UK games industry faces EU tax break investigation

Lego Harry Potter Lego: Harry Potter games were developed in the UK before the tax break plan had been confirmed

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The UK video games trade body Tiga says it is "disappointed" that the EU has decided to probe a planned tax break.

The deduction was due to have been introduced on 1 April, but was delayed after the European Commission failed to approve the plan.

On Tuesday the regulators ruled an in-depth investigation was needed as they believed there was "no obvious market failure" that needed to be addressed.

The UK government says it remains committed to the proposal.

The scheme would see 25% tax relief offered on up to 80% of a game's production budget if the cash was spent designing, producing and testing the title in the UK.

Games with a primary focus of gambling or advertising would not qualify, and titles involving pornography or other "extreme material" would also be excluded.

The chancellor George Osborne described the relief as being ""among the most generous in the world" when he announced the proposal in December.

Canada and France already offer similar incentives, but in the French case the tax break is limited to games whose development costs total at least 150,000 euros (£129,128; $196,876).

The UK decided not to impose such a threshold after a consultation exercise highlighted the value of offering the relief to the fast-growing smart device video games market.

The government suggested other restrictions would prevent the offer being abused by non-commercial games.

Subsidy race risk

Tiga suggests that Canada's tax breaks had proved particularly enticing to the industry causing "several hundred" jobs to be lost in the UK over recent years. Quebec offers tax credits covering up to 37.5% of video game labour expenses, and Ontario up to 40%.

However, the lobby group told the BBC that interest in shifting production had "dried up" following the chancellor's Autumn Statement.

Despite this the EU's competition commissioner Joaquín Almunia said he doubted that aid was needed to stimulate video game production, and added that he feared giving the UK the green light to introduce relief could spark a subsidy race across the bloc.

"The market for developing video games is dynamic and commercially promising," he said.

Joaquin Almunia Commissioner Almunia has warned the tax relief could create a "subsidy race" across the EU

"It is not clear whether the taxpayer should be subsidising this activity. Such subsidies could even distort competition."

France introduced its games tax relief scheme in 2008. When the measure came up for renewal in January 2012 the EU carried out a 12-month investigation before agreeing to allow it to continue.

Tiga said that outcome gave it reason to be optimistic that the UK's plan would also survive.

"I would be surprised if it took as long to agree as in France's case because we've had the precedent, and UK officials have been discussing their scheme with the EU for some time," said Richard Wilson, Tiga's chief executive.

"Certainly the expectation that the relief is incoming has already had an impact. In the past year Activision Blizzard, Microsoft and Konami have all created jobs here for the first time in some years."

Not all industry insiders are in favour of tax breaks.

Several US-based visual effects (VFX) professionals have mounted a campaign to ban such subsidies for their business.

VFX workers provide services to movie, television and video game sectors including creating high-end animations and keying footage of actors on to computer-generated backgrounds.

The campaigners claim that "tax kickbacks" have caused instability in their business as VFX facilities are being put under pressure to shift work to wherever the best subsidies are on offer, to allow the studios that commission their work to qualify for the discounts.

"This has led to some studios actually requiring VFX facilities to open satellite studios in subsidised regions and move the work there," they said in a letter.

"Many that have not been able to make the jump have gone out of business. Many professionals who are unable to move are laid off, leading to bankruptcy and often foreclosure if they own a home."

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