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ELSPA warned Govt of cultural tax break concerns

Tue 07 Dec 2010 9:30am GMT / 4:30am EST / 1:30am PST
PoliticsPublishingDevelopment

Organisation says it had a duty to warn of relief that could "seriously affect the commercial development of the industry"

While the UK's videogames community was in the process of lobbying for greater state business support last year, it has emerged that ELSPA - the country's former publisher trade body - aired a number of concerns to the government regarding the issue of cultural tax breaks for businesses in the region, warning against initiating that kind of relief for fear of damaging international sales.

Documents obtained via the Freedom of Information Act by Vincent Scheurer of Sarassin LLP and passed to GamesIndustry.biz show that the organisation - now known as UKIE - submitted a three-page document to the government when invited to contribute to a review by the Department for Culture, Media and Sport, noting its support for TIGA's 68-page proposal for cultural tax relief.

But the submission also warned of a "restrictive trade and legal environment" if videogames were to be deemed a cultural service or product - although the organisation subsequently claimed publicly that it knew of no stance that could be deemed as 'anti-tax relief' when rumours of a global publisher pressuring the government into abandoning the matter surfaced.

"We have no idea where that has come from, it's totally left of field and has certainly not been on the agenda of any of the many political briefings we've been involved in," said ELSPA director general Michael Rawlinson at the time. "That's not to say it's not true, but we've been discussing tax relief for some time, and lobbying solidly. It's something we haven't come across."

The industry was, somewhat surprisingly, awarded film-style tax breaks in the Budget statement made by the last - and outgoing - government early in 2010. But that position was swiftly overturned after the Coalition government came to power in May, and set about identifying billions of pounds in spending cuts.

While ELSPA's submission seems contrary to its public statements noting unequivocal support for the economic relief, the organisation has defended its position, claiming a responsibility to ensure that any system put in place was beneficial to "full breadth of the videogames and interactive entertainment industry". While the comments may be surprising to some, the organisation at the time was only responsible for the publishing community. Publishers with larger developer headcounts in the UK would have had more to gain from cultural relief than those without a creative presence; indeed there may have been some negative effects on some sections of the business community if videogames were subsequently reclassified from entertainment products to cultural goods.

"Currently videogames are classed as 'software' under World Trade Organisation rules, and as such enjoy the benefit of free trade status," wrote ELSPA in its DCMS submission. "Cultural products on the other hand, are afforded a protected status, that allows countries to apply trading restrictions to protect their own locally cultural products and therefore to restrict free trade.

"Any change to the classification of videogames could seriously affect the commercial development of the industry and its long-term future. Currently, videogames are not affected by the imposition of retail levies, output quotas and the like which are applied to cultural industries (such as the French and Spanish film industries) in order to fund the tax relief schemes.

"Our concern is that the provision of a tax relief scheme on cultural grounds could label the industry's products, in the EC's view, once and for all as cultural, and that this could be an irreversible first step towards the imposition of retail levies or further protectionist regulation aimed at sourcing funding to support the tax relief scheme.

"Any introduction of retail levies within the videogame industry would, from the publishers' point of view, erode any previous financial benefit derived from tax relief at the development stage, mainly because retail levies would apply across all products whereas only a percentage of videogames in development would be successful in obtaining tax relief."

ELSPA's submission went on to say that "should the government decide in favour of a tax relief scheme for videogames, this decision is made with a full understanding of the potential consequences of this policy on the future status of the industry."

Speaking to GamesIndustry.biz UKIE has claimed that following the submission process, and once it had determined there would be no negative impact from a cultural tax break, it contacted both the government and TIGA to indicate it no longer had any reservations for such plans. However, those indications to government don't appear to have been recorded, while TIGA has declined to comment officially on the matter.

None of the organisation's private concerns on the culture issue had been made public until now, and while universal acclaim for a policy based on cultural requirements would have been unlikely, it's clear that a similar system adopted in France has benefited some sections of the development community there.

But while cultural tax breaks might have only helped a proportion of UK businesses, it's likely that the development community would have preferred a first step, rather than no step at all - although given that the tax break was included in the Labour government's subsequent Budget, it would appear that if any apparent mis-step between ELSPA and TIGA existed, it had little impact.

