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
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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. Such technology also has massive implications for medical research and medical science.
11 Ev 45 12 Ev 49 13 Ev 55 14 Ev 55 15 “At a glance: Digital Britain”, BBC News Online, 16 June 2009 16 DCMS and BIS, Digital Britain Final Report, Cm 7650, June 2009 17 Ev 45
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12. The Independent Game Developers’ Association’s report State of the Video Games Sector, published in 2010, argued that:
[...] the video game development sector is accustomed to adversity. It has grown up largely unloved and ignored by the political and economic powers in our country. Until recently, the only times the sector featured in the wider press was when it was being condemned for creating poisonous and addictive products which corrupted all who touched them.18
13. Although our inquiry focuses on the video games industry itself, rather than the nature and content of the games it produces, any wider discussion of the industry will invariably raise the issue of the sexual and violent content of some video games.
14. In evidence, Mr Rawlinson, Director General of UKIE, told us that “it is very important for the Committee and Parliament to know that video games are regulated, like films.”19 The Digital Economy Act 2010, passed in the previous Parliament, amended the Video Recordings Act 1984, so that “the industry’s self-regulatory system for the age-content classification of video games, which is called PEGI, is enshrined in law.”20 This is due to be implemented by the spring of 2011 introducing a “stand-alone classification system for video games that makes the classification from 12 upwards mandatory and legally enforceable. It will be the first time that video games are covered by such a benchmark”.21
15. Mr Rawlinson also said that:
We are a mature industry, so we should be free to tackle mature topics and mature subjects with our content and output, provided that it is correctly classified, regulated and signposted [...] the industry has acted, and it continues to act, very responsibly in relation to adult content [...] as part of the introduction of the new regime, which will come in next spring, the industry is committed to an education and awareness campaign to ensure that parents, gatekeepers and carers understand that video games are not just for children and that there is a content classification system.22
Finally, Mr Rawlinson said that “in the last year for which I have figures, 18-rated products accounted for about 8% of the market.”23
16. Regulating and enforcing the sale of boxed products for consoles and computers is, arguably, largely achievable. A greater challenge is the policing of online games, the availability and popularity of which has increased in recent years. Ed Vaizey MP, Minister for Culture, Communications and the Creative Industries, told us “it is a whole issue about how children are kept safe online and how parents monitor what they are doing online, and how parents in particular get the kind of instructions and education they will enable
18 TIGA, State of the UK Video Game Development Sector, 2010 19 Q 85 20 Ibid. 21 Ibid. 22 Ibid. 23 Q 87
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them because, let’s face it, not all parents are as tech savvy as their teenage children and they do need clear guidance.”24
17. In September 2007, the then Prime Minister asked Professor Tanya Byron to conduct an independent review looking at the risks to children from exposure to potentially harmful or inappropriate material on the internet and in video games. The report Safer Children in a Digital World was published in 2008,25 followed by Do we have safer children in a digital world? A review of progress since the 2008 Byron Review, published in March 2010. The follow-up report noted that:
[...] there has been excellent progress made on video games since 2008, particularly the clarification to the video games age classification system [...] For phase two I have made recommendations to help this excellent progress accelerate through: widely publicising the single classification system once it becomes law; looking at the issues around online gaming; ensuring that mobile and internet-enabled device manufacturers are involved in the development of parental controls and include them on their devices; ensuring that awareness of parental controls is included in the UKCCIS [UK Council for Child Internet Safety] public awareness raising campaign; and developing minimum standards and independent review for parental control standards on all internet-enabled devices.26
18. The wider issue of access to video games and more specifically the regulation of access to online games is one in which the industry as a whole is well placed to research further and we believe that further research in this area would be beneficial. Mr Durrant, University of Abertay, Dundee, noted that “the whole area of analytics around users and the audience is a really important one, obviously for child protection issues [...] it’s been very hard to secure research funding in this area, because of the interdisciplinarity of it.”27 He also noted that “it is an area that is fertile ground for people to understand more.”28 The Minister told us that funding for looking into the area was “something [he] would certainly happily look into [...] It would certainly be an interesting way to test technology to see whether you could monitor, as it were, the age of people playing games.”29
19. All creative industries, including the film and music industries, are faced with concerns and challenges over adult content. The Byron review notes the “excellent progress” made by the video games industry on the issue of classification, and it is worth noting that adult content represents less than 10% of the content either produced or consumed.
20. We note that much improvement has been made by the industry, particularly in relation to classification, however more needs to be done to future proof age verification for video games accessed online. The industry and universities are well placed to research how best to go about ensuring children cannot gain access to
24 Q 211 25 Department for Education, Safer Children in a Digital World; the Report of the Byron Review, April 2008 26 Department for Education, A Review of progress since the 2008 Byron Review, March 2010 27 Q 120 28 Q 124 29 Q 212
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inappropriate adult content. Therefore we recommend the Government look into supporting such research, and ask the industry to see how they too can invest in such research as a part of their corporate social responsibility.
Decline in the UK industry 21. The sector, both in the UK and in Scotland, has declined over the last couple of years. Between July 2008 and July 2009, 15% of all video games companies in the UK went out of business.30 So far in 2010, the UK has experienced a 4.4% decline in workforce.31 It is predicted that the UK has fallen from third place in the global development rankings to sixth place.32 Scotland has suffered a decline in the development workforce of more than 18% in 2010, mainly due to Realtime Worlds, one of the biggest development studios in Scotland, going into administration.33
22. This decline has been primarily attributed to the generous subsidies for games companies available overseas in certain countries such as Canada and France. As Dr Wilson, Chief Executive of the Independent Game Developers Association, told us that “over the last few years, game developers and publishers have been saying that the UK is competing on an uneven playing field and that we are losing jobs and investment to overseas jurisdictions.”34
23. However, NESTA said that:
Video Games are thriving in other countries without generous public support: it is worth bearing in mind that other arguably ‘expensive’ development territories are managing to compete without the sort of subsidies and incentives available in Canada or France. Japan and South Korea remain at the top of global rankings without targeted large-scale support, and German games studios have become a force to be reckoned with in emerging online and mobile markets in spite of a marked lack of government support. Likewise, the Nordic countries and Australia have attracted significant levels of foreign investment without the sort of measures available for their Canadian and French competitors. This suggests that tax credits are not the only explanation for the challenges that the UK video games sector is currently facing.35
24. NESTA also believe that there are other factors in the UK’s decline, noting that “studios in the UK face competition from both emerging markets with natural cost advantages, such as Eastern Europe, China and Singapore.”36 Skills shortages, unsustainable business
30 Ev 52 31 Q 57. The witness later provided information stating the workforce had declined 5% between July 2009 and September 2010. 32 NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010; see also written evidence from DCMS and BIS 33 Qq 57–59 34 Q 75 35 Ev 52 36 NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010
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models and a lack of innovation were also given as reasons why the UK is becoming a less attractive place to invest in video games development.37 However, NESTA also told us:
It is crucial to improve access to external finance for the sector [...] Lacking funds to reinvest on innovation and growth, or to buffer themselves against market uncertainty, they [businesses] fall in an ‘IP Poverty Trap’ which is hard to escape [...] NESTA believes that external finance focusing on projects rather than companies may have a role to play in enabling the sector to access capital for innovation and growth.38
25. Futhermore, the UK Industry has difficulty with intellectual property retention. The consequences of this is that concept innovation and creativity within the UK often generates activity and jobs overseas.
Government proposals to support the industry 26. The Government has set out its policy for video games:
[...] we want UK video games businesses to be particularly well placed to respond to the new opportunities offered by the rapid growth in global demand for interactive entertainment, the new routes to market we see from the growth of online delivery, the broadening demographic for games and the potential for SME games businesses to create new business models.
DCMS and BIS are talking to the video games industry regarding what Government, industry and others might do to promote the sector’s competitiveness, including by ensuring the games sector is fully considered in broader ongoing exercises such as Government’s focus on supporting growth and on business access to finance.39
27. Since the Government’s announcement to not introduce the games tax relief, the Government has initiated:
• the appointment of Ian Livingstone OBE, Life President of Eidos, as a skills champion for video games, building on his role as Chair of Skillset’s Games Council to drive forward work to produce a better skilled workforce for the sector;
• an independent review, led by Mr Livingstone and Alex Hope, and carried out by NESTA and Skillset, of education and training in the UK games and visual effects sectors. This is likely to report in January 2011;
• a series of ministerial roundtables with the sector on themes such as finance and skills; and
37 NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010 38 Ev 52 39 Ev 45
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• work with UK Trade and Investment, the industry and others to update and better define the proposition the UK offers for video games inward investors/potential inward investors.40
The call for financial incentives 28. The UK’s fall in the global rankings and decline in workforce has led to a call for the introduction of financial incentives for the sector, both to retain and to encourage investment. Dundee City Council believed that “even with all else being equal, investment capital of all types will continue to flow towards areas with active investment incentives and away from the UK.”41
29. When asked why the industry should benefit from such incentives, Mr Livingstone argued that:
[...] the games industry is very much misrepresented in the world’s perception. It’s the largest entertainment industry in the world—bigger than DVD, music, box office and books—yet there has always been a sort of negative connotation. It’s an industry that we are particularly good at in the UK, and we want to incentivise games makers, wherever they are in the world, to make the UK their destination of choice when it comes to making games.42
30. The video games industry is a highly mobile and relatively young industry, with predicted annual growth rates double that of the film industry. Scotland has an outstanding reputation for excellence in video games production, but in reality the sector is of great economic benefit to the whole of the UK. The UK industry, however, is currently contracting. It faces an uneven international playing field, disadvantaged by subsidies from governments overseas, notably France and Canada, and cheaper labour markets elsewhere, as well as by skills shortages, unsustainable business models a need for innovation and investment vehicles. The Government has a responsibility to help create an economic environment in which the creative industries can flourish. Impediments for growth in the UK are emerging and we believe the Government should make the future of this industry a priority.
