ELSPA warned Govt of cultural tax break concerns

While the UK's videogames community was in the process of lobbying for greater state business support last year, it has emerged that ELSPA - the country's former publisher trade body - aired a number of concerns to the government regarding the issue of cultural tax breaks for businesses in the region, warning against initiating that kind of relief for fear of damaging international sales.

Documents obtained via the Freedom of Information Act by Vincent Scheurer of Sarassin LLP and passed to GamesIndustry.biz show that the organisation - now known as UKIE - submitted a three-page document to the government when invited to contribute to a review by the Department for Culture, Media and Sport, noting its support for TIGA's 68-page proposal for cultural tax relief.

But the submission also warned of a "restrictive trade and legal environment" if videogames were to be deemed a cultural service or product - although the organisation subsequently claimed publicly that it knew of no stance that could be deemed as 'anti-tax relief' when rumours of a global publisher pressuring the government into abandoning the matter surfaced.

"We have no idea where that has come from, it's totally left of field and has certainly not been on the agenda of any of the many political briefings we've been involved in," said ELSPA director general Michael Rawlinson at the time. "That's not to say it's not true, but we've been discussing tax relief for some time, and lobbying solidly. It's something we haven't come across."

The industry was, somewhat surprisingly, awarded film-style tax breaks in the Budget statement made by the last - and outgoing - government early in 2010. But that position was swiftly overturned after the Coalition government came to power in May, and set about identifying billions of pounds in spending cuts.

While ELSPA's submission seems contrary to its public statements noting unequivocal support for the economic relief, the organisation has defended its position, claiming a responsibility to ensure that any system put in place was beneficial to "full breadth of the videogames and interactive entertainment industry". While the comments may be surprising to some, the organisation at the time was only responsible for the publishing community. Publishers with larger developer headcounts in the UK would have had more to gain from cultural relief than those without a creative presence; indeed there may have been some negative effects on some sections of the business community if videogames were subsequently reclassified from entertainment products to cultural goods.

"Currently videogames are classed as 'software' under World Trade Organisation rules, and as such enjoy the benefit of free trade status," wrote ELSPA in its DCMS submission. "Cultural products on the other hand, are afforded a protected status, that allows countries to apply trading restrictions to protect their own locally cultural products and therefore to restrict free trade.

"Any change to the classification of videogames could seriously affect the commercial development of the industry and its long-term future. Currently, videogames are not affected by the imposition of retail levies, output quotas and the like which are applied to cultural industries (such as the French and Spanish film industries) in order to fund the tax relief schemes.

"Our concern is that the provision of a tax relief scheme on cultural grounds could label the industry's products, in the EC's view, once and for all as cultural, and that this could be an irreversible first step towards the imposition of retail levies or further protectionist regulation aimed at sourcing funding to support the tax relief scheme.

"Any introduction of retail levies within the videogame industry would, from the publishers' point of view, erode any previous financial benefit derived from tax relief at the development stage, mainly because retail levies would apply across all products whereas only a percentage of videogames in development would be successful in obtaining tax relief."

ELSPA's submission went on to say that "should the government decide in favour of a tax relief scheme for videogames, this decision is made with a full understanding of the potential consequences of this policy on the future status of the industry."

Speaking to GamesIndustry.biz UKIE has claimed that following the submission process, and once it had determined there would be no negative impact from a cultural tax break, it contacted both the government and TIGA to indicate it no longer had any reservations for such plans. However, those indications to government don't appear to have been recorded, while TIGA has declined to comment officially on the matter.

None of the organisation's private concerns on the culture issue had been made public until now, and while universal acclaim for a policy based on cultural requirements would have been unlikely, it's clear that a similar system adopted in France has benefited some sections of the development community there.

But while cultural tax breaks might have only helped a proportion of UK businesses, it's likely that the development community would have preferred a first step, rather than no step at all - although given that the tax break was included in the Labour government's subsequent Budget, it would appear that if any apparent mis-step between ELSPA and TIGA existed, it had little impact.

Additionally, it's very unlikely that any action would have persuaded the new Coalition government to stick with those plans; in the face of huge cuts to public spending it's clear that doing so would have been politically impossible to justify for an industry that, the government would argue, was successful and thriving.

However, it did appear to use 'mixed messages ' from the games industry as one reason for ditching tax relief, although that comment was never clarified - and the Treasury subsequently claimed that it simply disagreed with the numbers put forward by TIGA with respect to the benefits that the tax break might bring.

"We have continued to support tax breaks at every given opportunity and at no point has it ever been indicated that our resolved enquiry about WTO trade classification had any effect on the government's decision to not introduce them," stated Rawlinson when asked to clarify UKIE's position in light of the FOI documents.

"UKIE has the responsibility for serving the interests of the full breadth of the videogames and interactive entertainment industry. For the games industry to thrive all parts of the value chain need to be successful. That's why the wider implications of our policy agenda are always carefully considered."

"In our submission to government in Autumn 2009, ELSPA (as UKIE was then) once again fully supported a call for tax breaks. As part of a wider consideration of the issue, ELSPA asked for clarification on whether the classification of videogames as cultural products (which would be necessary to obtain tax breaks under European state aid rules) would have any knock-on effect on the World Trade Organisation's (WTO) trade classification of videogames as software.

He added: "UKIE was concerned that the any re-classification required to allow tax breaks might change the status of videogames from software and bring it within the scope of audio-visual and media classification, which might bring unintended and seriously damaging consequences for the whole industry."

Further details on the identity of any companies that were rumoured to be specifically against cultural tax breaks are now the subject of an ongoing FOI appeal, following the government's initial refusal to share any information it has.

Two major publishers have specifically stated that tax benefits would encourage them to invest in the UK to a much greater degree. Activision CEO Bobby Kotick and THQ's Danny Bilson both claimed that they would consider the country for future development studios if there was some a financial environment that could help it compete with areas such as Canada - which offers 37.5 per cent back on labour costs alone in some areas.

Rawlinson said that following a meeting with the Department for Business, Innovations and Skills in April this year, "UKIE had it confirmed that our concerns about WTO trade classifications could be addressed without affecting the introduction of tax breaks" - although BIS does not have any record of this meeting.

He also said that UKIE is working with developer association TIGA on supporting tax breaks: "UKIE had a meeting with TIGA on September 13 where we shared with them every piece of correspondence that we had on the issue of tax breaks including the document that refers to the WTO question," said Rawlinson.

"UKIE continues to work closely with TIGA to develop and support the call for tax breaks for the UK's videogames industry and has recently given joint evidence on the issue, with TIGA, to the Scottish Affairs Select Committee."

GamesIndustry.biz understands that only one meeting has so far taken place, and that no further meetings have yet been planned. The meeting Rawlinson refers to was with Sarassin's Vincent Scheurer, who also acts as company secretary of TIGA, and held after the documents from the DCMS had been released via the Freedom of Information act.

The UKIE board is made up of senior executives from Nintendo, Sony, Disney, Activision Blizzard, 505 Games, Mastertronic, Eidos, Codemasters, EA, Microsoft, Ubisoft and Warner Bros.

A full timeline of ELSPA, TIGA and the UK government's public and private interactions regarding tax breaks is now available on GamesIndustry.biz, while the full submission from ELSPA to the DCMS and UKIE's complete response to GamesIndustry.biz are contained on the following pages.