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Taxing Times for the UK Gaming Industry

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As with many industries in this globalised world, the UK gaming sector now faces an increasingly uphill battle to survive and thrive. Currently, British studios contribute around £1 billion each year to the UK economy and the industry only lags behind the US and Japan in terms of its size and scale. However, as Bob Dylan once sang, "the times they are a changin'". Emerging markets in Asia, Europe and other parts of the world are nibbling away at the edges of the UK industry, leading to ever more pressing calls for the government to introduce greater financial support. Digital Spy investigates why state cash is now so imperative for UK studios to stay in the game.

Recent research published by the National Endowment for Science, Technology and the Arts (NESTA) indicated that external investment in privately operated UK developers has dropped by 60% since 2008. Employment is also down by 4% across the sector, with 15% of studios going out of business between July 2008 and July 2009. This has been mirrored by a continuing "brain drain" of UK-based talent to emerging industries such as Canada, Germany and South Korea, where increases in financial support begin to bear fruit. If this erosion continues, then NESTA predicts that the UK could slip to the sixth-placed global industry by 2010.

Industry body Tiga has, therefore, been campaigning for the UK government to introduce a tax credit against gaming production to boost the industry's prospects. Its chief executive Richard Wilson explained that "success breeds success", meaning that protecting the UK's current strong reputation for making excellent games is essential to ensure a steady flow of overseas investment. While he stressed that the industry "would never disappear" due to the talent and reputation built up over the past 20 years, it is in danger of being gradually eroded.

"What you'd tend to see over a five-year period is the UK video games sector getting smaller and falling down the league tables, with millions of pounds lost to the economy," he said. "Rather than being a world leader, we would be confined to the second rank of the global industry, which would be a tragedy. It would then be harder to encourage investors to choose this country, and harder to say to designers, artists or computer programmers that they should work here rather than seek better opportunities in the US and Canada. So when you're on that slippery slope it's hard to reverse it, which makes it all the more important that we get this tax break."

Jason Kingsley, co-founder of Oxford-based Aliens Vs Predator developer Rebellion Games, also believes that the tax credit is an important part of retaining a thriving UK gaming sector. Kingsley would rather that nobody got any kind of incentive, but the fact remains that the playing field is not level and other countries have introduced tax incentives to the benefit of their own industries. As Kingsley "can make games anywhere that is English speaking", he is constantly given offers to relocate Rebellion to other countries with the lure of incentives and "advantageous treatment".

A powerful example of this is Canada, which didn't have a competitive gaming industry until a few years ago. A small injection of state cash has encouraged Electronic Arts and Ubisoft to establish bases in the country, helping it to become a force on the global market. This conjures a twofold challenge for the UK industry in that overseas investment will increasingly opt for more favourable conditions elsewhere, coupled with the fact that these new markets will draw away UK-based talent in search of better projects and more money.

"It's either me losing people or it's about me taking my whole company to Canada. Put it this way, if someone said that you could save 36% of your costs, that's quite a big margin," said Kingsley. "People like Ubisoft are going, 'Canada looks quite good, let's set something up there'. Then they slowly improve that area and wind down the UK operation. There is only so much air in the balloon and if it is squeezed at one end then the air will come out somewhere else. It's not like people are going 'f**k it', slamming the door and heading off to Canada. Rather, there's a tendency for people to say, 'where shall we spend money? You know what, let's not go to the UK, let's go somewhere else'. It will be a death of a thousand cuts."

Another pertinent example of the power of government support is France, where a tax incentive recently helped invigorate a relatively modest domestic sector. Following this move, French publisher Ubisoft strengthened its home country position, leading to other publishers taking confidence to choose France as their new base. As the French sector is still significantly smaller than the UK, Kingsley says that this highlights the potential benefits of a similar credit for our more established industry.

Ministers are currently consulting on whether to introduce the tax relief, which would be similar to the support already in place for the domestic film sector. As part of this process, Tiga recently submitted a 60-page report detailing its case to the Department of Culture Media and Sport. Under Tiga's proposal, any studio wanting the support would have to pass a cultural test before getting the assistance so that it is not viewed as just a handout. In this, projects would receive points for aspects such as the number of UK-based workers or whether the development reflects European heritage. In trials run by the organisation, 44% of games passed the test.

If the credit were implemented, Tiga estimates that the government would see a healthy return on a relatively modest investment. According to the organisation's calculations, the tax break would cost around £54m in the first year to cover existing and new projects, and then drop to between £32m to £36m for subsequent years (significantly lower than the £104m allocated for the UK film industry). Over a five-year period, the credit would generate 1,400 new jobs and lead to £146m of fresh investment in British studios. It would also bring £133m of direct and indirect annual tax revenues to the Treasury and make a GDP contribution of £323m.

"In the current economic environment where a lot of sectors are asking for support, I think it's important to demonstrate to the government that these proposals are not just good for the gaming sector, but also for the whole country," said Wilson. "For a very small outlay, they are actually getting a really big return. It makes an awful lot of sense. We need to foster and develop our creative industries that generate IP and exports for the UK economy. The games development sector is a classic example of that."

Kingsley added: "As a businessman, if I was offered this as an investment, that I could put one X in and get three X out, then I'd say, 'yes, I'll do that, thanks very much'. It shouldn't be that difficult, but it is."

Both men believe that there is sufficient political capital in the government to push through the proposal, largely because the gaming industry not only contributes to GDP but also enriches cultural life in Britain. Current figures indicate that 60% of the UK population play video games at least once a week, which demonstrates its widespread adoption in society. Indeed, the industry is rapidly overtaking music and film in terms of its importance, which further adds fuel to arguments for government support.

"I think they realise the value of video games, economically and culturally," explained Wilson. "But there are, of course, some people who haven't played video games who are traditionally more attuned to film. For those people, it's a steep learning curve. But I do feel that we are making progress because developers are making different types of games that appeal to lots of different people, male and female. There is support for music and film, but games are just as important as those sectors. So we're just asking for the same level of support for our industry."

Kingsley added: "If the government wants to keep a competitive industry, then it needs to give the support. In terms of importance, we're likely to overtake both films and music in the next few years, which is astonishing. The great thing is that MPs and people in power seem to be aware that our industry needs a bit of attention, but whether they will be able to give the help, I don't know. We're in a recession and, quite frankly, making sure people are fed, watered and housed is more important. But at the same time there is a lot of demand for games and it would be nice if they could offer us some support."

Tiga now hopes that the government will include the gaming tax break against production in the chancellor's pre-Budget report next year, although the recession and upcoming general election could complicate this aim. However, with the current government seemingly in favour of the credit and shadow arts minister Ed Vaizey previously saying that the Tories would do likewise if elected, it seems to be very far from game over for the UK sector.

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