40 Ev 45 41 Ev w1 42 Q 10
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2 A Games Tax Relief
Background to the proposal for a games tax relief 31. In August 2009, the Independent Game Developers’ Association (TIGA), a trade association representing the UK games industry, submitted a proposal to the UK Government to introduce a games tax relief.43 Dr Richard Wilson, Chief Executive of TIGA, told us that “we want to be able to compete on a level playing field and the best way to do that would be with the games tax relief.”44
32. TIGA proposed a tax relief that would cover any company in the UK paying corporation tax, and with a budget of £100,000 or more. They calculated that:
[...] over a five-year period a games tax relief would more than pay for itself. It would generate £415 million in tax receipts for the Treasury, from an outlay of £192 million [...] it would also lead to additional investment in the sector over a five-year period to the tune of £457 million, and it would create about 3,500 graduate-level jobs.45
33. However, HM Treasury disagreed with some of these figures. We were told that the Treasury’s calculation of the cost of the relief was:
[...] broadly consistent with the level of tax relief which TIGA had asked for in its submissions. The question of what the fiscal impact would be of any relief [...] is more difficult [...] the assumptions on which they are predicated we would disagree with [...] the assumption about the creation of a job actually being an addition to the UK economy and hence an addition to our revenues we just do not accept.46
Supplementary evidence from HM Treasury argued that “it is likely that the estimates provided in the research commissioned by TIGA, at the very least overestimate the impacts of introducing a sector specific incentive for the video games industry.”47
Cultural test 34. Dr Wilson explained that, due to EU rules, applications would need to pass a cultural test in order to benefit from a games tax relief:
You would, for example, get points for using new technology, for having your production staff based in the United Kingdom, for if your game was a new game rather than a sequel, for using new technology, or for basing it on an aspect of British or European heritage—that could be a book, film, historical event or sport.48
43 TIGA, Investing in the Future: a Tax Relief for the UK Video Games Development Sector, August 2009 44 Q 43 45 Q 8 46 Q 159 47 Ev 59 48 Q 83
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35. He also told us that TIGA:
[...] ran a test involving 18 games last year, just to see how it worked out [...] we found that out of those 18 titles, about 44% passed [...] we imagine that if the games tax relief was introduced, clearly games companies would try to make sure that they could benefit from the tax break and pass the cultural test, so we think that a higher proportion would pass eventually.49
Impact of tax relief in other countries 36. Several countries currently offer a tax relief for this sector, notably Canada, France and the USA. The NESTA report, The Innovation Game, looked in-depth at the tax breaks offered in Canada and France:
Montreal has a tax credit for the production of multimedia (rebate up to 37.5% on 90% of all eligible expenditure) and France has a production tax credit for cultural video games of 20% of qualifying labour expenditure for projects that pass a cultural test. France spent €170 million in 2008; Montreal spent £500 million between 2004 and 2008 (including tax credits and other grants.)50
37. Other countries such as Japan and Finland do not offer tax credits but do offer other financial incentives. NESTA said:
[...] many territories provide additional incentives for video games development: they entice foreign experts with tax holidays, support independent video games studios with Intellectual Property Development Funds and directly subsidise publisher investments in their territories. In some cases, such as British Columbia, they also favour investments in the sector through tax incentives for venture capitalists.51
38. Looking at the impact of the tax relief, TIGA note that “in the mid-1990s, Canada was a minor video games development location, only just starting to benefit from its location next to the world’s largest video games market [...] by 2006, Canada had leap-frogged Britain to take third place in the global sales rankings.”52 This significant change has been attributed to tax relief.53
Potential benefits of a games tax relief 39. In 2009 NESTA commissioned It’s Time to Play: A Survey on the impact of a tax credit for cultural video games in the UK development sector. The report surveyed 30 leading British video games developers, publishers and sources of funding. It found that: “most respondents to the survey believe that a tax credit for cultural games would benefit the UK
49 Q 32 50 NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010 51 Ibid. 52 TIGA, Investing in the Future: a Tax Relief for the UK Video Games Development Sector, August 2009 53 Q 67
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video games industry in a number of ways, principally by improving growth, widening investment prospects, and supporting creativity and innovation.”54 Dr Wilson argued that: “with games tax relief in place, there are powerful incentives for overseas publishers to invest in Scotland [...] or the rest of the UK. There are strong financial measures in place, flowing from games tax relief, to enable indigenous developers to grow their firms.”55
Opposition to a tax relief 40. A games tax relief is not universally supported. Ed Vaizey reminded us that “not everyone in the video games industry necessarily thought the tax credit was a good idea.”56
41. One criticism of the proposed tax relief is that it would mainly benefit large, multi- national companies, with the added risk that these companies would leave if and when the tax break was removed. Linked to this is the argument that start-up companies would not benefit from the relief. Mr Paul Durrant, Abertay University, said that “one of the challenges with a measure such as games tax relief is that it sometimes comes in a little way into the development cycle. It is a retrospective benefit that does not always bring the immediate cash-flow benefits that a SME games developer, particularly a smaller micro- business, might seek.”57
42. It has also been argued that a tax relief would not help in either the generation or retention of intellectual property, which are priorities for the industry. In 2008, NESTA commissioned a report assessing the competitiveness of the UK’s games development sector and the impact of governmental support in other countries. Their report, Raise the Game, noted that “while tax incentives have been very effective in encouraging investment into Quebec, they have not been targeted at the creation of new intellectual property by Canadian-owned studios, whose original ideas remain weak.”58
43. The call for a games tax relief in the UK is a response to the effects of subsidies in other countries. The Minister told us that “if you take a step back to how we got in a position where we are effectively talking about tax breaks, it was all effectively down to Canada. So if Canada wasn’t doing what it was doing I am not sure it would be so high on the political agenda.”59 The introduction of tax relief to compete with other countries is not guaranteed to succeed and has inherent risks. The Treasury do not think that “it is efficient on either a global or a national level to enter into economic competition [...] orthodox advice would be not to seek to retaliate simply because you get into mutually assured destruction territory.”60 The UK’s fall to possibly sixth place in the global games rankings puts the country behind Japan and South Korea, both of which:
54 NESTA, It’s Time to Play, A Survey on the impact of a tax credit for cultural video games in the UK development sector, 2009 55 Q 8 56 Q 205 57 Q 94 58 NESTA, Raise the Game, December 2008 59 Q 217 60 Q 162
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[...] are still at the top of the global rankings without bespoke, large-scale support for video games companies. German studios too have attained healthy rates of growth in spite of their government’s apathy [...] towards video games. Similarly, the Nordic countries and Australia have established themselves on the global map of video games development, and attracted substantial levels of foreign investment, without the sort of measures available in Canada and France.61
The NESTA report, whilst generally in support of tax relief, concluded that “the tax credit is no panacea to the problems faced by the UK video games sector.”62 It was also argued that the ‘cultural’ element to the proposed relief could produce commercial incentives for companies to produce games to qualify for the credit instead of games which consumers wanted to buy.63
44. There are also concerns over the benefit of such a relief for smaller, indigenous companies, and how it would impact on intellectual property creation and the skills shortage. A tax relief is not the sole factor for investors; other cost factors and skills are also crucial elements in deciding where to locate a business. We accept that it is impossible to guarantee the impact that a tax relief would have in the UK.
Government position on a tax relief 45. Before the 2010 general election, the Conservative, Liberal Democrat, Labour and Scottish National parties all signalled their support for a games tax relief. The then Chancellor, Rt Hon Alistair Darling MP, stated in the March 2010 budget that “our creative industries are also a huge source of jobs, wealth and pride. I will offer help to the computer games sector, similar to the steps that are helping to restore the fortunes of the British film industry.”64
46. On March 29 2010, Ed Vaizey, the then shadow Minister for the Department for Culture, Media and Sport, told Develop magazine that the Conservatives “are going to support tax breaks for the industry.”65 On April 26 he added that “we are fully behind game tax breaks. This is my unequivocal statement [...] it’s been approved by [then shadow Chancellor] George Osborne.”66 On April 30, Don Foster MP, the then Liberal Democrat shadow Secretary of State for Culture, Media and Sport, said in a statement to TIGA that “Liberal Democrats support the introduction of a games tax relief. Following consultation on the details, we would implement the relief as soon as possible.”67 The Rt Hon George Osborne MP, Chancellor of the Exchequer, announced as part of the Budget on 22 June 2010 that “we will not go ahead with the poorly targeted tax relief for the video games
61 NESTA, The Innovation Game: Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010 62 NESTA, It’s Time to Play, A Survey on the impact of a tax credit for cultural video games in the UK development sector, 2009 63 Ev w13 64 HC Deb, 24 March 2010, col 261 65 “Tories: We’ll offer tax breaks in our first budget”, www.develop-online.net. Tuesday 30 March 2010 66 “Tories: you have to trust us on game tax breaks”, www.develop-online.net. Monday 26 April 2010 67 Ev 55
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industry.”68 On 27 October, the Prime Minister was asked why the Government reneged on their promise to introduce a games tax relief. He replied: “we had to make difficult decisions about tax relief [...] I am afraid that that tax relief, which was not particularly successful or well targeted, must go.”69
47. We asked Mr Vaizey why support for a tax relief was expressed before the election and opinion changed so quickly after the election. Mr Vaizey replied that “to put it completely bluntly, as far as I am concerned, after the election all bets were off in terms of the financial situation and in terms of how the Chancellor wanted to approach his budget.”70 He added “do I, as a matter of principle, think that tax credits are a good thing? Not necessarily. Did I, as shadow Minister [...] take a view that we were effectively in tax competition with other jurisdictions? Yes quite possibly.”71
48. The Association for UK Interactive Entertainment told us that “no detailed explanation has been given to date for why these tax breaks are now considered to be ‘poorly targeted’.”72 In evidence, Edward Troup of HM Treasury, said “I am not sure I would say [a games tax relief] was poorly targeted. It was targeted at the video games industry.”73 We asked Mr Vaizey why the tax break was described as “poorly targeted.” He replied “I can’t clarify the position for you. I didn’t get a chance to lobby the Treasury directly on the video games tax break. I lobbied indirectly and made my views known, but I wasn’t aware the Treasury regarded the tax break as poorly targeted.”74
UK Film tax relief 49. In the 1990s the UK Government introduced a tax credit for the film industry. This tax credit currently costs £110 million per year.75 The games tax relief is estimated to cost £192 million over five years. Although the Government decided not to proceed with the games tax relief, the film tax relief will not be abolished. When this issue was raised with the Minster, he replied “I think it is a historic issue [...] I think an existing tax credit is in a stronger position than one that doesn’t exist.”76
50. A games tax relief would cost less than the tax credit currently awarded to the film industry. The Government has tried to explain away the existence of a film tax credit in contrast to the resistance to a games tax credit as a matter of politics and history. This is a poor argument for seemingly favouring a mature industry over an emerging one. Inertia is a poor justification for the status quo. We highlight the inconsistency in the Government’s approach to the two industries and draw this anomaly to the Government’s attention. We believe that a cost benefit analysis should be done of the
68 HC Deb, 22 June 2010, col 175 69 HC Deb, 27 October 2010, col 311 70 Q 185 71 Q 187 72 Ev 49 73 Q 138 74 Q 186 75 Q 143 76 Q 202
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video games industry and the film industry to see which gives the better value for money.