Additionally, it's very unlikely that any action would have persuaded the new Coalition government to stick with those plans; in the face of huge cuts to public spending it's clear that doing so would have been politically impossible to justify for an industry that, the government would argue, was successful and thriving.

However, it did appear to use 'mixed messages ' from the games industry as one reason for ditching tax relief, although that comment was never clarified - and the Treasury subsequently claimed that it simply disagreed with the numbers put forward by TIGA with respect to the benefits that the tax break might bring.

"We have continued to support tax breaks at every given opportunity and at no point has it ever been indicated that our resolved enquiry about WTO trade classification had any effect on the government's decision to not introduce them," stated Rawlinson when asked to clarify UKIE's position in light of the FOI documents.

"UKIE has the responsibility for serving the interests of the full breadth of the videogames and interactive entertainment industry. For the games industry to thrive all parts of the value chain need to be successful. That's why the wider implications of our policy agenda are always carefully considered."

"In our submission to government in Autumn 2009, ELSPA (as UKIE was then) once again fully supported a call for tax breaks. As part of a wider consideration of the issue, ELSPA asked for clarification on whether the classification of videogames as cultural products (which would be necessary to obtain tax breaks under European state aid rules) would have any knock-on effect on the World Trade Organisation's (WTO) trade classification of videogames as software.

He added: "UKIE was concerned that the any re-classification required to allow tax breaks might change the status of videogames from software and bring it within the scope of audio-visual and media classification, which might bring unintended and seriously damaging consequences for the whole industry."

Further details on the identity of any companies that were rumoured to be specifically against cultural tax breaks are now the subject of an ongoing FOI appeal, following the government's initial refusal to share any information it has.

Two major publishers have specifically stated that tax benefits would encourage them to invest in the UK to a much greater degree. Activision CEO Bobby Kotick and THQ's Danny Bilson both claimed that they would consider the country for future development studios if there was some a financial environment that could help it compete with areas such as Canada - which offers 37.5 per cent back on labour costs alone in some areas.

Rawlinson said that following a meeting with the Department for Business, Innovations and Skills in April this year, "UKIE had it confirmed that our concerns about WTO trade classifications could be addressed without affecting the introduction of tax breaks" - although BIS does not have any record of this meeting.

He also said that UKIE is working with developer association TIGA on supporting tax breaks: "UKIE had a meeting with TIGA on September 13 where we shared with them every piece of correspondence that we had on the issue of tax breaks including the document that refers to the WTO question," said Rawlinson.

"UKIE continues to work closely with TIGA to develop and support the call for tax breaks for the UK's videogames industry and has recently given joint evidence on the issue, with TIGA, to the Scottish Affairs Select Committee."

GamesIndustry.biz understands that only one meeting has so far taken place, and that no further meetings have yet been planned. The meeting Rawlinson refers to was with Sarassin's Vincent Scheurer, who also acts as company secretary of TIGA, and held after the documents from the DCMS had been released via the Freedom of Information act.

The UKIE board is made up of senior executives from Nintendo, Sony, Disney, Activision Blizzard, 505 Games, Mastertronic, Eidos, Codemasters, EA, Microsoft, Ubisoft and Warner Bros.

A full timeline of ELSPA, TIGA and the UK government's public and private interactions regarding tax breaks is now available on GamesIndustry.biz, while the full submission from ELSPA to the DCMS and UKIE's complete response to GamesIndustry.biz are contained on the following pages.

The following is the ELSPA submission to the to DCMS in its entirety, dated September 2, 2009:

Views on the potential impact of a tax relief scheme to promote culturally British videogames

Following the letter from Sin Simon on 30 June, ELSPA has been in discussion with TIGA in relation to our submissions relating to the Government's call for evidence.

ELSPA is keen that the UK must maintain a thriving videogames development industry. UK developers face increasing challenges from competitors overseas who are eligible for government financial support, and the UK must ensure that its developers receive the support necessary to enable them to compete on the global stage. In this respect we therefore support the arguments for the introduction of a tax relief for UK videogames on cultural grounds presented by TIGA. We also support the value of such a scheme in cutting production costs and managing risk at the early stages of videogame development, when proposals are most likely to be discarded on the grounds of cost and/or risk of failure.

