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Video games creators still left out in the cold with Creative Industry Tax Relief, says tax adviser

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Mark Evans, managing director of Wolverhampton based accountants and tax advisers Copia
Wealth & Tax, has commented on the complexities surrounding the new Creative Industry Tax Reliefs, introduced in The Finance Act this April, and has asked why the production of video games is still being overlooked.

“The Creative Industries Tax Reliefs introduced in April are designed to encourage creative talent to stay in the UK”, says Mark. “The new tax reliefs cover the production of high-end television, known as HTR, and animation (ATR) and follow on from Film Tax Relief (FTR) that was introduced in 2007. They allow British qualifying companies to claim a larger corporation tax deduction, or a payable tax credit, when working out their taxable profits. This is similar to the
well-established R&D Tax Relief scheme for SMEs.

“In addition to these reliefs, the Technology Strategy Board’s new Creative Industries Strategy was published in September and sets out a plan for innovation and growth in the creative sector over the next three years. This includes funding programmes worth up to £26m. 

“This new strategy must be commended as previous governments have paid lip service to the creative industries and the value they add to the economy, but little has been done to understand how such businesses actually function”, says Mark.

The rules on Creative Industries Tax Relief for ATR and HTR are complex and HMRC treats each
discipline differently but with basic requirements. In all cases the company applying must be paying corporation tax on the production and must pass a “Cultural Test” to certify that the production is British. It is not possible to claim for the creation of advertisements, news or current affairs programmes, quiz shows or training videos.

“In the case of animation, the programme must be intended for broadcast with at least 51 per cent of the total core expenditure on animation and at least 25 per cent of the total production costs relating to UK based activities” Mark continues. “Where HTR is concerned, the cultural test includes the European Economic Area. The production costs must be at least £1m per programme hour and must be a drama, comedy or documentary with a slot length of greater than 30 minutes and at least 25 per cent of the total production costs relating to UK based activities.

“A fourth sector, video games production, is awaiting state aid approval for tax relief. This is surprising, not just because video games consist largely of animation, but also because the UK, and the West Midlands in particular, has, since the mid 1980s, been a hotbed for the creation of video games and animation. Many of the world’s leading publishers and developers originated in this area, including publishers Eidos, Elite and Codemasters, with local creative development
studios supplying these publishers, often with self-funded product.

“The late 1980s saw a massive talent drain from this region and the UK as a whole to more tax-favourable countries including USA, Canada and in particular Malaysia, where video games developers enjoyed tax breaks of up to ten years. The video games industry’s trade association TIGA has campaigned for a number of years for the industry’s games developers to be supported in what is essentially ongoing research and development.

“From the early 1980s Britain was the world’s third biggest producer of computer games, behind USA and Japan. It’s now fifth, overtaken by Canada and Korea, with the games workforce in Canada increased by 33 per cent, while UK employees have fallen by eight per cent. Meanwhile, British-made Grand Theft Auto 5 is expected to generate £1bn in sales in its first year and cost just £170m to develop.

“Chancellor George Osborne proposed Video Games tax relief in the 2012 budget but it was thrown out by the EU for possibly offering Britain an “unfair advantage” and questioning if video games were “cultural”, even though French developers enjoy the support of their government. It’s time that Britain was allowed to compete on a level playing field in a sector in which we are still a major employer and creative force.”