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Seven reasons why the Coalition rejects tax credits for the UK games industry

By on November 18, 2010

I am not a fan of special pleading for an industry. I would prefer a government to work to make Britain a more favourable environment for all entrepreneurs, not just games ones. I’ve written my arguments on Gamesbrief before (Video game tax breaks: Short term gain for long term pain?)

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The Coalition, which supported the tax credit before the election, decided against implementing game-specific tax credits in the Budget, calling them “poorly targeted.”

Now, in a detailed debate in the House of Commons initiated by David Hanson MP (Lab, Delyn), the government has explained why they think they were poorly-targeted.

The stated purpose of the amendment that Mr Hanson put forward was:

“to test with the Minister whether [there] is an in-principle opposition to tax relief for the video games industry. If not… is there, in principle, room for discussion, so that it would be possible for him to bring back, at some point, a tax relief that would… help to support the video games industry.”

The answer is clear: the government is not in favour of the principle of this kind of tax relief. (Which does, I admit, make their continued support for film tax credits a little inconsistent).

I’ve gone through the debate in detail. Here are, the seven reasons given by David Gauke (Exchequer Secretary to the Treasury) why the government opposes tax credits specifically targeted at the games industry.

1. There is not strong evidence of market failure

The government says:

“The United Kingdom’s video games industry is recognised as a world leader, having produced hugely successful games such as the "Grand Theft Auto" series, and has led to innovations in industries as diverse as defence and health care… All that has been achieved without specific Government intervention for the sector through the tax system.”

2. The government prefers across-the-board tax cuts to targeted ones

Minister David Gauke said:

“In that Budget on 22 June, we announced a reduction in the main corporation tax rate from 28% to 24% over the next four years. In doing that, we wanted to show a sense of direction, to ensure that Britain was open for business, and that we were providing lower rates. Our approach is to have a broader base but lower rates rather than targeted intervention, unless there is clear evidence that intervention is the right approach.”

He also said:

“The government’s focus must be on providing a strong business environment for sectors across the board, including video games”

3. The government does not believe TIGA’s numbers

“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.”

4. Tax credits distort the market

As part of David Gauke’s examples of why he does not believe TIGA’s numbers, he argued that TIGA’s analysis assumes that the investment incentivised by the subsidy is entirely additional to the UK economy. He said:

“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.”

5. Unemployed developers are eminently re-employable

The government does not believe that the demise of a developer means highly-skilled graduates joining the ranks or the unemployable. Certainly, the two people I spoke to most at RealTime World’s about that studio’s demise are now re-employed (one in a US film studio, one in the back office of an investment bank). Mr Gauke said that the TIGA analysis makes the assumption that everything achieved as a consequence of the relief would be additional to the economy. He said.

“It does not appear to recognise that there would also be displacement, and that highly skilled graduates would not remain unemployed if they did not find work in the video games industry. We are therefore sceptical about the TIGA analysis.”

6. There are too many special reliefs

The Office of Tax Simplification announced its list of reliefs and exemptions within the tax system. It was expected there would be about 400 reliefs and exemptions: in fact the number was 1,042.

My personal opinion is that tax reliefs are good for accountants, lawyers and pork-barrel politicians. I do not believe that this level of complexity is good for the economy. Mr Guake is a little more circumspect:

“Many [tax reliefs and exemptions] play an important role within our tax system – I do not wish to decry that – but we have to think carefully about introducing new areas of complexity and new reliefs and exemptions, unless there is a strong case for doing so. Members have already made the case for video games, but the Government remain unconvinced.”

7. It will be illegal state aid under EU rules

To be fair, this appears to be just a timing issue. It is unlikely that EU clearance could be sought and granted before this Bill is passed, in which case tax credits would be illegal state aid.

(Unlike the other points, I don’t view this as an -in-principle opposition. It is an administrative issue).

The government’s position

Mr Gauke summarised the government’s position thus:

“The new clause would create unjustified distortion and complexity in the corporate tax system. We do not think that such an intervention would represent good value for money for the Exchequer or be conducive to providing a simple and competitive tax system. The UK needs a tax system that supports all businesses, because it is the private sector across the board that will drive the recovery. I therefore ask the right hon. Gentleman to withdraw the new clause and new schedule.”

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
  • Guy

    Nick,
    But the TIGA pitch is ill educated and badly pitched.
    Successful application of tax credits are based on job creation, not feeble attempts to prop up moribund industries. The purpose of a justifiable tax credit is to run for ten years until so entrenched that international businesses can’t afford not to have a presence in the UK.
    Backward selling playing the woe is me card is no help to anyone.
    We have the infrastructure, we have the potential, Japan had a dominant lead and threw it all away, if played right the games industry in the UK could be the new Hollywood (and who wouldn’t want a tax-paying multi-billion dollar industry to be native and resident) but pleas that games developers are having to prop up accountancy firms aren’t going to help anyone.

    …….Guy.

  • Ivan

    A key reason for the existence of film tax credits, and their approval under EU state aid rules, is the significance of film as a medium for cultural expression. Whether justified or not, gaming is not successfully able to employ this argument.

  • Dave

    I can’t agree with assertion that tax credits are for a moribund industry. If it is moribund in the UK, it is because when a studio closes in the UK, a proportion of it’s staff will go abroad. So there is a talent relocation outside the UK, which long term is not helpful to Govt. coffers or supporting a creative industry in the UK in the long run.

    Furthermore, it’s not as if publishers clamour to set up shop in the UK. The publisher led major development, slowly get based outside the UK, so consolidating the bleeding of talent and diminishing the games industry further. It’s a slowly vicious circle.

    The quote below, which itself is not very thorough gauge to exemplify a decision on

    “Certainly, the two people I spoke to most at RealTime World’s about that studio’s demise are now re-employed (one in a US film studio, one in the back office of an investment bank)”

    is pretty indicative of the bleeding of the industry anyway.

    When Ubisoft says it is strongly not considering establishing jobs in the UK without a tax break it is serious. Why would they when 1. other countries offer better tax set-up for them; 2. the talent in the UK has to strongly consider relocating anyway.

  • http://www.gamesbrief.com Nicholas Lovell

    My view (although TIGA disagrees with it) is that tax breaks support the old business model of making games on consoles. There will be fewer of those titles made, by fewer companies, which means in effect governments subsidising the profits of global (mainly American, French and Japanese) companies by paying part of their workforce costs.
    My point is about the 80% of new startups in the UK who are focused on digital distribution, not the megalithic monsters making traditonal AAA games (who are, in my view, in decline)