TIGA's proposal for a UK videogames tax relief test and their projections for the practical application of the scheme have clearly been extensively researched. The immediate benefits to the UK videogames development industry of such a scheme are clear, not only economically but also in terms of stimulating the UK to develop and retain home grown talent and to prevent the further decline of the UK as a top global producer of videogames.

However, we would also like to take this opportunity to raise one or two concerns about the possible longer-term impact on the industry, should the introduction of such a scheme lead to a classification of videogames as a cultural product or service for international trade purposes. The consequences in that case could be much more restrictive trade and legal environment for our products see below.

Classification of videogames as cultural media

ELSPA has a number of concerns connected to the introduction of a tax relief scheme for UK videogames on a cultural basis.

Change in product classification.

Currently videogames are classed as 'software' under WTO rules, and as such enjoy the benefit of free trade status. Cultural products on the other hand, are afforded a protected status, that allows countries to apply trading restrictions to protect their own locally cultural products and therefore to restrict free trade. Any change to the classification of videogames could seriously affect the commercial development of the industry and its long-term future.

It is important to videogames publishers that videogames continue to be regarded by the EC as software. Currently, videogames are not affected by the imposition of retail levies, output quotas and the like which are applied to cultural industries (such as the French and Spanish film industries) in order to fund the tax relief schemes. Our concern is that the provision of a tax relief scheme on cultural grounds could label the industry's products, in the EC's view, once and for all as cultural, and that this could be an irreversible first step towards the imposition of retail levies or further protectionist regulation aimed at sourcing funding to support the tax relief scheme.

Any introduction of retail levies within the videogame industry would, from the publishers' point of view, erode any previous financial benefit derived from tax relief at the development stage, mainly because retail levies would apply across all products whereas only a percentage of videogames in development would be successful in obtaining tax relief. While we appreciate that such a situation has not yet developed in France where tax relief has been made available on a cultural basis, our concern is that the introduction of a similar scheme in the UK would identify the top two European videogames producing members as having a cultural classification, thus making it more difficult to retain our valued software classification.

Intellectual Property/Legal classification

A further consideration for videogames publishers concerns intellectual property and legal classification. Videogames currently benefit from a legal classification as (interactive) software in most European Countries. In addition this classification was recently recognised by the European Union when excluding games from the regulations in the 2007 Audiovisual Media Services Directive (Recital 18). Maintaining such a legal classification is essential to the continued growth of the industry as it provides the most effective and efficient legal protection possible for the range of intellectual property contained within a game. A cultural classification of games may very well lead to their being considered purely as audiovisual products meaning that the unique legal protection provided by a software definition would be lost

Conclusion

ELSPA is keen that UK videogames developers be encouraged to innovate and grow, and that conditions must exist in the UK in which the industry can thrive and drive the UK onwards as a global leader. The potential benefits of a tax relief scheme in developing such conditions, and in developing the UK skills base, are clear.

We understand that the introduction of a tax relief scheme for UK videogames on a cultural basis will not automatically lead to a cultural classification for the videogames industry within the EC. However, for the reasons set out above, it remains a concern for us that it will become increasingly difficult for videogames to maintain their important software classification within the EU should the UK industry be granted a tax relief scheme on cultural grounds.

It is therefore important that, should the government decide in favour of a tax relief scheme for videogames, this decision is made with a full understanding of the potential consequences of this policy on the future status of the industry. We are very happy to discuss this issue further with the officials concerned as it is paramount that the best outcome be secured at the earliest possible date for the British industry, at home and abroad. We are therefore grateful for this opportunity to feed into the Government's considerations and would be glad to meet the relevant officials in the near future to further discuss the potential impacts of a cultural tax credit

In the interest of clarity, the following is an extract from a note of a meeting held between ELSPA and Sion Simon, held November 25, 2009.

A paragraph has been withheld, with details also included for clarity.

Extract from note of meeting with ELSPA on 25/11/09.

Sion Simon had lunch yesterday with Michael Rawlinson and Phil (Snape) from ELSPA....

ELSPA feel that support for education, internships and apprenticeships would be more helpful to the industry and would like a fund, similar to the UKFC's, for the games industry. They also think that the support scheme run in Finland would also be helpful to the industry.

[One paragraph of this note has been withheld under section 43 and 35 of the Freedom of Information Act. The rest of the note concerned other subjects and has been redacted on the basis that it is not relevant to the request].

