Taxing Times

As has been widely publicised, the UK games industry was the big winner in the March 2010 Budget with the Government announcing its intention to introduce games tax relief to support our highly successful and innovative games industry. This is fantastic news for the industry whose position as a world leader in games development is being eroded by tax breaks offered in other countries

The new games tax relief should (i) promote a sustainable UK games industry (ii) retain a critical mass of infrastructure in the UK and (iii) encourage games that might not otherwise be made at all to be made (and to be made here in the UK), particularly new and innovative games which may be considered to be higher risk.

Initial Challenges: the General Election and European Commission Approval

The initial challenges facing the games tax break are (i) the upcoming General Election (albeit that there is strong cross political party support for the games tax credit, particularly from Labour MP Tom Watson and Conservative MP Ed Vaizey) and (ii) the requirement to obtain the European Commission's approval of the relief (which typically takes 18 months from first notification). Hence, implementation of the relief is unlikely to be quick.

EC approval of the relief is required because of the prohibition on state aid, which prevents an EU Member State from assisting one of its industries (to the potential disadvantage of other Member States) without EC clearance. The film industry previously went through a similar process and obtained approval that the film tax credit could fall within the cultural exemption.

Assuming the Government chooses to adapt the film tax credit which, in our view, is the fastest and most efficient way to deliver the tax break, a case will need to be made that it will promote "culturally significant videogames that might not otherwise be made in the UK". Building on our experience from the film tax credit it is essential that the test does promote British (or European) culture or heritage rather than simply being an economic test. We have designed a cultural points test that would work for the games industry.

Games Tax Credit Structure

There is currently little detail available regarding the structure of the games tax relief and, as always, the (legal) devil is in the detail. The Government therefore intends to engage in a more detailed consultation with the games industry. We have highlighted below some of the key issues that will need to be addressed.

It is envisaged that tax relief will be given in one of two ways: enhanced tax losses generated from games development expenditure which can either be (i) set off against the games company's taxable profits or (ii) surrendered to HMRC for a payable cash tax credit.

What type of spend will qualify and how much will tax relief be worth?

The types of development spend upon which games tax relief can be claimed will need to be clarified, as will its interaction with the existing research and development tax reliefs. Film tax relief is provided on expenditure incurred in the pre-production, principal photography and post production of a film where such goods or services are "used or consumed" in the UK. While it is a slightly unusual test, it should be more straightforward to apply the "used or consumed" test to games expenditure (for example, labour, computer equipment, IP and general overhead costs) on the basis that games development typically involves individuals carrying out development work at a fixed location in the UK.

Further, the value of the games tax relief needs to be high enough to encourage continued game development in the UK by existing players and new companies to start making games here. Typically, if the film model is followed, a cash benefit of 20 per cent (for low budget games) and 16 per cent (for high budget games exceeding £20 million) of a development budget (excluding the costs of finance, interest and marketing) would be available. However, if less than 25 per cent of the total budget is spent in the UK then you will not be entitled to any games tax relief.

What games will qualify and who can benefit?

Key issues include defining who and what types of games should benefit from games tax relief relief. We consider that both games developers and publishers based in the UK and overseas (provided that the game is made in the UK by a company within the charge to UK corporation tax) should be entitled to benefit so that the relief encourages both inward investment and the UK indigenous games industry to flourish. Any restrictions requiring IP to be held in the UK would in our view be counter–intuitive (similar IP ownership restrictions contained in the research and development tax relief rules were recently removed).

The meaning of qualifying games must also be defined broadly enough to encompass the myriad of games currently available (across an array of platforms) and those developed in the future. It's key to future proof the impact of the legislation to permit new types of game, platforms and revenue models to benefit if the UK is to retain its competitive edge and encourage innovation and creativity.

The availability of film tax relief is conditional upon a film being "intended for theatrical release" meaning that a proportion of the earnings from the film must be intended to be obtained from exhibition to the paying public at commercial cinemas. Deciding upon an analogous concept for games raises a number of interesting questions. Gaming revenues are increasingly derived from sources other than direct sales (of boxed products). Consumers of digital products often pay a subscription fee to use a particular service, pay per play and pay to acquire digital goods. Significant revenues are also derived from in game advertising.

Above all we would advocate that, as with the film tax credit which is claimed through a company's corporation tax return, the procedure for claiming relief is simple to encourage companies to take advantage of the relief. It is widely expected that the Film Council may operate the games tax relief certification process, which we would support.

As you can see, there are a number of complex commercial and legal issues which will need to be worked and hence we encourage you to get involved and ensure the new games tax relief works for you.