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By Ali Qassim
Aug. 8 — The U.K.’s video games industry, citing Brexit fears, is pushing for further tax breaks as part of a wider campaign to protect the nation's burgeoning 4.1 billion-pound ($5.3-billion) industry, the largest of its sector in Europe.
The Independent Game Developers Association (TIGA) wants to increase video games tax relief (VGTR), enacted in 2014, and have the government review the “cultural” eligibility test to allow more gamemakers access to existing tax breaks.
It also proposes advancing the timetable for lowering the U.K. corporate tax rate to 17 percent from 2020 to 2017, increasing R&D tax relief for qualifying expenditures by small and medium entities and exempting SMEs from significant EU VAT regulations.
The U.K. now allows eligible game developers a tax credit worth 25 percent of qualifying production costs under the VGTR. TIGA wants this credit expanded to 30 percent.
The U.K. government estimated more than 500 game development studios operated in the U.K. and employed staff of around 9,000 in 2014, and TIGA says some 30,000 work in the U.K. gaming industry. The vote to leave the European Union is important for those companies, said Richard Wilson, TIGA's CEO, “because it could make it harder to recruit people from other EU countries to work in the UK.” About 15 percent of the U.K.'s games development workforce originates from other EU countries, according to TIGA's Brexit report.
Jason Kingsley, CEO of game developer Rebellion—whose flagship Sniper Elite games series has sold more than 10 million units worldwide and which is set to release Battlezone VR this year—agreed that Brexit fears have made a number of its non-U.K. national staff “very worried about their future.”
Brexit could also deprive British companies from accessing substantial EU grants, said Juliana Koranteng, founder of media and consultancy firm JayKay Media Inc., referring to the trade bloc's Creative Europe scheme to support the culture and audiovisual sectors, and Horizon 2020 that promotes research and innovation.
These post-Brexit uncertainties are also driving the Association for U.K. Interactive Entertainment (UKIE), which represents the U.K.’s games and interactive industry, to unveil its own recommendations following a post-Referendum membership survey, according to Sophie Densham, UKIE's community and communications officer.
Brexit brings some potential advantages as well, Wilson said. “It should make it easier for the U.K. government to operate the tax system to the benefit of the U.K. and its citizens,” he said, because the U.K. no longer would have to worry about coming up against EU state aid rules that prohibit the bloc's 28 member states from providing enhanced tax breaks to resident businesses that could otherwise provide an unfair competitive advantage over businesses in other member countries.
Brexit could free up the U.K. from these restrictions, Wilson said, and allow a package of tax reliefs and incentives it has proposed to the government with the support of attorneys firm Weightmans LLP. The package includes:
• raise tax credits to 30 percent from 25 percent, “which would put us closer to or even match some of the levels of relief in Canada,” Wilson said;
• review the point-based cultural test designed to test that the video game is sufficiently “British” to be eligible for VGTR;
• increase the R&D tax credit, or super deduction, from 230 percent to 250 or even 300 percent, and increase the cash credits available for small and medium-sized enterprises in a loss-making position, from the current 33.5 percent level;
• move quickly to lower the corporate tax rate to 17 percent by 2017; and
• negotiate an EU-wide simplification measure, such as a VAT threshold, to help small businesses.
Koranteng said the proposals “are understandable. The gaming sector belongs to the creative industries, a category that like the music, film and TV industries, traditional lenders such as banks or conservative investors have avoided because they are considered frivolous.”
Of the proposed tax measures, David Turner, a tax senior manager at PricewaterhouseCoopers, said “any increase in the rate of VGTR is likely to be more beneficial to the video games industry than the other measures.
“Just to put some very high level numbers around this to provide some context,” Turner said video game credits are worth up to 20 percent of development spending while R&D credits are worth around 30 percent of development spending for SMEs, and around 8 percent for large companies.
He underlined that the types of development cost that can be included in R&D credit claims “are more restricted, meaning that even for SMEs, VGTR may be more valuable than R&D credits.
Regarding the moving quickly to lower the corporate rate, he said a reduction from the current 20 percent to 17 percent “would only save tax on the taxable profits they make (if there are any).”
UKIE also supported the case for VGTR, noting that since the measure was introduced in April 2014, the relief has provided 45.9 million pounds ($59.7 million), according to the HMRC's recent figures–the first available for the gaming sector.
But Turner warned that “as a sector-specific” tax relief,” VGTR was designed with the EU's State Aid requirements in mind, and the relief in its current form needs to be approved by the European Commission before it can be introduced.
He said “it is also worth noting that, depending on the form of Britain's exit from the EU, it's possible the State Aid rules will continue to apply in the same way they do now” (123 ITM, 6/27/16).
As a way of opening up more businesses to the benefits of the VGTR, TIGA said Brexit could allow the government to lower the threshold of what constitutes a “British” company which, under EU rules, requires companies to pass several strict criteria under a “cultural” test administered by the British Film Institute.
Developer Kingsley said that “if the EU did not have those rules or we weren't bound by them, then the cultural test could perhaps be modified or deleted.”
Wilson confirmed that TIGA “is suggesting that the Government reviews the cultural test to see if it can be improved or even dispensed with. We only have a cultural test governing VGTR because of our membership of the EU.”
According to developer Kingsley, increasing R&D tax relief should be the government's priority, even over VGTR, and Wilson agreed “there is more scope for the U.K. to change the levels of relief here because certain other EU countries already have such levels of R&D tax relief.”
But Koranteng said “a more circumspect government will be more careful about increasing the R&D tax credit as successful U.K. SMEs, especially in the digital tech sectors, have a reputation of selling to the highest bidders, which are mostly not from the UK.”
For instance, Google Inc., Facebook Inc. and Apple Inc. are some of the most prolific buyers of U.K. tech start-ups, “which once acquired are sometimes killed off to prevent them from becoming nuisance competitors,” she said.
Regarding the feasibility for an EU-wide simplification VAT measure, Wilson said “there are other EU countries that would like a threshold.”
On proposals to boost exports through the tax system, the TIGA chief said “the UK Government would need to ascertain what was permissible under WTO rules and what was politically acceptable before introducing such a relief.”
Asked to comment on the proposals, a Treasury spokeswoman declined to comment on specifics: “We keep all tax under review”.
While supporting the call for further tax incentives, Koranteng said TIGA “also needs to come up with really strong arguments why the government should care” about the future of the industry.
Currently, TIGA says, “too many” U.K. game studios fail, but Koranteng argued that the industry “needs to do more than just blame” the better tax incentives offered in other countries like Canada, France and Japan.
“Tax credits or not, investors feel better if they are assured the chances of profit are high, as opposed to feeling comfortable about not losing too much of their money,” she said. “TIGA must prove that, when government support works, it isn't only revenue that grows—profit is also sustainable.”
To contact the reporter on this story: Ali Qassim in London at email@example.com
To contact the editor responsible for this story: Rita McWilliams at firstname.lastname@example.org
The TIGA Brexit report is at http://src.bna.com/hxR.
HMRC's latest Creative Industries Statistics are at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/538918/July_2016_Commentary_Creative_Industries_Statistics.pdf.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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