Is UK Government’s Tax Relief For Videogame Industry Severely Hampered By EU Law?
What started off as a great idea to reignite the games industry in the UK, putting more people into development roles, has now started to show signs of breaking apart at the seams. Found on the Develop-Online article posted a while ago, the UK government have proposed something known as “The Cultural Test”.
The idea is that developers qualify for tax credits based on requirements that reflect not only the hiring of British personnel, but also that the games themselves reflect British principles. Naturally I was as confused as everyone else about why this was necessary, so I put a few questions to the government. I eventually got a response from a Press Officer from the Department for Culture, Media and Sport (DCMS). He begins by saying that a lot of the legislation is reflected on European Union competition law:
European Union competition law exists to ensure that free competition prevails in the single market and that Governments cannot distort that market by giving assistance to companies in ways which could distort competition and affect trade, known as illegal State aid. A tax relief is usually State aid, but there are exceptions to the rule that the provision of State aid is illegal. One such exemption is where the objective of the aid has a cultural rationale.
This is perfectly kosher and reflects a lot of the issues in bringing a similar system to that of the Canadian Tax Breaks. Similar examples of this include the likes of regional food and drink, but also more relevantly films written and produced in European territories. As such, the cultural representation of foreign film is greatly encouraged by their governments. The email received continues to explain that…
The UK Government is currently seeking clearance from the European Commission for a targeted Corporation Tax relief for video game developers on the basis of a cultural rationale – that there is a cultural market failure in the UK videogames development sector. A key aim of the Tax relief is to ensure the development of more culturally British games. To demonstrate to the European Commission that only culturally British games will qualify for tax relief (State Aid), a draft cultural test has been developed with industry input that is similar to that used in the State aid compliant film tax relief.
“Cultural market failure?” you might ask. What that means is when free markets do not provide a required social good. Examples of this include the provision of healthcare and education to the poor, the funding of basic (not industry related) research, protection of the environment, etc. Where there is a market failure, government steps in either to provide the service or incentivise it. Essentially this is a financial incentive. There is now a question of “are culturally British games a required social good?” The DCMS representative then gives an update on the history of this legislation and where it is up to now.
A Consultation document on the design of this cultural test was published on 1 October 2012 and closed on 29 October. HM Treasury then published on 11 December 2012 the draft legislation setting out the proposed final design of the videogames tax relief, including a cultural test. This consultation on this legislation closes on 6 February 2013. It is not the Department’s intention to dictate the content, or style, of videogames. The aim of the cultural test is solely to apply objective criteria to the measurement of cultural attributes in order to better identify culturally British videogames that are eligible for tax relief on the basis of State aid precedents, such as the successful re-notification to the Commission of the French videogames tax incentive.
What I find completely fascinating here is when they say, “It is not the Department’s intention to dictate the content, or style, of videogames.” Because of the European competition law that severely hampers this proposal being competitive compared to Canadian tax breaks, they’re essentially forced into limbo: How can they make games developed using this tax relief attractive to global companies, while at the same time comply with EU law? It’s certainly a massive hurdle that they’re trying to overcome.
By looking at an interview regarding the French videogames tax incentive and what projects it has helped develop, you probably won’t find any triple-A titles there. A few Nintendo Wii and DS titles, together with a bunch of mobile apps, but nothing that is competitive in the market. Obviously, they don’t mention in the article which games received funding, so we have nothing to compare it to. Finally, the DCMS representative addresses the cultural test in more detail, clarifying an important point.
In Section D of the cultural test, points can be scored for persons working on videogame development if they are British or European (European Economic Area – EEA) citizens, or if they are resident in Britain or another EEA state. Guidance on qualification will be provided once the tax relief comes into force. The cultural justification here is that the tax relief will support the engagement of industry professionals, resident in Britain or Europe, in making culturally British and creative videogames, helping to promote UK and European culture in the videogames sector.
By employing British or European residents, this makes things a little fairer than simply restricting it to those of British or European citizenship as it guarantees that each of the people working on the project will be based in the UK to see the project’s development. Again, this is something I can get behind and it is the part of the proposals that make the most sense. However my concerns are that there is a larger focus on cultural representation which might not resonate as well within videogames as it does in film.
I asked the representative some specific questions which he took the time to address individually at the end of his response:
One Hit Pixel: How much of the legislation was written for the purpose of bringing more business and talented people in the industry from overseas?
Department for Culture Media and Sport (DCMS): The tax relief is intended to provide support to maintain the UK’s status as a leading developer of videogames and to promote investment into the production of videogames in the UK. Without Government support, there is a risk that under-investment will lead to valuable productions moving overseas, or nor being made at.
How much of the policy was the result of input from the DCMS?
HM Treasury and DCMS have worked closely throughout the design of the tax relief, including the cultural test.
How are the UK tax breaks competitive with those in place in Canada and other nations with similar tax breaks for the industry?
The Government is committed to introducing a tax relief for videogame development companies that is among the most generous available in the world.
Okay, the last question is a bit of a non-answer, so I have chased up for a more complete response on how the tax breaks are competitive. Whacked out ideas that come out of nowhere in government do indeed occur as shown in the critically acclaimed political satire: The Thick Of It, but this one seems to be trying to be on our side.
Videogames in general tend to be pushed by the leading nations – Japan and America, so naturally a lot of the assumption is that their culture is reflected. But is this the case? You do get quite a few triple-A titles that feature these tropes and quite a few of them are bestsellers, but the majority tend to be more focused on otherworldly concepts with some reflecting no world at all. It is my understanding that the Cultural Test does recognise this within its confines, so might be more attractive than its French counterpart in that respect. But there is the other question of “Are culturally British games a required social good?”.
Within the UK there does seem to be talk of an EU referendum which has seen conflicting opinions. I don’t wish to delve into that particular can of worms, but an interesting point does reveal itself. If the UK wasn’t in the EU, would the Cultural Test even exist in its current state, or would there be a lot of modifications? I shall leave you with that question to consider and also leave a transcript of culprit in question below.