Consultation 51. A major issue regarding the Government’s decision to abandon a games tax relief is that of consultation. Dr Wilson was “disappointed that we weren’t able to have meetings with Ministers, even for just five minutes, before the Budget, which I think was unfortunate,”77 and Edward Troup confirmed that between March 2010 and the June 2010 Budget, “the industry spoke to Treasury officials, but there were no meetings.”78
52. Ed Vaizey described his job as being “to support this industry as much as I can.”79 In relation to the games tax relief, however, Mr Vaizey told us “I didn’t get the chance to lobby the Treasury directly on the video games tax break. I lobbied indirectly and made my views known.”80 It appears that Mr Vaizey was not consulted by the Chancellor before the proposed tax relief was abolished. When pressed on this issue, Mr Vaizey replied “I am quite low down on the food chain.”81
53. Prior to the general election the Conservative, Liberal Democrat, Labour and Scottish National parties supported the principle of a games tax relief. Given this consensus across the political landscape, the industry could have reasonably expected the introduction of such a tax relief, and would have planned accordingly. However, in its first budget, the Government changed its position.
54. The Minister responsible for the video games industry should make representations at the heart of Government on behalf of this economically and culturally important industry. We are surprised and disappointed that the Minister was only able to lobby the Treasury indirectly on the games tax relief. We expect the industry to be better represented in future within Government. We invite the Government to explain in its response to this Report how it will ensure that the voice of the industry is properly represented in future and give an undertaking that this experience will not be repeated.
The future of tax relief 55. The Chancellor described the proposed tax relief as “poorly targeted”, prompting debate over the meaning of the phrase. The proposed tax relief was specifically targeted to the UK video games industry; in this sense, it was well-targeted. The real issue is whether the tax relief is value-for-money and would alleviate many of the structural problems in the UK sector; those being generating and retaining IP, self-publishing and aiding start-ups.
77 Q 89 78 Q 150 79 Q 211 80 Q 186 81 Q 213
Video games industry in Scotland 17
56. There are both compelling arguments for a tax relief, most notably in the lessons of the effect such a relief has had in Canada, and real concerns. The Committee is divided over the issue of tax relief for the industry and we are unlikely to come to a consensus on this issue. There is disagreement between HM Treasury and games industry representatives over the financial benefit of a games tax relief. We recognise, however, that the UK Government has ruled out a tax relief for the foreseeable future, and the current fiscal environment means this view is unlikely to change in the short-term.
57. We recommend that the possibility of introducing a tax relief be kept under review, and the health of the industry be monitored for the potentially malign effects of uneven international competition. We recommend that the Government, meanwhile, undertake a full and comprehensive assessment to determine the benefits of such a relief, as well as examining those countries whose industries continue to flourish without Government support.
18 Video games industry in Scotland
3 Adapting and extending the support currently available to the industry
Research and Development tax credits 58. Research and development (R&D) relief is a corporation tax relief. There are two schemes for claiming relief, depending on the size of the company or organisation:
• The Small or Medium-sized Enterprise (SME) Scheme
• The Large Company Scheme
A company or organisation can only claim for R&D relief if it is liable for corporation tax and if an R&D project seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty—and not simply an advance in its own state of knowledge or capability.82
59. We endorse the view of National Endowment for Science, Technology and the Arts (NESTA) that:
The Research and Development (R&D) Tax Relief scheme needs to be made more relevant for UK video games companies: Innovation in technologies, content and business models can make UK video games companies more productive and efficient, and enable to develop the new products and services to stay ahead of the international competition. By supporting the innovative activities of UK video games companies, policy can help the sector to step away from an unsustainable ‘race to the bottom’ on the basis of costs, and instead continue at the top through the creativity and technical excellence that drove it there on the first place.
The R&D Tax Relief scheme is one of the main mechanisms through which the UK government encourages innovation in the private sector. However, many innovative video games companies are unaware of its existence, or face substantial barriers in benefiting from it. The way that the credit is configured means that it is particularly hard for video games companies with distinctive innovation processes to prepare claims, or get them approved; these companies usually lack the scale or in-house resource to access the legal and tax-related expertise required to prepare their claims.83
60. Several other submissions to the Committee’s inquiry focussed on the R&D tax relief. Dundee City Council recommended an “extension of the current R&D Tax Credits system to include ‘the creation of intellectual property suitable for export’”;84 UKIE suggested a “modification of the R&D tax credit to ensure that the video games industry can make full
82 HMRC, Research and Development (R&D) Relief for Corporation Tax, www.hmrc.gov.uk 83 Ev 52 84 Ev w1
Video games industry in Scotland 19
use of it,”85 and TIGA stated that “R&D tax credits should be retained and enhanced.”86 Dr Wilson from TIGA told us that:
[...] at the moment, R and D tax credits [are] very much focused on technological improvements, and they are designed to give tax relief to technological or scientific improvements... [what TIGA would like to see] is the R and D tax credits being made more generous. At the moment, for every £1 of qualifying R and D expenditure, you can get £1.75 back. For example, you could—the Dyson report suggested this as well—raise the qualifying amount to £2, so that for every £1 of qualifying expenditure you might get £2 back in R and D tax relief.87
61. Edward Troup, Managing Director, Budget, Tax and Welfare, HM Treasury, explained that:
[...] of the R&D tax credit, in the most recent year for which we have got data, about £50 million of the £700 million or £800 million of support went to software development. So it is not as if the industry isn’t already able to access some support. But we do see this as an important broader plank in supporting a whole range of industries but particularly in the intellectual property field.88
62. On 18 October 2010, NESTA published The Innovation Games: Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, which recommended:
[...] modifications to the R&D tax credit that would remove unintended obstacles that make it harder for UK video games companies to benefit from the scheme. By grounding our policy recommendations in the distinct nature of the industry’s R&D processes, we ensure that they have only limited implications for other sector—and hence the Exchequer—but at the same time promise to significantly boost innovation by video games companies.89
The report recommended specifically:
• raising the profile of the R&D tax credit in the eyes of video games companies, and improving access to information about how to apply;
• clarifying the status of important innovation expenditures for video games development;
• using data collected as a by-product of development to assess R&D Tax Relief Claims;
• providing R&D specialist units with video games specific expertise; and
85 Ev 49 86 Ev 55 87 Q 6 88 Q 174 89 NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010
20 Video games industry in Scotland
• improving access to data on the R&D Tax Relief scheme for evaluation and assessment purposes.90
Dr Wilson described R&D tax credits as “very much a second-best measure for the video games industry [which] would not draw in those overseas publishers to invest in the United Kingdom or stimulate new investment in the UK games industry.”91
63. Research and development tax credits already provide an incentive for innovation. These credits could be adapted and enhanced, at little cost to the Exchequer, but with great benefit to video games companies. We recommend that the Government set out in its response to this Report how it plans to work with NESTA on adapting the research and development tax credits as soon as possible so that video games companies can make full use of the scheme.
Taxation of Intellectual Property (IP) 64. The 2009 NESTA report, It’s Time to Play, noted that “nearly three quarters of our respondents believe that original Intellectual Property (IP) generation in the UK has been in decline or stopped altogether in recent years [...] this trend is particularly worrying for the UK video games sector which has traditionally relied on its creativity and capacity to innovate as a differentiation factor against cheaper development territories.”92 Furthermore, “retaining ownership over successful original IP [...] would enable UK video games developers to hold on to the asset and cash flow value generated by their creations [...] helping them to adopt more sustainable business models, and reducing their reliance on overseas publisher funding sources.”93
65. Ensuring companies create and retain IP is a priority, and Mr Rawlinson, Director General, Association for UK Interactive Entertainment, noted that “if the Government could produce something that links IP to this country, or makes it beneficial to keep the ownership of the IP in this country, along with the tax receipts from the worldwide exploitation of that IP, it would be very beneficial.”94
66. The Government has announced a review of the taxation of IP, which Mr Vaizey told us would be completed in time for the 2011 Budget.95 The creation and retention of intellectual property is a priority issue for the UK video games industry. We welcome the review of the taxation of IP currently being undertaken by the Government. We expect the Government to set out a timetable for the implementation of the recommendations of the taxation of IP review in its response to this Report. We will monitor its outcome.
90 NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010 91 Q 43 92 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 93 Ibid. 94 Q 71 95 Q 197
Video games industry in Scotland 21
Measures announced in the June 2010 Budget 67. On 22 June 2010, the Chancellor announced as part of the Budget that:
[...] from April 2011, the threshold at which employers start to pay national insurance will rise by £21 a week above indexation [...] next year we will cut corporation tax by 1%, to 27p in the pound, the year after we will cut it again by 1%, and again the year after, and again the year after that—four annual reductions in the rate of corporation tax that will take it down to just 24%. That will give us the lowest rate of any major Western economy, one of the lowest rates in the G20 and the lowest rate that this country has ever known [...] we will also reduce the small companies tax rate [...] to 20%, [...] I will extend the enterprise finance guarantee scheme, which supports small and medium-sized businesses' access to lending.96
The 2010 Budget also abolished the condition applying to small or medium (SME) companies requiring any intellectual property deriving from the research and development to be owned by the company.97
68. The measures announced in the 2010 Budget will have a positive impact on start- ups and small and medium sized businesses, and we welcome the Government’s actions. However, these proposals are not specific to the video games industry. We recommend that proposals for more targeted support be set out by the Government in its response to this Report. Those proposals should be accompanied by a clear and costed action plan.
96 HC Deb, 22 June 2010, col 174 97 HM Revenue and Customs, Budget 22 June 2010: Business Taxes, www.hmrc.gov.uk`
22 Video games industry in Scotland
4 Other challenges facing the industry
Skills shortage 69. An innovative and talented workforce has traditionally been one of the key selling points of the UK video games industry. However, recent surveys have identified a lack of adequately skilled employees as a priority issue.98
70. NESTA told us that “the UK video games industry has long complained about the low quality of specialist video games courses at universities. Indeed, only 18 per cent of those who graduated from these courses in 2007 managed to gain a job in the sector.”99 Mr Livingstone, Life President of EIDOS, concurred: “so many courses in the UK are, frankly, not fit for purpose. They are generalist subjects—media studies, effectively, masquerading as computer games studies.”100
71. Mr Rawlinson, told us:
[...] what we need to do is to get young people into programming and the fundamentals of computer science and other STEM subjects [...] and that will then flow through into the university agenda and on into the work force. That doesn’t necessarily need more money; it needs more focus. We also need our industry to be talked up rather than down.101
Dr Wilson concurred:
[...] we need to increase the supply of good quality computer science and mathematics graduates [...] we would like to see measures taken by the Government to make sure that computer science graduates and mathematics graduates pay lower tuition fees than those on other courses.102
Mr Livingstone believed that:
[...] the UK average is that 6% of universities engage with local industry [...] we would ask any Government to ensure that there is more incentive for universities to engage with local industry. Abertay is a shining example of best practice, and that should be replicated throughout the country.103
Chris Chapman, the Director of Black Company studios, based in Edinburgh, argued that:
98 For example see: TIGA, State of the UK Video Games Development Sector, 2010 99 NESTA, The Innovation Game, Adjusting the R&D Tax Credit: boosting innovation in the UK video games industry, October 2010 100 Q 2 101 Q 21 102 Q 6 103 Q 38
Video games industry in Scotland 23
[...] the tightening belts of the publishers and financiers of the industry don’t allow developers the leeway they need to recruit and train new talent, and that hurts the industry both now and in the long term.104
He recommended “making it easier and cheaper to hire talented but inexperienced staff” and “subsidies for education and training.”105
72. In the course of our inquiry we visited the University of Abertay, which is seen as a beacon of how successfully to equip graduates for work in the industry.106 Our visit confirmed the outstanding work which is being done, and we were particularly impressed to see the work place simulation being undertaken. The innovative practices in place at the University of Abertay, such as workplace simulation, the level support given to graduates starting their own business and the level of cooperation with local industry should be replicated across the UK. We recommend that the Government set out in its response to this Report how it will develop ways of encouraging the adoption of these practices nationwide.
