Taxing Times
Olswang's Cliona Kirby and Natalie Coope on the challenges of implementing Labour's tax break
Cliona Kirby and Natalie Coope, partner and associate respectively in Olswang's tax group, discuss the recently-announced games tax break and the challenges it is likely to face before the games industry will be able to take advantage of it.
As has been widely publicised, the UK games industry was the big winner in the March 2010 Budget with the Government announcing its intention to introduce games tax relief to support our highly successful and innovative games industry. This is fantastic news for the industry whose position as a world leader in games development is being eroded by tax breaks offered in other countries
The new games tax relief should (i) promote a sustainable UK games industry (ii) retain a critical mass of infrastructure in the UK and (iii) encourage games that might not otherwise be made at all to be made (and to be made here in the UK), particularly new and innovative games which may be considered to be higher risk.
Initial Challenges: the General Election and European Commission Approval
The initial challenges facing the games tax break are (i) the upcoming General Election (albeit that there is strong cross political party support for the games tax credit, particularly from Labour MP Tom Watson and Conservative MP Ed Vaizey) and (ii) the requirement to obtain the European Commission's approval of the relief (which typically takes 18 months from first notification). Hence, implementation of the relief is unlikely to be quick.
EC approval of the relief is required because of the prohibition on state aid, which prevents an EU Member State from assisting one of its industries (to the potential disadvantage of other Member States) without EC clearance. The film industry previously went through a similar process and obtained approval that the film tax credit could fall within the cultural exemption.
Assuming the Government chooses to adapt the film tax credit which, in our view, is the fastest and most efficient way to deliver the tax break, a case will need to be made that it will promote "culturally significant videogames that might not otherwise be made in the UK". Building on our experience from the film tax credit it is essential that the test does promote British (or European) culture or heritage rather than simply being an economic test. We have designed a cultural points test that would work for the games industry.
Games Tax Credit Structure
There is currently little detail available regarding the structure of the games tax relief and, as always, the (legal) devil is in the detail. The Government therefore intends to engage in a more detailed consultation with the games industry. We have highlighted below some of the key issues that will need to be addressed.
It is envisaged that tax relief will be given in one of two ways: enhanced tax losses generated from games development expenditure which can either be (i) set off against the games company's taxable profits or (ii) surrendered to HMRC for a payable cash tax credit.