Details of the reasons for withholding the paragraph

From the DCMS:

Officials have carried out a search of our paper and electronic records and I can confirm that we hold a limited amount of information in relation to discussions with ELSPA.

I am pleased to set out below the large majority of the (limited) relevant information we hold. However, I am unable to provide one paragraph of the note of the meeting of November 26 as it is exempt from publication under section 43(2) (would, or would be likely to, damage the commercial interests of ELSPA) and 35(1)(a)(formulation or development of government policy).

Both section 43 and 35 of the FOI Act are 'qualified exemptions', which means that before taking any decision to apply them, the Department must carry out a test of whether the balance of public interest lies in releasing the information or withholding it.

In favour of releasing the information we considered the following points:

In relation to section 43

  • The general interest in scrutiny of government action.
  • The public interest in knowing whether ELSPA's comments contradict its public position or the position of its members.

In relation to section 35

  • The general public interest in disclosure
  • Greater transparency makes government more accountable to the electorate and increases trust;
  • The public interest in being able to assess the quality of advice being given to ministers.

However, on balance we decided that the public interest lay in withholding the information because:

In relation to section 43

  • The information in question was an internal note of a meeting taken by a member of staff who was not a policy official. It was not, in fact, an accurate reflection of what was discussed at the meeting. Releasing it would be likely to unfairly damage the confidence that its members and contacts may have in it, and would at least require ELSPA to publicly rebut the contents of the note;
  • Disclosure would also make it less likely that ELPSA or other organisations within DCMS sectors would provide the department with commercially sensitive information in the future and consequently undermine the ability of the department to fulfil its role.

In relation to section 35

  • The fact that the information in question is an incorrect description of what was discussed at the meeting significantly reduces the public interest in its release. The information is more likely to misinform the public than contribute to the public interest, and its release would be likely to divert the debate towards theoretical discussions of where policy may potentially have gone.
  • Policy towards tax relief is still in development. Releasing this information would be likely to confuse the current debate. We do not consider this to be in the public interest.

The following is the full statement from UKIE on its current position on tax breaks:

UKIE director general, Michael Rawlinson said: "UKIE has always supported video games specific tax breaks. To show its ongoing commitment, UKIE agreed to a joint working group with TIGA back in August. This group is re-examining the evidence required to present to Government that would support the case for the introduction of tax breaks, whist also looking at other means of financially supporting the video games and interactive entertainment industry. We look forward to TIGA engaging with us more in the coming months."

"UKIE has the responsibility for serving the interests of the full breadth of the video games and interactive entertainment industry. For the games industry to thrive all parts of the value chain need to be successful. That's why the wider implications of our policy agenda are always carefully considered."

"In our submission to government in Autumn 2009, ELSPA (as UKIE was then) once again fully supported a call for tax breaks. As part of a wider consideration of the issue, ELSPA asked for clarification on whether the classification of video games as cultural products (which would be necessary to obtain tax breaks under European state aid rules) would have any knock-on effect on the World Trade Organisation's (WTO) trade classification of video games as software."

"UKIE was concerned that the any re-classification required to allow tax breaks might change the status of video games from software and bring it within the scope of audio-visual and media classification, which might bring unintended and seriously damaging consequences for the whole industry."

"Since that time, at a meeting with the Department for Business, Innovations and Skills, in April 2010, UKIE had it confirmed that our concerns about WTO trade classifications could be addressed without affecting the introduction of tax breaks."

"UKIE had a meeting with TIGA on 13 September where we shared with them every piece of correspondence that we had on the issue of tax breaks including the document that refers to the WTO question."

"We have continued to support tax breaks at every given opportunity and at no point has it ever been indicated that our resolved enquiry about WTO trade classification had any effect on the government's decision to not introduce them."

"Following the decision not to introduce tax breaks, UKIE wrote to the Treasury to ask for a full explanation of the reasons behind their decision. We were told that the government believes that a simpler tax system with lower rates for all is the most effective way to support economic growth. They have also said that the proposal was poorly targeted and needed to be more culturally focussed."

"The Treasury has recently further clarified the government's decision in a parliamentary debate reported by GamesIndustry.biz. The main reason given for not adopting tax breaks was that government did not accept the validity of TIGA's analysis."