73. The shortage of graduates adequately qualified to sustain the video games industry in the UK is matter of real concern, as is the unsuitability of many self-proclaimed video games courses. There needs to be more focus on the hard skills needed for the industry, such as mathematics and computer science. Other important factors necessary to ensure graduates are both trained for industry and able to find a job, are the levels of engagement between higher education institutions and industry, and the incentives for industry to take on talented graduates as trainees. The Department for Business, Innovation and Skills should be able to demonstrate that it is aware of these problems and has proposals to address them effectively. We recommend that the Government’s strategy for addressing such issues is set out in its response to this Report.
The £5 million Abertay prototype scheme On 14 July 2010, Ed Vaizey announced that a multi-million pound investment project was to be launched at Abertay University. Mr Vaizey said:
The first phase of the £5 million project is a £2 million fund to invest in new computer games prototypes, creating new businesses and giving fledgling companies the chance to attract further investment by developing their intellectual property (IP).
Grants of up to £25,000 will be available to support the development of fully-working prototypes. Commercialisation and project management support will also be provided from Abertay’s business and computer games experts, giving each successful applicant the best chance of establishing or developing a thriving business. Talented students and graduates will also gain important work experience
104 Ev w 12 105 Ev w 12 106 DCMS and BIS, Digital Britain Final Report, Cm 7650, June 2009
24 Video games industry in Scotland
opportunities on project teams, further developing the successful Abertay model of small teams working in the same studio environment as computer games companies.
The project aims to create 30 new companies, provide important support to another 80 existing smaller businesses, and create up to 400 new jobs.107
Financial support for the project came from the UK Government (£2.5 million), the European Regional Development Fund (£1 million) and the University of Abertay Dundee (£1.5 million).
74. The £5 million prototype scheme, to be run by Abertay University, is an excellent example of support targeted towards a priority issue for the video games industry. We expect the Government to monitor the progress of the scheme, and if it is successful, to explain how it intends to ensure that it can be replicated nationwide.
Livingstone/Hope review of skills 75. On 14 July 2010, the Government has announced an independent review of education and training in the UK games and visual effects sectors, to be led by Ian Livingstone, co- founder of Games Workshop and Life President of Eidos, and Alex Hope, co-founder of Double Negative, and carried out by NESTA and Skillset. The review is expected to conclude at the end of January 2011.108 Mr Livingstone said the review would be:
[...] an opportunity to transform the UK into the world hotbed of games production talent [...] we will be working hard to deliver a blueprint for change in the UK’s educational system, so that our companies can access the kind of talent they need to stay on top, creatively and commercially.109
76. Ensuring schools and universities provide the right education and training is beneficial to graduates, businesses and the wider economy. We support the Government’s decision to commission an independent review of education and training in the UK video games sector. We expect the response to this Report to set out a timetable for the Government’s analysis of the review and for developing its action plan for working with the Scottish Government on the recommendations.
Brain drain 77. TIGA’s State of the UK Video Game Development Sector report, published in 2010, notes that “over the last year, 23% of developers said that some of their staff had left them to go and work for developers overseas.”110 NESTA’s 2009 report It’s Time to Play noted that:
107 “Games industry jobs boost from £5m Abertay prototyping project”, University of Abertay, 14 July 2010, www.abertay.ac.uk 108 Ev 45. The review is due to be published on 1 February 2011. See www.nesta.org.uk/ 109 www.develop-online.net/features/1003/A-call-to-action 110 TIGA, State of the UK Video Game Development Sector, March 2009
Video games industry in Scotland 25
[...] the brain drain is a relatively recent trend [...] it is clear from our results that government support is now enabling studios in Canada to attract some of the UK’s most talented and experienced developers, who they target with generous relocation packages. One in three respondents to this survey claim that this brain drain will, over time, have a detrimental impact on the quality of UK video games development.111
78. The skills shortage in the UK industry is compounded by a brain drain to countries offering more generous incentives to the video games industry. If the UK is to retain its position as a global player in the industry, efforts must be made to halt this brain drain. We recommend that the Government, in its response to this Report, outline how it will work with universities and the industry to ensure talented graduates remain in the UK.
Access to Finance 79. Access to finance is cited as a priority issue for many industries, and the creative industries are no exception. As Mr Rawlinson told us in evidence:
Any creative industry is a high-risk, high-reward industry, and the video games industry probably stands at the very top of that list of high risk and high reward [...] for normal high street banks looking at that business, it is incredibly difficult for them to assess the risk and understand the proposition.112
Ian Livingstone expanded on the point, stating that:
[...] not just banks [but] private equity, VCs [venture capitalists] and angels [private investors] still have trouble understanding our industry, and quite right too, because it’s not just one format and one way of consuming content [...] with diverse content device skills and budgets from a few hundred pounds to £30 million, it is very difficult for anyone, even in our own industry, to understand the economics, let alone outside funders.113
80. Mr Daniel Livingstone, School of Computing, University of the West of Scotland, stated that “the production for the games industry is such that a company may operate for many months before receiving any income, and income may be irregular. This can be problematic for opening business accounts.”114
81. The video games companies face significant challenges in accessing finance. More needs to be done to increase the understanding of the financial cycle for video games companies amongst banks and private equity funders. The Government has an important role to play in providing support to businesses in attracting finance. We invite the Government to outline in its response to our Report how this business support is being tailored to video games companies.
111 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 112 Q 48 113 Q 48 114 Ev w17
26 Video games industry in Scotland
Marketing and representing Scotland 82. In evidence, Ian Livingstone told us:
[...] there is a golden age of opportunity now for games. Traditionally they have been high-cost packaged goods that go at retail, and consequently, they have not been able to reach global markets. But today, with the online world of network gaming, social games, casual games and games that are played on iPhone, small teams of people can get global audiences.115
83. Both the video games representatives we met during our visit to Dundee and written submissions highlighted several measures needed to ensure the industry in Scotland can benefit from this golden age of opportunity. Most notably amongst the issues raised were marketing Scotland, adequate guidance for small companies and representation.
84. Dr Richard Wilson, TIGA, concurred: “one thing that we could do throughout the UK [...] is be much more aggressive in marketing Scotland and the UK in general as a place to do business.”116 He went on to say that “trade associations have a role [...] and Scottish Enterprise, UK Trade and Investment, the Scottish Government and the Westminster Government have a role.”117 Mr Rawlinson noted that “Having a Government, an education system and a trade and investment department that really trumpet our industry as open for business and open for capability will give us the opportunity to lay our wares out and show what we are capable of.”118 The Minister assured us that he was:
[...] very interested in ensuring that we have a successful video games industry [...] I certainly think we need to learn perhaps from the aggression of some of our competitor countries in terms of their active wooing of different companies. I think we need to be bolder in terms of going after organisations and actively encouraging them to come here.119
85. Scotland is open for business, and it is vital that this message is publicised. We see the need for a more targeted marketing strategy to attract investment to Scotland, and recommend that the Government work with the Scottish Executive and trade associations to formulate and implement such a strategy relating to the video games industry in particular. We invite it to set out in its response to this Report how it intends to do this.
86. Scottish Enterprise told us that “the companies that have developed their own content and got to market have largely done so as a result of personal networks [...] access to mentors, either formally or informally, appears to be invaluable for companies,”120 and this is something we heard about first-hand in Dundee. Notwithstanding these personal networks, we heard that small companies “need help and guidance [...] because they are
115 Q 25 116 Q 25 117 Q 26 118 Q 51 119 Q 206 120 Ev w5
Video games industry in Scotland 27
creatives and they often do not have the help in business that they need. They need to partner with business people, they need access to finance, and they need guidance.”121
87. This is a “golden age of opportunity” for the video games industry, with small businesses able to access global audiences. It is imperative that guidance and support is available for these companies. We recommend that the Minister for Culture, Communication and Creative Industries holds regular meetings with companies from the video games industry to develop and provide this support. We recommend that the Government, in its response to this Report, set out its strategy for engagement with the video games industry and its underlying criteria to enable the video games industry to secure Government support.
88. Although there are personal networks within in the video games industry, more formal representation at regional level could provide stronger support for companies. We see an argument for a trade body representing companies in Scotland, with the UK Government, trade associations and games companies all involved in its creation. We invite the Government to set out its action plan for such a body in its response to our Report.
