ELSPA warned Govt of cultural tax break concerns

The following is the ELSPA submission to the to DCMS in its entirety, dated September 2, 2009:

Views on the potential impact of a tax relief scheme to promote culturally British videogames

Following the letter from Siôn Simon on 30 June, ELSPA has been in discussion with TIGA in relation to our submissions relating to the Government's call for evidence.

ELSPA is keen that the UK must maintain a thriving videogames development industry. UK developers face increasing challenges from competitors overseas who are eligible for government financial support, and the UK must ensure that its developers receive the support necessary to enable them to compete on the global stage. In this respect we therefore support the arguments for the introduction of a tax relief for UK videogames on cultural grounds presented by TIGA. We also support the value of such a scheme in cutting production costs and managing risk at the early stages of videogame development, when proposals are most likely to be discarded on the grounds of cost and/or risk of failure.

TIGA's proposal for a UK videogames tax relief test and their projections for the practical application of the scheme have clearly been extensively researched. The immediate benefits to the UK videogames development industry of such a scheme are clear, not only economically but also in terms of stimulating the UK to develop and retain home grown talent and to prevent the further decline of the UK as a top global producer of videogames.

However, we would also like to take this opportunity to raise one or two concerns about the possible longer-term impact on the industry, should the introduction of such a scheme lead to a classification of videogames as a cultural product or service for international trade purposes. The consequences in that case could be much more restrictive trade and legal environment for our products – see below.

Classification of videogames as cultural media

ELSPA has a number of concerns connected to the introduction of a tax relief scheme for UK videogames on a cultural basis.

Change in product classification.

Currently videogames are classed as 'software' under WTO rules, and as such enjoy the benefit of free trade status. 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.

It is important to videogames publishers that videogames continue to be regarded by the EC as software. 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. While we appreciate that such a situation has not yet developed in France where tax relief has been made available on a cultural basis, our concern is that the introduction of a similar scheme in the UK would identify the top two European videogames producing members as having a cultural classification, thus making it more difficult to retain our valued software classification.

Intellectual Property/Legal classification

A further consideration for videogames publishers concerns intellectual property and legal classification. Videogames currently benefit from a legal classification as (interactive) software in most European Countries. In addition this classification was recently recognised by the European Union when excluding games from the regulations in the 2007 Audiovisual Media Services Directive (Recital 18). Maintaining such a legal classification is essential to the continued growth of the industry as it provides the most effective and efficient legal protection possible for the range of intellectual property contained within a game. A cultural classification of games may very well lead to their being considered purely as audiovisual products meaning that the unique legal protection provided by a software definition would be lost

Conclusion

ELSPA is keen that UK videogames developers be encouraged to innovate and grow, and that conditions must exist in the UK in which the industry can thrive and drive the UK onwards as a global leader. The potential benefits of a tax relief scheme in developing such conditions, and in developing the UK skills base, are clear.

We understand that the introduction of a tax relief scheme for UK videogames on a cultural basis will not automatically lead to a cultural classification for the videogames industry within the EC. However, for the reasons set out above, it remains a concern for us that it will become increasingly difficult for videogames to maintain their important software classification within the EU should the UK industry be granted a tax relief scheme on cultural grounds.

It is therefore important 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. We are very happy to discuss this issue further with the officials concerned as it is paramount that the best outcome be secured at the earliest possible date for the British industry, at home and abroad. We are therefore grateful for this opportunity to feed into the Government's considerations and would be glad to meet the relevant officials in the near future to further discuss the potential impacts of a cultural tax credit