UK game tax at the mercy of EU law

Britain’s dash for a game development tax cut could be heading for a brick wall.

The culture department (DCMS) has revealed to Develop that a European Commission approval process lies ahead for any such tax credit system in the UK, if indeed such a bill is put forward by the government.

The EC approval process can be complex, timely and unpredictable, as relevant prior cases illustrate.

With the UK game industry now in desperate need to become more internationally competitive – as developers continue to flock to Canada, France and the US – such a delay could have a punishing effect on the sector.

The UK government has an opportunity to accelerate any such application process, providing its proposals are of a similar (or even identical) nature to the existing ‘cultural’ tax break system in France.

However, recent revelations from both sides of the English Channel suggest this will not be the case.

Documents uncovered by Develop show that France made a full EC proposal for tax relief back in December 2005.

It took twelve months before the EC opened an in-depth investigation into the proposals, with the Commission stating it was concerned that the definition of ‘cultural videogame’ was too broad, and that such a system would put other EU nations – such as the UK – at a disadvantaged position.

Throughout 2007, agents for the French game industry were forced to make a series of revisions to its initial application. Finally, two years from making its initial bid, the Commission accepted the amended proposals.

Ironically, it is these very amendments that will likely slow down any proposals brought forward by the UK.

CHANNEL SWITCH
The current chair of the European Game Developers Federation (EGDF) –Guillaume de Fondaumière – revealed in a recent Develop Blog how much resistance he was subjected to when pushing for game tax breaks in France.

Crucially, he explained that the French system was initially based on the UK’s ‘cultural film’ tax policy, which he negotiated the scheme away from.

 “I fought for another year with the Culture Ministry in France, and the EU, to at least integrate a portion of test that would be game-related,” he said.

“For example, we wanted part of the test to review games on their innovation. So today, about 20 per cent of the total possible test points are based on technical innovations. This shift from plain film culture to technology breakthroughs was an important step for us.”

Speaking to Develop, a European Commission spokesperson said that the approval process would be “made much easier” if the UK followed the exact same principals as the French tax system, as anything beyond this would be without precedent.

However, back in June, the Department for Culture Media and Sport told Develop that the proposed UK tax test would be “based on the same rules that we have for films.”

If the UK does not shift to the French template, the European Commission – with its 27 State members, their numerous civil servants and lawyers – will have to take the proposals through a thorough examination process.

In 2007 the UK business department (BERR) submitted proposals to the EC for its new venture capital scheme (effectively, tax breaks). The proposals were only approved in April this year.

GREATER GOOD
Despite tax relief considered as a matter of urgency for the UK game industry, there are some who believe that Britain shouldn’t adopt the French system.

“With a culturally British test in the works right now, I would like to say that basing the games tax test on the film one is a mistake,” said de Fondaumière.

“It is of course the easier option: The [UK] government knows that if the game test is copied and pasted from the film test then the EU will accept it, because they already have done for films. Therefore, this measure may allow things to move quicker and easily, but it is the lazy approach.”

There is also the case for the UK to push for a better tax credit rate than in France, which presently gives game development studios 20 per cent tax credit if they meet a criteria of quality, originality, and “contribute to cultural diversity”.

The top tax subsidy rate in Canada – often thought to be the most progressive nation when it comes to state support for game production – stands at 40 per cent.


The UK’s film tax relief rules show that “culturally qualified” films with a budget below £20 million are “entitled to an enhanced deduction of 100 per cent of their UK production costs and to surrender losses for a payable credit, worth 25% of up to 80% of the qualifying production costs.”

All eyes are now on the UK culture department to make its next move.

During the publication of Digital Britain, Westminster called for various game industry bodies to submit evidence supporting tax proposals.

In August, both NESTA and Tiga submitted their own comprehensive reports in favour of the scheme.

Both measures are seen as a final push from the game industry, with little room for further negotiation.

With so many factors hanging in the balance, the future for UK game creators remains uncertain.

Yet the events of the past year – which has seen a united industry rally against Brown’s government and, against the odds, carve sympathy out of it – it’s likely that the movement won’t stop for Westminster, or indeed Brussles.