Blessed Relief

This week's budget announcements by UK chancellor George Osbourne haven't gone down well in most quarters, drawing scathing headlines even from newspapers which have traditionally supported the government's policies. At least the chancellor won friends in one place, though - he might not be welcome in many places in the country right now, but he'd be guaranteed a bit of back-slapping if he were to turn up to any game development conference in the coming months.

That's because Osbourne's budget finally realised the long-held ambition of the UK game development sector - announcing a tax relief proposal targeting video game, animation and television industries, which will be implemented from April 2013 and provide £15 million in relief for the games sector in its first year, rising to £35 million in the second year.

The details haven't yet been announced (and as ever, the devil will reside in them), but gaming luminaries in the UK and beyond have already been effusive in their praise for the measure. Their reaction is understandable. The UK, traditionally a powerhouse of game development which has taken pride in "punching above its weight" for decades, has faced an increasingly worrying brain-drain of development talent to territories like Canada, whose tax environments are simply more attractive to game publishers.

In theory, a tax relief should help to level the playing field, making the UK into a more attractive place for games companies to do business.

In theory, a tax relief should help to level the playing field, making the UK into a more attractive place for games companies to do business - which in turn should mean more new studios setting up and better opportunities for existing studios to expand and hire staff. More people employed in development means higher tax revenues for the UK exchequer, so this kind of relief is (if it works) seen as a virtuous circle for state and industry alike.

In the midst of all the praise for this initiative, I'd like to sound a few notes of caution. None of this is intended to disparage the fine work done by country's trade bodies and the individuals who have worked tirelessly towards this goal - it's been a difficult few years of extremely positive and well-delivered lobbying, and they deserve the praise they're receiving right now. From an economic and industry standpoint, however, there are questions and caveats about the tax relief which need to be aired.

Firstly, it's a little troubling to note how many of the responses to the relief on social networking sites have been along the lines of "if only this had come soon enough to save (Studio X)" - an understandable response from gamers, perhaps, but a little more worrying when it falls from the lips of those in the industry. That simply isn't what this tax relief is for - at least, I sincerely hope that it's not. Certainly, the UK has seen the demise of a number of studios in recent years, some of them even pretty well-established and well-loved studios.

If your business is in trouble, tax relief won't save it - and it shouldn't even try to. Government tax relief exists to encourage and support businesses that are successful and growing, not to prop up failure.

However, in more than ten years of covering the UK development industry, I've never seen a studio go under because its tax burden was too great. I've seen plenty go under because they failed to produce games on time or on budget. Many more have been sunk because you're only as good as your last game, and their last game didn't sell. Others were stiffed by publishers pulling the plug on well-advanced projects. Not a single one, however, blamed Her Majesty's Revenue and Customs for their demise.

If your business is in trouble, tax relief won't save it - and it shouldn't even try to. Government tax relief exists to encourage and support businesses that are successful and growing, not to prop up failure. It's all very well to shake our fists at distant publishers or "tough economic conditions" or various other ill-defined causes for studios going under, but it's also fundamentally dishonest. Every studio that has gone under in the UK in the past decade has done so because of a failure of either management or creativity - usually the former rather than the latter, but they're more closely tied than many of us would like to admit in polite company. The one area where tax relief might have helped is with studios whose development costs were too high compared to bidders from other territories - but that's usually got a whole lot more to do with cost of living and foreign exchange than it does with taxation.

This brings us on to the second question - the idea of "picking winners". Several commentators, perhaps more orthodox capitalist in their views than I, have objected to tax relief on the basis that it represents government "picking winners". If you fervently believe in the invisible hand of the market, you also tend to believe that the cold dead hand of the state has no business smacking it when it reaches for the biscuits. A tax relief, of course, is not quite the same thing as a cash injection, but it does still represent the government picking one sector and saying "you're valuable, we'll support you; the guy next door, not so much."

As a moderate capitalist (meaning that I believe that a purely capitalist state would be every bit as much of a nightmarish dystopia as purely communist states turned out to be) I'm actually not terribly opposed to the idea of the state picking winners. It can work extremely well, when it's done deftly and intelligently. The problem is that when we say "picking winners", what we actually mean is "propping up failures", which is rather more objectionable.

Should the UK government pick the games industry as a winner? Absolutely. It's a no-brainer.

Should the UK government pick the games industry as a winner? Absolutely. It's a no-brainer. This is a sector in which the UK has a stunning track record, a sector with immense growth prospects in both the developed and the developing worlds, a sector that can thrive in exactly this sort of climate - highly educated workforce, advanced infrastructure (yes, advanced - go live anywhere in the USA outside of the really major cities and then come and complain to me about our broadband or our transport networks), not so hot on the natural resources any more. It's a blueprint for the kind of post-manufacturing skilled economy we can aim for. Taken as a whole, the games business is a winner. The government would be mad not to pick it as such.

The problem here is the question of how exactly this tax relief is going to be implemented - the devil in the detail. Until we see technical details of how firms will be able to access tax relief and what exactly it will cover, the lingering question will be whether the government has backed a winner overall, only to target its support at a losing sector within a generally healthy industry.

That's where these two concerns come together. If this tax relief is aimed at supporting AAA studios that get into difficulties, then it's an extremely poorly targeted relief. More AAA studios are going to get into trouble in the coming years - that's only to be expected, as costs and risks continue to rise. Spending taxpayer money to stave off their demise for a few extra months would be an outrageous waste. If, on the other hand, the tax relief is targeted at giving startups some aid in hiring their first few members of staff, or helping SMEs to embark on new projects and rise to the next level, then we're looking at something really positive. The UK doesn't need help for old hands, it needs encouragement for new business, for innovation and for growth. Until we see evidence that the Treasury really understands that, the appropriate response to the tax relief announcement is cautious optimism rather than an outright welcome.