I would rather that Canada did not offer games tax breaks. But given that Canada does, my preferred solution is to make the UK the best place in the world for small businesses (low corporation tax rates, highly skilled knowledge workers, a creative community), not to offer tax breaks due to special pleading on an industry-by-industry basis.

I fear that may make me unpopular in the gaming community.

Tax breaks are a complex issue. What do you think? Please do let me, and other readers, know in the comments.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com