"UKIE continues to work closely with TIGA to develop and support the call for tax breaks for the UK's video games industry and has recently given joint evidence on the issue, with TIGA, to the Scottish Affairs Select Committee."

10 Comments

Hmm. The withheld paragraph is interesting. Wonder what it said.

"The information in question was an internal note of a meeting taken by a member of staff who was not a policy official. It was not, in fact, an accurate reflection of what was discussed at the meeting. Releasing it would be likely to unfairly damage the confidence that its members and contacts may have in it, and would at least require ELSPA to publicly rebut the contents of the note"

So, a note taken by someone who was not a policy official. Does this mean they took down a note of something said by someone who WAS a policy official?

The mind boggles.

Edited 1 times. Last edit by Fran Mulhern on 7th December 2010 11:10am

Posted:3 years ago

#1

John Bye
Senior Game Designer

477 434 0.9
Previously we'd been led to believe that one or more rogue publishers had secretly briefed against tax breaks, going behind the backs of TIGA and ELSPA. ELSPA had no idea this was going on or who was responsible, and were 100% behind tax breaks in all of their communications with the government.

Now we find out that ELSPA themselves were suggesting in formal written submissions to the government that if cultural tax breaks were introduced they could make things worse rather than better. No wonder the Tories were able to claim the industry had been sending mixed messages!

It also appears that those "concerns" ELSPA voiced about tax breaks being based on cultural criteria were misinformed, as we're now told they were cleared up by them having a quick conversation with another government department. The whole incident was completely unnecessary, if ELSPA had just taken the time to check their facts before suggesting the sky might fall if tax breaks were introduced on that basis.

And apparently the Culture department either didn't get the letter from ELSPA withdrawing those concerns, or they ignored or lost it, as a result of which the incoming government was able to point to ELSPA's original letter and say the industry was divided as to whether the agreed tax breaks would actually be a good thing or cause even more damage in the long run.

Can't say I'm particularly impressed...

Posted:3 years ago

#2
betrayal...

Posted:3 years ago

#3
More to the point, the ELSPA openly displayed its willingness to sabotage efforts to support developers even at the suggestion that it might be damaging to publishers, possibly, perhaps, at some point in the future.

Posted:3 years ago

#4

Elisabeth Pinto
Production Manager

1 0 0.0
Hmm. I'm confused as to why they thought video games would get involved in French-style quotas and the like, when the UK film industry isn't, in spite of the tax break and cultural industry label.

Posted:3 years ago

#5

James Prendergast
Research Chemist

730 410 0.6
It doesn't surprise me in the least. As i get older i see everyone in a position of power working towards their own ends and not the benefits of those they represent or guide. I guess any tax breaks could have had 'negative' consequences for any body that needed to represent a body of individuals who needed representation in an environment that wasn't favourable to them/their existence. Removing that need or some of that need could reduce that body's power and influence.

Edited 1 times. Last edit by James Prendergast on 7th December 2010 6:05pm

Posted:3 years ago

#6
I was surprised by what we found through the Freedom of Information Act. In particular, the arguments raised against tax breaks were just not convincing in themselves, particularly as the precedent has already been set by the French games tax relief and the tax relief for the UK industry (as Elisabeth Pinto mentions above).

In addition, UKIE's official comment on all of this states that "In our submission to government in Autumn 2009 ... ELSPA asked for clarification on whether the classification of video games as cultural products ... would have any knock-on effect on the World Trade Organisation's (WTO) trade classification of video games as software." However, if you read their submission, it doesn't seem to me to be asking any questions at all.

Posted:3 years ago

#7

Ed Daly
Managing Partner

2 0 0.0
This reforces that because ELSPA/UKIE's members are publishers (mostly foreign companies) whose interests are never going to be 100% aligned with UK developers it makes sense for UK developers to support TIGA.

Edited 1 times. Last edit by Ed Daly on 9th December 2010 2:07pm

Posted:3 years ago

#8

Paul Sinnett
Programmer

7 7 1.0
I agree with John in not being impressed with ELSPA's behaviour. I only hope this encourages game publishers to look carefully at what is being put forward in their name.

Posted:3 years ago

#9
The tricky element is the blurring of boundaries between representation of publishers/developers/ 1-2 man teams, students by UKIE/TIGA.

Posted:3 years ago

#10

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