121 Q 25
28 Video games industry in Scotland
Conclusions and recommendations
1. We note that much improvement has been made by the industry, particularly in relation to classification, however more needs to be done to future proof age verification for video games accessed online. The industry and universities are well placed to research how best to go about ensuring children cannot gain access to inappropriate adult content. Therefore we recommend the Government look into supporting such research, and ask the industry to see how they too can invest in such research as a part of their corporate social responsibility. (Paragraph 20)
2. The video games industry is a highly mobile and relatively young industry, with predicted annual growth rates double that of the film industry. Scotland has an outstanding reputation for excellence in video games production, but in reality the sector is of great economic benefit to the whole of the UK. The UK industry, however, is currently contracting. It faces an uneven international playing field, disadvantaged by subsidies from governments overseas, notably France and Canada, and cheaper labour markets elsewhere, as well as by skills shortages, unsustainable business models a need for innovation and investment vehicles. The Government has a responsibility to help create an economic environment in which the creative industries can flourish. Impediments for growth in the UK are emerging and we believe the Government should make the future of this industry a priority. (Paragraph 30)
3. A games tax relief would cost less than the tax credit currently awarded to the film industry. The Government has tried to explain away the existence of a film tax credit in contrast to the resistance to a games tax credit as a matter of politics and history. This is a poor argument for seemingly favouring a mature industry over an emerging one. Inertia is a poor justification for the status quo. We highlight the inconsistency in the Government’s approach to the two industries and draw this anomaly to the Government’s attention. We believe that a cost benefit analysis should be done of the video games industry and the film industry to see which gives the better value for money. (Paragraph 50)
4. Prior to the general election the Conservative, Liberal Democrat, Labour and Scottish National parties supported the principle of a games tax relief. Given this consensus across the political landscape, the industry could have reasonably expected the introduction of such a tax relief, and would have planned accordingly. However, in its first budget, the Government changed its position. (Paragraph 53)
5. The Minister responsible for the video games industry should make representations at the heart of Government on behalf of this economically and culturally important industry. We are surprised and disappointed that the Minister was only able to lobby the Treasury indirectly on the games tax relief. We expect the industry to be better represented in future within Government. We invite the Government to explain in its response to this Report how it will ensure that the voice of the industry is properly represented in future and give an undertaking that this experience will not be repeated. (Paragraph 54)
Video games industry in Scotland 29
6. The Chancellor described the proposed tax relief as “poorly targeted”, prompting debate over the meaning of the phrase. The proposed tax relief was specifically targeted to the UK video games industry; in this sense, it was well-targeted. The real issue is whether the tax relief is value-for-money and would alleviate many of the structural problems in the UK sector; those being generating and retaining IP, self- publishing and aiding start-ups. (Paragraph 55)
7. There are both compelling arguments for a tax relief, most notably in the lessons of the effect such a relief has had in Canada, and real concerns. The Committee is divided over the issue of tax relief for the industry and we are unlikely to come to a consensus on this issue. There is disagreement between HM Treasury and games industry representatives over the financial benefit of a games tax relief. We recognise, however, that the UK Government has ruled out a tax relief for the foreseeable future, and the current fiscal environment means this view is unlikely to change in the short-term. (Paragraph 56)
8. We recommend that the possibility of introducing a tax relief be kept under review, and the health of the industry be monitored for the potentially malign effects of uneven international competition. We recommend that the Government, meanwhile, undertake a full and comprehensive assessment to determine the benefits of such a relief, as well as examining those countries whose industries continue to flourish without Government support. (Paragraph 57)
9. Research and development tax credits already provide an incentive for innovation. These credits could be adapted and enhanced, at little cost to the Exchequer, but with great benefit to video games companies. We recommend that the Government set out in its response to this Report how it plans to work with NESTA on adapting the research and development tax credits as soon as possible so that video games companies can make full use of the scheme. (Paragraph 63)
10. The creation and retention of intellectual property is a priority issue for the UK video games industry. We welcome the review of the taxation of IP currently being undertaken by the Government. We expect the Government to set out a timetable for the implementation of the recommendations of the taxation of IP review in its response to this Report. We will monitor its outcome. (Paragraph 66)
11. The measures announced in the 2010 Budget will have a positive impact on start-ups and small and medium sized businesses, and we welcome the Government’s actions. However, these proposals are not specific to the video games industry. We recommend that proposals for more targeted support be set out by the Government in its response to this Report. Those proposals should be accompanied by a clear and costed action plan. (Paragraph 68)
12. The innovative practices in place at the University of Abertay, such as workplace simulation, the level support given to graduates starting their own business and the level of cooperation with local industry should be replicated across the UK. We recommend that the Government set out in its response to this Report how it will develop ways of encouraging the adoption of these practices nationwide. (Paragraph 72)
30 Video games industry in Scotland
13. The shortage of graduates adequately qualified to sustain the video games industry in the UK is matter of real concern, as is the unsuitability of many self-proclaimed video games courses. There needs to be more focus on the hard skills needed for the industry, such as mathematics and computer science. Other important factors necessary to ensure graduates are both trained for industry and able to find a job, are the levels of engagement between higher education institutions and industry, and the incentives for industry to take on talented graduates as trainees. The Department for Business, Innovation and Skills should be able to demonstrate that it is aware of these problems and has proposals to address them effectively. We recommend that the Government’s strategy for addressing such issues is set out in its response to this Report. (Paragraph 73)
14. The £5 million prototype scheme, to be run by Abertay University, is an excellent example of support targeted towards a priority issue for the video games industry. We expect the Government to monitor the progress of the scheme, and if it is successful, to explain how it intends to ensure that it can be replicated nationwide. (Paragraph 74)
15. Ensuring schools and universities provide the right education and training is beneficial to graduates, businesses and the wider economy. We support the Government’s decision to commission an independent review of education and training in the UK video games sector. We expect the response to this Report to set out a timetable for the Government’s analysis of the review and for developing its action plan for working with the Scottish Government on the recommendations. (Paragraph 76)
16. The skills shortage in the UK industry is compounded by a brain drain to countries offering more generous incentives to the video games industry. If the UK is to retain its position as a global player in the industry, efforts must be made to halt this brain drain. We recommend that the Government, in its response to this Report, outline how it will work with universities and the industry to ensure talented graduates remain in the UK. (Paragraph 78)
17. The video games companies face significant challenges in accessing finance. More needs to be done to increase the understanding of the financial cycle for video games companies amongst banks and private equity funders. The Government has an important role to play in providing support to businesses in attracting finance. We invite the Government to outline in its response to our Report how this business support is being tailored to video games companies. (Paragraph 81)
18. Scotland is open for business, and it is vital that this message is publicised. We see the need for a more targeted marketing strategy to attract investment to Scotland, and recommend that the Government work with the Scottish Executive and trade associations to formulate and implement such a strategy relating to the video games industry in particular. We invite it to set out in its response to this Report how it intends to do this. (Paragraph 85)
19. This is a “golden age of opportunity” for the video games industry, with small businesses able to access global audiences. It is imperative that guidance and support
Video games industry in Scotland 31
is available for these companies. We recommend that the Minister for Culture, Communication and Creative Industries holds regular meetings with companies from the video games industry to develop and provide this support. We recommend that the Government, in its response to this Report, set out its strategy for engagement with the video games industry and its underlying criteria to enable the video games industry to secure Government support. (Paragraph 87)
20. Although there are personal networks within in the video games industry, more formal representation at regional level could provide stronger support for companies. We see an argument for a trade body representing companies in Scotland, with the UK Government, trade associations and games companies all involved in its creation. We invite the Government to set out its action plan for such a body in its response to our Report. (Paragraph 88)
32 Video games industry in Scotland
Formal Minutes
Wednesday 19 January 2011
Members present:
Mr Ian Davidson, in the Chair
Fiona Bruce Fiona O’Donnell Mr Mike Freer Mr Alan Reid Cathy Jamieson Lindsay Roy Jim McGovern Dr Eilidh Whiteford David Mowat
Draft Report (Video games industry in Scotland), proposed by the Chair, brought up and read.
Ordered, That the draft Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 88 read and agreed to.
Resolved, That the Report be the Second Report of the Committee to the House.
Ordered, That the Chair make the Report to the House.
Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.
Written evidence was ordered to be reported to the House for printing with the Report, together with written evidence reported and ordered to be published on 15 September and 17 November 2011.
[Adjourned till Wednesday 26 January 2011 at 2pm.
Video games industry in Scotland 33
Witnesses
Wednesday 13 October 2010 Page
Mr Ian Livingstone, Life President, Eidos, Mr Michael Rawlinson, Director General, The Association for UK Interactive Entertainment and Dr Richard Wilson, Chief Executive Officer, The Independent Game Developers’ Association Ev 1
Mr Paul Durrant, Director of Business Development, University of Abertay Dundee Ev 19
Wednesday 20 October 2010
Edward Troup, Managing Director, Budget, Tax and Welfare, HM Treasury Ev 28
Mr Edward Vaizey MP, Minister for Culture, Communication and Creative Industry, Department for Business, Innovation and Skills and Department for Culture, Media and Sport Ev 35
List of printed written evidence
1 Abertay University Ev 48 2 Association for UK Interactive Entertainment (UKIE) Ev 49 3 Department for Culture, Media and Sport and the Department for Business, Innovation and Skills Ev 45 4 HM Treasury Ev 59 5 National Endowment for Science, Technology and the Arts (NESTA) Ev 52 6 Scotland Office Ev 58 7 TIGA Ev 55
List of additional written evidence
(published in Volume II on the Committee’s website www.parliament.uk/scottaffcom) 1 Black Company Ev w12 2 Denki Ltd Ev w21 3 Dundee City Council Ev w1 4 Gamers Voice (UK) Ltd Ev w18 5 Mr Nicholas, Lovell, Gamesbrief Ev w13 6 Greater Glasgow Games Group Ev w17 7 Ludometrics Ev w16 8 Proper Games Ltd Ev w21 9 Scottish Enterprise Ev w5 10 Skillset Ev w14 11 Yo Yo Games Ltd Ev w20
34 Video games industry in Scotland
List of Reports from the Committee during the current Parliament
The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.
Session 2010–11 First Report Postal Services in Scotland HC 669
Scottish Affairs Committee: Evidence Ev 1
Oral evidence
Taken before the Scottish Affairs Committee on Wednesday 13 October 2010
Members present: Mr Ian Davidson (Chair)
Fiona Bruce Fiona O'Donnell Cathy Jamieson Mr Alan Reid Jim McGovern Lindsay Roy Mark Menzies Julian Smith David Mowat Dr Eilidh Whiteford ______
Examination of Witnesses
Witnesses: Mr Ian Livingstone, Life President, Eidos, Mr Michael Rawlinson, Director General, The Association for UK Interactive Entertainment, and Dr Richard Wilson, Chief Executive Officer, The Independent Game Developers’ Association, gave evidence.
