Video Games Industry in Scotland

House of Commons Scottish Affairs Committee Video games industry in Scotland Second Report of Session 2010–11 Volume I Volume I: Report, together with formal minutes, oral and written evidence Additional written evidence is contained in Volume II, available on the Committee website at www.parliament.uk/scotaffcom Ordered by the House of Commons to be printed 19 January 2011 HC 500-I Published on 7 February 2011 by authority of the House of Commons London: The Stationery Office Limited £14.50 The Scottish Affairs Committee The Scottish Affairs Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Scotland Office (including (i) relations with the Scottish Parliament and (ii) administration and expenditure of the offices of the Advocate General for Scotland (but excluding individual cases and advice given within government by the Advocate General)). Current membership Mr Ian Davidson (Labour/Co-op, Glasgow South West) (Chair) Fiona Bruce (Conservative, Congleton) Mike Freer (Conservative, Finchley and Golders Green) Cathy Jamieson (Labour/Co-op, Kilmarnock and Loudoun) Jim McGovern (Labour, Dundee West) David Mowat (Conservative, Warrington South) Fiona O’Donnell (Labour, East Lothian) Simon Reevell (Conservative, Dewsbury) Mr Alan Reid (Liberal Democrat, Argyll and Bute) Lindsay Roy (Labour, Glenrothes) Dr Eilidh Whiteford (Scottish National Party, Banff and Buchan) The following members were also members of the committee during the Parliament: Mark Menzies (Conservative, Fylde) Julian Smith (Conservative, Skipton and Ripon) Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No. 152. These are available on the Internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/scotaffcom. Committee staff The current staff of the Committee are Dr Rebecca Davies (Clerk), Alison Groves (Second Clerk), Duma Langton (Inquiry Manager), James Bowman (Senior Committee Assistant), Karen Watling (Committee Assistant), Mr Tes Stranger (Committee Assistant), and Ravi Abhayaratne (Committee Support Assistant) Contacts All correspondence should be addressed to the Clerk of the Scottish Affairs Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6123; the Committee’s email address is [email protected]. Video games industry in Scotland 1 Contents Report Page Introduction 3 1 Background 4 The video games industry in the UK 4 The video games industry in Scotland 5 Challenges currently facing the industry 5 Public opinion 5 Decline in the UK industry 8 Government proposals to support the industry 9 The call for financial incentives 10 2 A Games Tax Relief 11 Background to the proposal for a games tax relief 11 Cultural test 11 Impact of tax relief in other countries 12 Potential benefits of a games tax relief 12 Opposition to a tax relief 13 Government position on a tax relief 14 UK Film tax relief 15 Consultation 16 The future of tax relief 16 3 Adapting and extending the support currently available to the industry 18 Research and Development tax credits 18 Taxation of Intellectual Property (IP) 20 Measures announced in the June 2010 Budget 21 4 Other challenges facing the industry 22 Skills shortage 22 The £5 million Abertay prototype scheme 23 Livingstone/Hope review of skills 24 Brain drain 24 Access to Finance 25 Marketing and representing Scotland 26 Conclusions and recommendations 28 Formal Minutes 32 Witnesses 33 List of printed written evidence 33 2 Video games industry in Scotland List of additional written evidence 33 List of Reports from the Committee during the current Parliament 34 Video games industry in Scotland 3 Introduction 1. Following the announcement by the Chancellor of the Exchequer, Rt Hon George Osborne MP, in his 22 June 2010 Budget, not to proceed with a proposed tax relief for the video games industry,1 we decided to undertake an inquiry into the impact of this decision on the video games industry in Scotland and to examine alternative financial incentives for the industry. Our inquiry, announced on 21 July 2010, focussed on: • the contribution made by the Scottish video games industry to both the Scottish and UK economy; • what consultations were held by the UK Government with the industry before the decision was made to abolish a games tax relief; • the level of tax breaks or incentives offered in competitor countries; • what potential impact the decision to abolish games tax relief will have on the video games industry in Scotland, and; • alternative financial incentives for the industry. 2. As part of our inquiry, we travelled to Dundee where we visited the University of Abertay and two video games studios, as well as holding a roundtable discussion with representatives from the industry. We received a number of written submissions and took oral evidence from representatives of trade associations; the University of Abertay; HM Treasury; and Ed Vaizey MP, the Minister for Culture, Communications and the Creative Industries. We are grateful to all those who submitted evidence and aided us in our inquiry. 