On 16 April 2013, the European Commission (the Commission) announced that it had launched an in-depth investigation into whether tax breaks for businesses involved in the United Kingdom (UK) video games industry will constitute illegal state aid under European Union (EU) law.
In December 2012, the UK Government (the Government) released draft legislation in the form of an amendment to the Finance Bill which would, if enacted, create a new games tax relief allowing developers involved in the UK video games industry a 25% tax relief on up to 80% of the costs incurred in the production of a qualifying video game. The measure is designed to incentivise games designers to develop and produce work in the UK in a bid to boost the economy. The relief was due to come into force on 1 April 2013 but has been delayed due to the impending EU investigation. The Commission is concerned because it says that the tax break might be unnecessary and therefore could fall foul of EU state aid rules.
The legal basis
State aid is selective advantage or incentive granted by a Member State to certain commercial companies to the disadvantage of others. According to Article 107(3)(c) of the Treaty on the Functioning of the European Union (TFEU) aid to facilitate the development of certain economic activities or of certain economic areas can be compatible with the internal market where such aid does not adversely affect trading conditions to an extent contrary to the common interest. Article 107(3)(d) of the TFEU provides that aid to promote culture and heritage conservation can be compatible with the internal market where such aid does not affect trading conditions and competition in the EU to an extent that is contrary to the common interest. To ensure fair competition across the EU, state aid is generally prohibited unless it is de minimis or can be justified, for example as being necessary for economic development.
The Commission has initiated its in-depth investigation into the proposed relief in light of its view that UK video games are already being produced without the need for state aid. It is therefore concerned that there is "no obvious market failure" in the UK that needs to be addressed and the proposed tax break may not be necessary. The Commission is also keen to avoid "fuel[ing] a subsidy race between Member States".
Similar reliefs around the world
The US, Singapore and Canada all offer tax breaks for games developers. Inside the EU, many countries also offer support for the gaming industry in order to stimulate growth. In particular, France has tax relief in place for its own national video games industry and Finland supports the industry through various measures, including government funding.
The abovementioned French relief was authorised by the Commission in April 2012 following a 12 month investigation (see here). This positive, if long-awaited result, has led the UK trade association representing the UK games industry, The Independent Games Developers Association (TIGA), to feel positive about the potential outcome of the investigation into the Government's plans. However, this confidence may be misplaced in light of a crucial distinction in the facts: in France, the Commission's investigation was launched into whether the extension of an existing tax credit scheme for video game creation was in line with EU rules; the UK scheme will be the first of its kind in the UK and as such the Commission may determine that such a scheme will have more potential to create a distortion in competition in the market. On the other hand, it could be seen as unfair for the Commission to block a UK scheme, while authorising others to continue, on the grounds that the UK has a much more successful gaming sector.
The measures have not yet been vetoed by the Commission, but the opening of the in-depth investigation spells trouble for the Government's plans. As mentioned above, the investigation into French games tax relief took 12 months to conclude, meaning that the Commission's decision to investigate could, at best, subject the UK scheme to a protracted delay. However, in the alternative, the Commission might decide to put an end to what appears to be turning into a race between Member States to attract multinational games developers, studios and thus revenue to their economies. The outcome of the investigation will be keenly anticipated by TIGA and games producers alike.
The Commission has invited views on the publication of the Commission's decision by 16 May 2013.