Q1 Chair: I welcome you to this meeting of the My first question is basically aimed at getting an Scottish Affairs Committee and to our investigation of overview of Scotland’s position in the global games the video games industry and related matters. Some industry—the industry’s strengths and weaknesses, the of us have already had visits to Dundee on an informal key factors making Scotland a successful base, and basis, which we found immensely useful. We have changes that might imperil the industry’s future. advertised for and received a number of pieces of Respond to that, and if there are any other comments written evidence, which, again, have been found to be that you want to make of an opening nature, put them very useful. Now we are down to the formal hearings. in there. Then we will go into the questions. I am sorry for the delay caused by the vote in the I am offering each Member the opportunity to ask five House. It might seem to you people who deal with minutes of questions. Then we will try to tie things gee-whizzery and so on that it would be much easier up at the end. We will go through a similar process just to press a button. However, the great advantage with you, Mr Durrant. Who wants to be first? of voting in the way that we do is that you get to Dr Wilson: I am very happy to start off. Thank you meet lots of people in the Lobbies. The Government very much for inviting us here today. It is great to Members who are here will very soon learn that the have an opportunity to present the case of the video opportunity to catch a Minister without his or her civil games industry to this Committee. servants, get them to agree to something, and write to In terms of some of the key issues that we would be them saying, “As you agreed on such-and-such a date” keen to get across, I think we would like to emphasise is immensely helpful. [Interruption.] I am afraid that that the video games industry in the UK—in Scotland we have to go away again, but we will be back. We in particular—is important economically, culturally hope to get this finished by 11 o’clock tonight. Sorry and in terms of education. about this. Economically, the UK video games industry Sitting suspended for a Division in the House. contributes about £1 billion to UK GDP and generates On resuming— about £400 million in tax receipts for the Treasury. The sector is important educationally—there are many Chair: I will not say everything I said before, but for video game companies in the United Kingdom, and the record, we have with us Dr Richard Wilson, chief some in Scotland, that make educational-based games. executive officer of the Independent Game Developers The sector is important culturally: more than 70% of Association; Michael Rawlinson, the Director General the UK population now play video games. It is of the Association for UK Interactive Entertainment; important for all those key reasons. and Ian Livingstone, Life President of Eidos and Chair In terms of the sector in Scotland, our research shows of the Computer Games Skills Council. In the next that Scotland has 46 development companies, session, we will speak to Paul Durrant, who is the employing 651 development staff. Video game Director of Business development at the University of companies in Scotland, such as Denki and Digital Abertay Dundee, but rather than have him sit in the Goldfish in Dundee, make entertainment games. A corner like a bad boy, we thought we would have him company called 3MRT uses games-based technology up here. If there are any really difficult questions that to make learning tools and devices. We also have you don’t know the answer to, you can always palm other companies that develop software to support the them off on to him. games industry in Scotland. Mr Livingstone He can translate for us. The Scottish games industry has been very successful in recent years. Scotland was, of course, responsible Q2 Chair: Sorry, we don’t have a simultaneous for “Grand Theft Auto”, which was one of the most translation. That was a bit harsh, actually. Mark that successful entertainment products of all time. Other man down as a troublemaker. companies have produced games such as Ev 2 Scottish Affairs Committee: Evidence
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson
“Crackdown” and “Lemmings”, which have been clean, green and knowledge-based—all the skills that very successful. are required in the new world of the digital economy, However, the UK games industry—in Scotland in which is going to get the UK back on its feet again; particular—has suffered over the past couple of years. traditional manufacturing and financial services are in Our data show that the development work force in decline. For me, Scotland has been a great example of Scotland have declined by more than 18% over the promoting games with the right connotations—not course of this year, primarily because Realtime just talking about the violence in a few titles, but Worlds, one of the biggest development studios in about the games industry as a whole being a great Scotland, went into administration. thing. The sector, both in the UK and in Scotland, has Mr Rawlinson: I would like to add that the market declined in any case over the past 12 months. We for video games has grown and developed. The reason believe that one of the key reasons for this is that the why our association has changed its name so that it UK games industry doesn’t have a tax break against relates not solely to video games but covers production, whereas most of our key overseas interactive entertainment is the expansion in the competitors—or at least some of our key overseas market. As Ian rightly points out, Scotland has been competitors, our critical competitors—do have tax at the forefront of the close relationship between breaks against production. So our development education, development and governmental support. industry is not competing on a level field, which We are now on the cusp of a new wave of potential means that it is harder to attract investment and to growth and opportunity. create jobs. If we look at our industry, we have gone from Mr Livingstone I would like to add to that, and to hardcore video-games-playing to everybody point out what great things Scotland has done. The participating in interactive entertainment. This change Scottish embraced the games industry very early on. has been brought about by the introduction of easily Obviously, the University of Abertay Dundee has accessed devices such as the Wii and the DS, and been a shining example of how to do things right. It Apple iPhone applications that are touch-sensitive. got the Skillset accreditation for computer science and The barriers to entry for people playing games have for art and animation. The reason for that is that it been greatly reduced, so the opportunity for decided to set up a games-centric ecosystem in companies to create, access and exploit the market is Dundee, where the university was working very growing. We are at a point where we have got not closely with local industry and local government. only potential within the existing market, but a hugely There was therefore a very positive symbiotic growing market. Our problem is that we are relationship, from which everyone could benefit. competing against other countries that have Industry effectively got a two-year interview process, recognised this growing potential, and which are as regards the students coming out of Abertay, and setting their stall out with support that enables their Abertay in turn helped with research projects and with businesses to take maximum advantage. This is where giving the industry the students it actually wanted to our strengths and weaknesses come into play. We have make the games. strengths, but we really need to exploit them and make So many courses in the UK are, frankly, not fit for the most of them. purpose. They are generalist subjects—media studies, effectively, masquerading as computer games Q3 Chair: The point about the problems leads me on studies—whereas Abertay is absolutely doing it to the second point that I want to make, which is about correctly. It is giving the hard skills that industry your relationship with Government, particularly at needs to make the games—computer science, maths, Westminster, and whether we should be doing art and animation. So this has been very effective. I anything more to help you, as distinct from just would hope that that model is replicated throughout keeping out of the way. In terms of comparisons with the UK. elsewhere, we would quite like to hear from you what Using games as a learning tool in education has also points we should be putting to the Minister when we been a strong point in Scotland. I think you can even see him next week. That was really what triggered this study programming now. At one point a company like inquiry off. Jim McGovern, the Member for Dundee, Microsoft could almost effectively hijack the was very much the driver behind this inquiry, which classroom. Children are learning IT alone—they learn arose from the tax cut—or the cut in the tax cut—that about Word, PowerPoint, Excel, but they don’t learn you experienced. It would be helpful if you could to programme any more. It was not that many years spell out for us the agenda that we ought to be ago that the BBC Micro and the Dragon were used in pursuing with the Government to help you. schools, so children learned basic programming. That Dr Wilson: I think there are three key things that we creates a push further on in their educational profile, would be very keen for the Committee to advance or from primary school to secondary school to university. put to the Minister. The first is the issue of games tax There is a demand put on the university to support relief. As you know, at the time of the general children in studying computer science and maths. election, we were delighted because all political Clearly, the perception of games has been a lot better parties—the Scottish National party, the Labour party, in Scotland than it has been in the rest of the UK the Conservative party and the Liberal Democrats— because of the willingness of local government, publicly said that they supported games tax relief, universities and industries to say, “This is a great which we were very pleased about, as you can subject.” It is part of the digital economy—the imagine. Unfortunately, after the election we did not knowledge economy for the UK going forward. It is have an opportunity to present our case again to Scottish Affairs Committee: Evidence Ev 3
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson
Ministers, despite making attempts to do so. We mind that we cannot really unravel an international would be very grateful if the Committee could raise definition of what constitutes R and D—what we the issue of games tax relief and ask Ministers, would really like to see is the R and D tax credits particularly the Treasury team, to look at it again. being made more generous. At the moment, for every Games tax relief is the major issue facing our sector. £1 of qualifying R and D expenditure, you can get It is the key measure that we think, if implemented, £1.75 back. For example, you could—the Dyson would allow us to compete on a level playing field report suggested this as well—raise the qualifying and allow the sector to flourish. The second issue— amount to £2, so that for £1 of qualifying expenditure you might get £2 back in R and D tax relief. That is Q4 Chair: Can I just be clear about that? In the run- the second issue. I must emphasise that that is very up to the election, people were promising this. Then much a second-best option for our sector. the position changed after the election, did it, in the The third issue is skills. We have a skilled work force. sense that what was promised was not delivered? We need to increase the supply of good quality Dr Wilson: That is absolutely right. To be completely computer science and mathematics graduates. Our precise, the Labour party and the Scottish National trade association, TIGA, has been very concerned party both included a commitment to games tax relief about the decline in IT and computer science in their manifestos. The Conservative spokesman, Ed graduates. There has been something like a 25% drop Vaizey, and the Liberal Democrat spokesman, Don in recent years in IT and computer science graduates. Foster, both said that their parties supported games tax We have suggested, for example, that if tuition fees relief. As you can imagine, we were ecstatic at the are likely to rise—we saw yesterday that they time to have cross-party support, so it was unfortunate probably will—we would like to see measures taken that, after the election, that clearly dissipated. But by the Government to make sure that computer there was a united front before the election, with science graduates and mathematics graduates pay political parties supporting games tax relief. lower tuition fees than those on other courses. That would at least give people an incentive to study those Q5 Chair: When you say “dissipated”, you mean that important courses. In the case of computer science and it was not delivered. mathematics degrees, there would be a cross-sectoral Dr Wilson: Exactly. benefit; it would benefit not just the games industry. That is the first issue. The second issue that would be Those would be TIGA’s three top priorities. well worth raising is the research and development tax credits. That is very much a second-best measure for Q7 Chair: Do the others want to add anything to the video games industry. None the less, because the that? Government are conducting a review of R and D tax Mr Livingstone We are certainly very much in support credits, it makes sense to raise with the Minister ways of production tax credits, from a practical point of in which the R and D tax credits can be made more view. This country often sees production tax credits helpful to the sector and, indeed, other sectors as well. We suggest, for example, making the tax relief more as a handout, whereas a country like Canada sees generous at the very least, and making it easy to apply. them very much as an incentive. Canada offered $500 million by way of incentivising companies like Electronic Arts, Ubisoft and my own company, Eidos, Q6 Chair: Can I just clarify whether or not there is to set up shop in Montreal. That in turn generated anything specific about your industry in relation to R and D? Would you require a tweaking of the scheme, $1.5 billion of inward investment into Montreal. It has or would the generality of the scheme apply equally achieved in three years what it took this country 25 to yourselves and anybody else? years to achieve. It has a highly skilled work force that Dr Wilson: We are limited, unfortunately, in what we creates content for global companies and publishers. can do with research and development tax credits. I We have now fallen behind Canada in the world understand that there is an international definition of ranking of developments, and that is a tragedy given what constitutes R and D. It is called the Frascati our heritage, and our initial launch of video games definition. I think that all Governments around the way back in the ’80s. It is no surprise that games like world are constrained in what they can do with “Grand Theft Auto” and “Tomb Raider” started life research and development tax credits. Some here. We very much support production tax credits, developers—you probably met them when you were not just as an incentive, but to create a level playing up in Dundee—have said that they would be very glad field. They would be financially rewarding for the if you could make R and D tax credits reward content Revenue as well. innovation. At the moment, R and D tax credits very Mr Rawlinson: I would just reiterate that the much focus on technological improvements, and they introduction of the tax credit scheme would enhance are designed to give tax relief to technological or the ecosystem, which would generate inward scientific improvements. investment from major multinational publishers who As you can imagine, many game development are looking for the centres to create those big games. companies engage in R and D. They develop their That, in turn, would support and develop our own own technology and their own engines to make video smaller local companies. Together, we would create games, R and D tax credits having helped up to a the right ecosystem, which would be a great ground point. But, of course, the main focus of development for developing skills and enhancing our work force. that takes place in a development studio is generating We stand fully behind the points that Richard has new content. I suppose in simple terms—bearing in outlined. Ev 4 Scottish Affairs Committee: Evidence