1 HM Treasury, Budget 2010, 22 June 2010, HC 61, Table 2.1 Budget policy decisions 4 Video games industry in Scotland 1 Background The video games industry in the UK 3. Since their emergence in the 1970s, video games have grown from a niche market into a global entertainment industry. The part played by UK video games studios in this expansion has led to the sector being described as the “jewel in the crown of the UK’s creative industries.”2 4. The UK has the highest number of games development companies and publishers in Europe, with approximately 280 development studios in the UK employing 9,500 people.3 Dr Richard Wilson, CEO of the Independent Game Developers’ Association (TIGA) told us that “economically, the UK video games industry contributes £1 billion to UK GDP and generates about £400 million in tax receipts for the Treasury.”4 Until 2008, the UK held third position in the world on development rankings by turnover.5 5. Globally, the video games market was worth $52.5 billion (approximately £33 billion) in 2009.6 The National Endowment for Science, Technology and the Arts (NESTA) estimates that the video games markets will experience annual growth rates of 10.3% between 2008 and 2012—twice as much as the film industry is expected to grow.7 6. Traditionally, the strengths of the UK video games industry have been creativity and innovation in the development of original intellectual property (IP). Levels of relative labour costs are considered the UK’s main competitive disadvantage.8 7. The industry is undergoing significant changes, with the traditional market of boxed retail products for home consoles and computers being supplemented by the rapid growth of games for mobile and handheld devices, as well as social network gaming and online gaming. In addition, “technologies and business models developed in the video games industry are being applied to areas such as health, defence and architecture.”9 It is estimated that more than 70% of the UK population now play video games in one form or another.10 8. Since 2005, the Department for Culture, Media and Sport (DCMS) has shared the policy responsibility for the video games industry in the UK with the Department for Business, Innovation and Skills (BIS), and its predecessors. 2 Ev 49 3 DCMS, Computer and video games, www.culture.gov.uk 4 Q 2 5 Ev 52 6 Ev 45 7 Ev 52 8 NESTA, It’s Time to Play, A survey on the impact of a tax credit for cultural video games in the UK development sector, August 2009, 9 NESTA, Level Up-Building a Stronger Games Sector, December 2008 10 Q 2 Video games industry in Scotland 5 The video games industry in Scotland 9. Evidence from Department for Culture, Media and Sport and Department for Business, Innovation and Skills explained that “Scotland is world renowned for excellence in computer games design. With hubs in Edinburgh, Glasgow and Dundee it is responsible for an impressive list of iconic, globally successful games.”11 The Association for UK Interactive Entertainment (UKIE) state that Scotland is home to nearly 25% of UK video games companies.12 Scotland has 46 development companies employing 651 development staff, with the games development sector supporting an additional 1,190 jobs.13 Annually, Scottish games companies are estimated to invest £30.2 million in salaries and overheads, contribute £27.5 million in direct and indirect tax revenues to the Exchequer, and make a direct and indirect contribution of £66.8 million to the UK’s Gross Domestic Product.14 Challenges currently facing the industry 10. On 16 June 2009 the Government published the Digital Britain report, “a guidepath for how Britain can sustain its position as a leading digital economy and society.”15 The report noted that the UK’s strong position in the world games market was being challenged in three key ways: • it is competing for investment against lower-cost countries; • there is a shortage of skills, due to both a brain drain and lack of adequate graduates; • there are too few indigenous UK intellectual property [IP] owners.16 In addition, DCMS and BIS listed “difficulties in attracting finance” as a priority issue for the industry. 17 Public opinion 11. Some perceive the video games industry as having no wider benefit than in entertainment, and question both the sector’s output and whether such an industry should receive financial incentives. During the Committee’s inquiry it was noted that the term ‘video games’ embraces a larger field of activity which includes the highly positive and widely beneficial work, such as undertaken at Abertay University, which has been described as ‘pervasive technology.’ Technology such as accident simulation is but one example of the innovative nature of the industry.

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