UK Games Tax Relief Passes Another Milestone

At TIGA we have campaigned for the last five and a half years for a Games Tax Relief which supports cultural products, assists UK developers, is necessary and proportionate in design, and which delivers these results without distorting competition within the European Union's internal market.

Last week we passed another milestone. TIGA submitted its formal response to the EU Commission's investigation into Games Tax Relief (GTR) on behalf of our members and of the wider UK games development and digital publishing industry.

TIGA finally convinced the UK Government to adopt Games Tax Relief in the March 2012 Budget but the EU Commission announced its intention to carry out a formal investigation into GTR in April 2013. The Commission expressed four principal concerns. The Commission:

• doubts that GTR is necessary because of the global growth of the video games market and industry;
• questions whether video games are cultural products in the same way that films are cultural;
• thinks that if the UK introduces GTR it could start a subsidy war and distort the internal market; and
• doubts that the proposed cultural test is sufficiently restrictive to ensure that it only supports genuinely cultural video games.

TIGA's response to the EU Commission addresses these concerns head on.

Video games are cultural products

At TIGA our position is that video games are cultural products similar to other audio-visual creations such as film. The game development process is a cultural activity on a par with animation and film production. Video games are developed by teams of artists, animators, musicians (and other audio specialists), designers, programmers and script writers and these are often supplemented by voice actors, regional marketing experts, translators and other cultural localisation specialists. Additionally, video games interact with other forms of media, for example, inspiring film, literature, music and television. Video games have inspired films, (e.g. Tomb Raider, Silent Hill, Final Fantasy), television programmes (e.g. Lost), and music (e.g. EMI has organised a orchestral tour series called Video games Live featuring music from video games). Video games have also had an influence on literature, fine arts, design, museum exhibitions, academia, children's industries, radio, newspapers and the Internet. Moreover, video games are embedded in British life. 33 million people play video games in the UK. TIGA therefore believes that video games are as cultural an entertainment media as any other in the UK and that the necessity of a Games Tax Relief should not be undermined by the belief that video games are any less culturally relevant than films, TV, or animation.

Games Tax Relief is necessary

Globally, the video games industry has growing in recent years. However, since 2007, the UK has seen a decline in its global chart ranking, edged out of the top 3 video-game-making territories by South Korea in 2005, out of the top 4 by Canada in 2006 and then from the top 5 by China in 2010. At the same time, to an important extent the UK development sector has been declining. In contrast to the rapid growth of the global market, the total number of games development staff employed in the UK shrunk by 7% between 2008 and 2012. Similarly, annual investment was approximately £30 million lower in 2012 when compared to 2008. There are two principal reasons for this long term development sector weakness, the decline in publisher studios in the UK and the closure of so many large independent studios.

One factor in the decline of larger UK studios has been the transfer of major games properties from UK developers to overseas developers. Some of the most notable properties to have been moved are the iconic British Tomb Raider franchise (from UK-based Core Design to USA-based Crystal Dynamics) and the official Olympics video games (from long-term franchise developer UK-based Eurocom to Sega Studios Australia). It is particularly ironic that the last Olympics game, London 2012: The Official Video Game, was the first and only summer Olympics game to have been developed outside of the UK since the Olympics video game franchise started in 1992. Following the transfer of their major franchises, both Core Design and the Eurocom studios downsized substantially and were eventually closed down, resulting in the loss of hundreds of jobs.

The UK is of course competing on an un-level playing field. Many countries support their domestic video games sectors via tax relief, while the UK does not. The level of public support for games businesses overseas can be significant. Studios in receipt of public support in Canada are receiving support equivalent to 23 per cent of their turnover, giving them a significant competitive advantage. This has resulted, and continues to result, in major publisher and independent studios closing down, major independent studios losing contracts to cheaper and subsidised overseas developers and major games properties, including culturally British ones, being transferred from UK to overseas studios. It has also resulted in a substantial and measurable brain drain of senior, skilled staff to overseas games companies. TIGA research indicates that 41 per cent of the jobs lost in the UK between 2009 and 2011 relocated overseas, particularly to North America.

Many games made in the UK are made with an international or Americanised theme, with culturally British elements eliminated. There is a market for culturally British games (both domestically and globally) but the cost of making them in the UK has become increasingly expensive. This is demonstrated by the decline in investment and employment in the UK games industry referred to above. Of the games that are still being made in the UK they are increasingly being made with an international or Americanised theme - accents are becoming American, cars are being driven on the 'wrong' side of the road, etc. and the back stories are becoming less about British or European situations. GTR helps to address the problem of the internationalisation/Americanisation of video games in two ways. Firstly, GTR will enable more studios to self-publish and keep a British feel in their games. Secondly, GTR will reduce the cost of games development in the UK and so could incentivise global publishers to take more of a risk on developing games with a British character.

Games Tax Relief will not distort the EU's internal market

France's video games tax relief was accepted as legal by the European Commission in 2007. In the intervening 6 years, only the UK has announced an intention to offer a similar tax relief, with no other Member following suit. The proposed UK Games Tax Relief does not constitute an attempt to join a global subsidy race but is rather a measured and proportionate measure which serves to address the under-supply of culturally British video games. However, the UK's Games Tax Relief would also help to mitigate the global market distortion caused by existing subsidies in other countries outside of the European Union. The proposed UK Games Tax Relief will go some way towards levelling the international playing field for the UK development sector in particular against its main developer territory rivals. Significantly, the European Games Developers' Federation supports TIGA's and the UK's proposed Games Tax Relief. European developers do not believe that the UK's planned Games Tax Relief will distort the internal European market.

The cultural test

The UK's Games Tax Relief will not distort the European market for games development primarily because the UK's proposed Relief is restrictive in a number of important ways. To begin with, only culturally British games can benefit from the measure. Games have to pass a cultural test in order to be eligible for GTR (The cultural test assesses the game's cultural content; cultural contribution; use of cultural hubs and use of cultural practitioners). Additionally, the rate of tax relief is limited to 25 per cent, whereas other jurisdictions such as Quebec boast a rate of 37.5 per cent. Finally, the scope of the relief is curtailed (gambling games, advertising games, marketing and speculative expenditure on games are not eligible for the Relief).

Over to the Commission

The video games sector is important culturally and economically. It has the potential to be a significant industry in the European Union in the years ahead, contributing both to its culture and to its economy. State aid for film and other audiovisual works helps to sustain a commercially important and culturally diverse audiovisual industry in Europe. Equally, tax relief for video games production in the can help to ensure the production of culturally relevant games and to maintain the sector's economic importance. The UK's Games Tax Relief is needed; it is well designed; it supports cultural products; and it will not distort the EU's internal market. Games Tax Relief is good for the UK, it is good for Europe and it deserves the Commission's support.