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson
Chair: Could I bring in Jim McGovern? He is the MP Q10 Jim McGovern: Yes. for Dundee East— Dr Wilson: I wish they were. I do my best to grow Jim McGovern: West. my organisation, as you can imagine. There are, as I Chair: Sorry, West. I knew it was Dundee; I got the said in my opening remarks, about 46 games city right. He has been the main driver behind these companies in Scotland. We have 19 members—14 hearings. Jim, over to you. developers and another five education institutions. Realtime Worlds was a member of TIGA, and it was Q8 Jim McGovern: First, I would like to thank Paul, a supporter of games tax relief, but unfortunately it Michael, Richard and Ian for coming here today to went out of business, as you know, and it went into give evidence to this inquiry. Richard, I recently said administration. So, no, we do not represent every to you that I see more of you than I do of my wife, single business in the UK. Equally, if you look at the Norma—but for all the best reasons. How can the UK Institute of Directors, the British Chambers of Government help support the games industry? The tax Commerce or the CBI, they do not represent every break that was offered prior to the general election has business in the UK. I think that we do a pretty good since been described as poorly targeted. Do you have job of representing our sector. a view on why it might have been poorly targeted, Chair: Julian? and do you think that it would have helped in the case Julian Smith: First, I thank our witnesses for coming. of Realtime Worlds? Chair: The fact that everyone is walking out of the Dr Wilson: On whether the games tax relief was room— poorly targeted, I think that, on the contrary, it was Julian Smith: I won’t take it personally. precisely targeted to help the UK games industry, and Jim McGovern: They just wanted to hear me. it was targeted to enable us to compete on a level playing field. Our calculations, or the calculations that Q11 Julian Smith: I want to start off by Games Investor Consultanting did on behalf of TIGA, complimenting your industry on its success. Can I ask indicated that over a five-year period a games tax more specifically why, in your opinion, in these relief would more than pay for itself. It would straitened financial times, your industry, as opposed to generate £415 million in tax receipts for the Treasury, other creative industries, merits being a special case? from an outlay of £192 million. It is important to Mr Livingstone The games industry is very much emphasise that the tax relief would more than pay for misrepresented in the world’s perception. It’s the itself. It would also lead to additional investment in largest entertainment industry in the world—bigger the sector over a five-year period to the tune of £457 than DVD, music, box office and books—yet there million, and it would create about 3,500 graduate- has always been a sort of negative connotation. It’s an level jobs. We think that it was a very precisely industry that we are particularly good at in the UK, targeted measure. It did not cost a great deal of money and we want to incentivise games makers, wherever in the great scale of things, as far as the UK they are in the world, to make the UK their destination Government are concerned, and it would have been of choice when it comes to making games. We have enormously beneficial for the sector itself. been particularly good at it. Traditional manufacture On the issue of whether games tax relief would have is in decline, financial services are in turmoil— helped Realtime Worlds, it would be difficult and wrong for me to comment on its ultimate fate. I am Q12 Julian Smith: Why computer gaming, as not on the management team and I am not a non opposed to other creative industries? Why should you executive director, so I can only comment in general get a tax break as opposed to others? terms. I suppose the only thing that you could say is Mr Livingstone The film industry has already had a that if games tax relief had been in operation five tax break. It’s had a 20% cultural tax break for a years ago, Realtime Worlds may have had different number of years. It had the support of the Film funding options available. I would say, and this is the Council and the BFI. The Film Council is no longer more important point, that with games tax relief in in its current state, but we never had any help. place we could look at the demise of particular firms with more equanimity—with regret, yes, but with Q13 Julian Smith: Is there anything specific? I more equanimity than we do now. With games tax presume there are things specific to the longevity of relief in place, there are powerful incentives for your development process that mean that you feel overseas publishers to invest in Scotland—Dundee, there is a good argument for having this. Edinburgh and Glasgow—or the rest of the UK. There Mr Livingstone A typical blockbuster game that runs are strong financial measures in place, flowing from on a high-end console—a super-intense graphic games tax relief, to enable indigenous developers to console—will cost between £20 million and £30 grow their firms. Games tax relief would be precisely million to produce. Then you are going to expend targeted to help our sector, and it would be another £20 million on marketing and advertising enormously beneficial not only to the games industry, before you see a penny back in return. R and D tax but to the wider UK economy. credits are always given at the end of a project. If you are successful in applying, you will get a rebate Q9 Jim McGovern: I have a supplementary, through R and D. What we need is help during the Richard. You are the chief executive of TIGA, the production process—because these are quite large games association. Is every organisation that is capital investments—unless you want all production involved in the games industry a member of TIGA? to move overseas to naturally cheap labour markets Dr Wilson: In the United Kingdom? such as Asia or to incentivised markets such as Scottish Affairs Committee: Evidence Ev 5
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson
Canada. You’re going to see more and more companies can bring; these other measures won’t production going offshore. bring that. If we look at the fiscal support that is provided to the film industry, it is identified because Q14 Julian Smith: Do you really think that it is just of the cultural benefits and output that that industry about tax breaks? Isn’t it about skills, really? If you can bring. But actually, I believe that that is a front for look at the Abertay situation, or at Strathclyde and the economic support that is coming. We absolutely telecommunications, or other Scottish universities, the produce culturally relevant products, and if we are not big opportunity seems, in my view, to come from a careful, our ability to continue to produce culturally generally advantageous fiscal position for new relevant material from a UK perspective is going to business combined with skills, university spin-offs be severely damaged, because we will be competing and that whole area. Are people going to come to with companies that are centring their creative process Dundee just for tax breaks? in the Americas and the Asian territories. Mr Livingstone Absolutely not. Good, high skills and Mr Livingstone We don’t want to become a work-for- low costs are absolutely joined at the hip. Canada hire nation. When you think of “Tomb Raider” and offers great skills as well as low costs. As you quite Lara Croft— rightly say, there is no point in going somewhere Julian Smith: Sorry, I’ve got one minute left. Paul, that’s cheap if the labour is no good. It’s all part of a Abertay seems— package of things that we need. You might know I’m Chair: I was going to take Paul after this session. conducting a skills review of the computer games Julian Smith: Are we not allowed to ask him industry on behalf of Ed Vaizey at the moment, and anything? we will be reporting in January. There are 81 Chair: Well, you can, but it’s coming off your time. universities in the UK offering games studies of some There’ll be a separate time to ask him questions at the sort, and nine of those courses have been approved by end, if you want. Skillset as fit for purpose. We need good skills and production tax credits, and we need the perception of Q18 Julian Smith: Okay. Fine. So, just going back the games industry to change in a positive sense. We to skills, do you feel that the UK Government—the need Government and all MPs to put their arms London Government—could be doing more on skills around the industry and say, “Hey, this is a great to help your industry? industry. It’s good socially, culturally and Mr Livingstone We’re very happy with Ed Vaizey’s economically for our country.” We need— backing of the skills review, which I am leading. It’s going to look at the whole talent pipeline—not just Q15 Julian Smith: Hang on, Ian; I’ve got limited at existing universities, but at primary and secondary time. We’ve got to put our arms around a lot of through to further and higher education—to get that people, and we’ve got limited money. What is it about push from a very early age, and to get careers your industry that means we should be giving it a advisers, teachers and parents on board with STEM tax break? subjects. Mr Livingstone We are creating IP, which is very valuable to the UK. Q19 Julian Smith: So you’d agree that public money is probably better put into that than tax breaks. Q16 Julian Smith: So does the TV industry and Mr Livingstone I think that it should be a other format entertainment industries. combination. You need the great skills, and you need Mr Livingstone We are knowledge-based. a financial incentive for people to— Jim McGovern: Could I make a point? I understand that the British film industry gets tax breaks of Q20 Julian Smith: But on balance, in an era in somewhere in the region of £110 million a year. The which we have limited finances, would you put the tax breaks that were offered by the previous Labour money more into skills or tax breaks? Government are somewhere in the region of £55 Mr Livingstone I would like to see both. million, and the computer games industry actually Mr Rawlinson: You wouldn’t necessarily have to add generates more income in the UK than the film additional money into the skills framework in schools. industry. As Ian said, training and the curriculum were diverted Chair: Could Members please not enter into a away from computer sciences and into learning IT dialogue? packages. I think it is probably recognised today that that is unnecessary going forward, as young people Q17 Julian Smith: Could I move on to the other automatically have an affinity with computers and fiscal measures that were announced in the Budget, with using packages. There is no longer a need to specifically the NI holiday for new start-ups, the invest in that capability. lowering of corporation tax and the abolishing of the jobs tax proposed by the previous Government? Q21 Julian Smith: I thought you said earlier that Michael, you talked about the new start-ups that your there was a skills shortage in the industry. industry attracts. That has been a really positive Mr Rawlinson: I think that what we need to do is to message to those new start-ups to come to Dundee get young people into programming and the and other areas of the UK, hasn’t it? fundamentals of computer science and other STEM Mr Rawlinson: It has; that is absolutely true. subjects—something that has been severely lacking— However, what I believe the games tax relief would and that will then flow through into the university bring is a scale of investment that multinational agenda and on into the work force. That doesn’t Ev 6 Scottish Affairs Committee: Evidence
