Tax relief: what the industry said

The Digital Britain report challenged the UK games industry to provide evidence to support the introduction of a tax relief for games production.

As part of the industry’s response, NESTA commissioned Games Investor to conduct a survey of leading games industry figures (whose companies employed around 50 per cent of the UK’s total development headcount) and external financiers (VCs, private equity and project finance companies) to assess the potential impact of a tax credit.

We deliberately went to the sources of financing for games development as well as the studios, avoiding cheerleading questions about whether the tax credit would be a positive development (turkeys voting for Christmas) and focusing on how the respondents’ companies’ recruitment levels, investment priorities, strategies and business models might change. The results, discussed only in summary for this article, provide a fascinating insight into the current and prospective health of the UK games development industry.

PROBLEMS AHEAD
Despite strong pride in what the UK games development industry has achieved to date, there was a unanimous view that the sector is facing mounting problems. The impact of government subsidies for games companies overseas has curtailed the growth of independent and publisher-owned studios in the UK. It’s resulted in what appears to be a growing exodus of experienced and high quality staff from UK studios, to studios in government-subsidised territories.

One independent developer relayed a remarkable anecdote to us that illustrates this problem: “Our best technical guy was offered two-and-a-half times his UK salary, 100 per cent subsidised relocation costs and a comprehensive support programme not just for him but also for his wife and children, as well as two years’ completely free accommodation to move to Canada. We had to let him go; he would have been mad to stay.”

So while the Quebecois have failed to get many British studios to relocate so far – this being ‘front door’ if you will – studios that benefit from Montreal paying for one in three employees are now coming through the back door to cream off our brightest and best. This, combined with the limited flow of suitably educated graduates from British universities, is creating a damaging and industry-wide skills shortage that has serious long term implications for the ability of UK games companies to create the sort of high quality games for which the UK is globally known.

RESURRECTING UK FORTUNE
However, all of the independents we spoke to foresaw the introduction of a tax credit stimulating headcount growth, and the exploration of the sorts of new direct-to-consumer business models that the advent of network gaming has enabled. They also saw their ability to retain the IPR for their games being improved, in some cases substantially, by a tax credit. This has potentially
significant ramifications.

Key to the problems facing independents and the development industry overall, has mostly been studios’ inability to fund and retain ownership of original games IP, and the ever increasing reliance on publishers for day-to-day funding. While licence-based external development work, now the mainstay of most console studios’ revenues, provides substantial cash flow value, it is the creation of successful original IP that generates long-term asset value for games companies. The retention of part, or all, of the IPR to successful original titles and the use of self-publishing can ensure that not only does the asset value get retained but also the cash flow value. The tax credit could therefore form a critical role in resurrecting the fortunes of UK independents, addressing the comparative shortfall in UK network gaming ventures and providing potentially self-sustaining business models to help wean developers off their over-reliance on overseas publisher funding sources.

EXTERNAL FINANCIERS
Uniquely for surveys of this kind, we also tapped into our investor network and interviewed external financiers. These respondents highlighted a plethora of barriers to investing in UK games at present, but expressed a uniform belief that the tax credit would trigger increased games investment by the finance industry overall and, in most instances, an improved attitude towards such investments themselves. This complements the finding that most independent developers surveyed would be more likely to seek external finance as a result of the tax credit’s introduction. It also neatly lines up alongside the increased exploration of direct-to-consumer network games business models by independents, which some investors are most interested in funding, but which several complained the UK lacks at present.

Despite this universal optimism, few saw the tax credit as a panacea to the industry’s problems, nor are these studios under any illusions that all their games will qualify for the credit (to comply with EC legislation, it could only be administered via a cultural test like the existing French games and British film tax credits). However, it seems that a tax credit would stimulate growth, innovation and investment in UK development, and will help level the uneven international playing field.

The Time To Play report can be downloaded for free via www.gamesinvestor.com.