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson necessarily need more money; it needs more focus. Mr Livingstone Historically, parents have allowed We also need our industry to be talked up rather than their children to watch endless hours of television and down, so that when young people want to pursue a now the game seems to be the new threat in soaking career in the video games and interactive up all their leisure time. You have to strike a balance entertainment industry, people are not saying, “Go and and parents have to take some control of what their get a proper job,” but rather recognising that it is a children’s activities are. The good thing about games proper job, and that we are a recognised industry in is that, because they are interactive, children are which there are real prospects for young people. actively involved—engaged—in what they are doing. Julian Smith: I started off by complimenting you on your industry, and I compliment you at the end. Q24 Fiona O'Donnell: They are more and more Chair: Fiona? physical as well. Mr Livingstone Children are not sitting passively like Q22 Fiona O'Donnell: Just leading on from what a couch potato; they are learning about choice and Michael was saying—and Ian also talked about the consequence, problem-solving, puzzle-solving, industry being misunderstood—I just wanted to give intuitive learning, many social skills and technology. you the opportunity to say why you think so few As a learning tool, games are helping children to learn women work in the sector. quite a lot more. Many games, whether they are brain Mr Livingstone If you look at this historically, I think training or mathematics games, actually promote the industry is relatively new, unlike TV, film and intelligence, I would offer. traditional entertainment media. Games started off as guys making games for guys—either sports games or Q25 Fiona O'Donnell: That is all very helpful. I shooting games—and it is only with the gradual promise you that I am not anti the sector; I just wanted acceptance of games as a genuine entertainment an opportunity to talk about that. medium that there has been more diverse content I apologise, because I am going to cherry-pick rather created over more diverse platforms, both online and than go with a theme today. There is help available to offline. Now you’re getting games that appeal to both the sector at different levels of government and from men and women, and women are joining more and Government agencies. Are there any parts that you more to create the content that they want to consume. think are or are not working well at local authority Girls predominantly prefer puzzle games. I think they level in terms of business gateway and supporting are more mature than men; we just like doing sort of start-ups? What are your views on the support that crazy stuff. But you are finding that more women are you get from Scottish Enterprise and the Scottish now joining the industry, which can be only a good Government? In terms of accessing—I know that this thing. The industry is not trying to exclude women— is a lot to think about—the support finance that is far from it. We recognise the purchasing power of available for SMEs from the UK Government, do you women and their enthusiasm for games, and we want have any comments? them to join the industry. Mr Livingstone I think that there needs to be greater clarity, clarification and understanding of how these start-up companies, of which there are many, can Q23 Fiona O'Donnell: I think that part of the access this help. There is usually a lot of bureaucracy perception out there of the industry concerns corporate involved and they do not know how to go about it— social responsibility and the violent content of games. who to ask, what to ask, and how to get it. I think that that debate has been had for some time, There is a golden age of opportunity now for games. but there is growing concern about the length of time Traditionally they have been high-cost packaged that young people—adults as well—spend playing goods that go through retail and, consequently, they games. I wonder whether the industry has any views have not been able to reach global markets. But today, on that, and whether there are any health or safety with the online world of network gaming, social concerns around it. games, casual games and games that are played on Mr Rawlinson: As an industry association, we are iPhone, small teams of people can get global very clear on our messaging through our website, and audiences. Two-man or two-women teams can make through all our communications, that interactive a game for iPhone and sell many millions of units entertainment should be part of a leisure pursuit and through broadband and through downloads. But they a lifestyle, and that it should not be the sole preserve also need help and guidance—not just fiscal help, but of people’s leisure time. We recommend very firmly mentoring help and business help—because they are that there should be regular breaks of five to 10 creatives and they often do not have the help in minutes in every hour that is played. I think, however, business that they need. They need to partner with that the zeitgeist is that young people really enjoy business people, they need access to finance, and they playing games, that they are rewarded for that need guidance and to be told, “We are over here and experience and that, through the interactivity, there is we can offer you this help with setting up business a benefit that perhaps people of my generation and and help with financial backing.” We are brilliant at some parents do not recognise, because it was not part making games. We just need to get that ecosystem up of their youth experience, so I think that there is still and running because we could be a world power work to be done to explain that. I am not saying that again. the perceptions are not true or real for people, but I Dr Wilson: I think that Scottish Enterprise has done a am not sure that they are the reality, if that makes good job with regard to video games—it has a number sense. We have work to do. of schemes in operation, as you know, to help small Scottish Affairs Committee: Evidence Ev 7
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson development studios. I think I am right in saying that Q28 Fiona Bruce: Thank you. How many people it has invested about £2.4 million in video game does the industry currently employ? companies in Scotland since 2004, so it has been Dr Wilson: In game development, it is just over 9,000 supportive of the sector. One thing that we could do at the current time. throughout the UK—on the part of the Government and of Government agencies in Scotland as well—is Q29 Fiona Bruce: You quoted a figure earlier. You be much more aggressive in marketing Scotland and said that in Scotland—did I hear this correctly?—you the UK in general as a place to do games business. have 651 development staff in the industry. What I have mentioned this to other MPs in different proportion are in Scotland and what proportion of the circumstances, but it is worth emphasising again: the 9,000 are elsewhere in the country? Canadians are extremely good at doing this. They Dr Wilson: Out of approximately 9,000 development phone up and contact the chairman of TIGA and staff, according to our most recent data, 651 are based people on my board—they have no shame. They will in Scotland, and the remainder are based in the rest of contact major UK developers and try to get them to the UK, mainly in England. locate overseas. They have a very attractive package of measures with 37.5% production tax breaks. Q30 Fiona Bruce: You said that your development Scotland has some fantastic things about it—a great work force in Scotland has declined by about 18%, education system, a good health service and good mainly because of Realtime Worlds, so is that 18% transport links—but if we are going to market of 651? ourselves well, we have to be much more aggressive Dr Wilson: It is 18% of earlier on this year, back in about the offering that we have available. March. Let me just check the figure—sorry. In April of this year, the game development work force was Q26 Fiona O'Donnell: Whose job is that, do you calculated in Scotland to be 798 development staff. think? That fell by 18.4% over the course of this year up to Dr Wilson: I think there are a number of roles, September, and now it is standing at 651. actually. I think trade associations have a role—TIGA in the UK has a role—and Scottish Enterprise, UK Q31 Fiona Bruce: So we have about 140 jobs in Trade and Investment, the Scottish Government and Scotland affected by the current climate—economic the Westminster Government have a role. We all have or governmental. a role to play. Moving on, but on the same theme, could you Fiona O'Donnell: Thank you for your patience. describe some of the companies that you think will chiefly benefit from the tax relief? Let me quote one Q27 Fiona Bruce: In the written evidence that TIGA of your colleagues—Mr Rawlinson, I think—who said has submitted, you say that you expect games tax that “tax credits would enhance the ecosystem for relief to have created or saved 3,550 jobs, although I major multinational companies”, and that “there think that the figure of 3,500 was said today. Could would be a scale of investment which major you elaborate on how you have come to that figure? multinational companies would bring”. My concern is Dr Wilson: There are a number of levels within games to support our businesses and our whole industry. I tax relief that we proposed. It was a tax break or tax have a particular concern for SMEs, which make up, credit depending on the size of the budget. For a game I think, well over 90% of all businesses, or possibly with a budget of more than £100,000 up to £3 million, 95%. What I am concerned about is that we ensure you get 30% tax relief. If the budget of a game was that the limited funds that we now have as a nation between £3 million and £6 million, you get 25% tax are targeted to support our businesses and our relief, and if the game was more than £6 million, you industry, and that we don’t end up subsidising get 20% tax break. Games Investor Consulting, which multinationals. we contracted to do the mathematics, did an estimate Dr Wilson: Can I reassure you on that point? When of how much additional economic activity would be we drafted our games tax relief proposal last year, we stimulated, and that was the figure it arrived at. wanted a measure that would help the—if I can use We are confident because if you look at the experience the term—entire ecosystem of video game in Canada—in Quebec, to which Ian referred earlier— development companies in the UK. That is why, as I typically, for £500 million of approximate investment mentioned a moment ago, the tax relief that we through tax breaks, you’re getting back another £1 suggested should be based on different sized budgets, billion—you get two for one back. I cannot give you with proportionately a larger relief available to smaller today the exact, precise mathematical calculations on budgets, which would help smaller game developers. how that figure was arrived at, although I am happy So, any game developers that are, basically, producing to send that to the Committee if you like, but we are a game with a budget of more than £100,000 stand to confident that the figures stack up. We are also benefit from games tax relief, provided that they also confident in the data presented to the Treasury in the pass the cultural test that we had to incorporate in our run-up to the March Budget. Treasury officials looked games tax relief proposal. at the data then and said to me that although their We envisaged that a spectrum of companies would figures were slightly different from ours, the broad benefit from games tax relief. Your SMEs would picture was the same. So we believe that games tax benefit from games tax relief. You are right that, just relief has a powerful stimulating effect on job creation as more than 90% of businesses in the UK are SME and additional investment. in nature, the same applies to the video games Ev 8 Scottish Affairs Committee: Evidence
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson sector—about 90% of studios would be classified as and pass the cultural test, so we think that a higher small and medium-sized enterprises. proportion would pass eventually. Publisher-owned studios in the UK could benefit in Fiona Bruce: Thank you. If there is time at the end, principle from the games tax relief, but they are an I might like to come back on that. important part of the ecosystem within the United Kingdom. Many smaller developers can often spin out Q33 Lindsay Roy: Good afternoon, gentlemen. from publisher-owned studios. Of course, the In making a case for investment, whether public or Chancellor of the Exchequer has said that he wants private, do you share my view that the industry is a the United Kingdom to be open for business, and we catalyst for more diverse creative technological understand from overseas publishers that they would development and that we perhaps do a disservice if find games tax relief attractive. We think it would help we focus solely on video games? I am thinking in the whole spectrum of fairness. particular about medical applications—it is about not Mr Rawlinson: Could I just illustrate that briefly? just games, but simulations. You might have a better There was a studio in Canada employing 20 people chance of stronger investment if what they put that Activision purchased, having seen its capability. forward was widened. Today that studio now employs 200 people—those are Dr Wilson: Again, the games tax relief proposal that 200 local Canadian jobs. That same model can apply we put forward last year would have benefited in the UK and in Scotland in particular. interactive products generally. At least in theory, it Fiona Bruce: I have one minute left. May I ask one would be possible for a game to pass the cultural test last question? even if it wasn’t primarily for entertainment purposes. Chair: Yes. You are right. There are obviously game companies in Scotland and in the United Kingdom more generally Q32 Fiona Bruce: Thank you, Chair. that create serious games—I think that about 20% of This is a completely separate question that again TIGA members and developers in the UK create relates to some evidence that TIGA submitted. You serious or educational games. Games can obviously said that to qualify for relief, video games would need be used for training purposes as well. When we put to pass a cultural test. Could you elaborate on how forward our proposal last year, we thought it should you would assess what to me seems like a very benefit as wide a range of interactive products as possible. subjective issue? Dr Wilson: Well, the cultural test is informed— actually, I shall rewind slightly. We had to incorporate Q34 Lindsay Roy: We hear again and again that a cultural test in the games tax relief proposal because youngsters are digital natives and that we are digital otherwise it wouldn’t get through the European Union. immigrants. Is it really the case that we need to There had to be a cultural test. We were advised that change the school curriculum? by the Treasury that that was the best way—the only Mr Livingstone I have some opinions on that matter. way, effectively—to get a games tax break. The way education has been for 50 years has not really changed very much: one person talks to the The cultural test that we proposed was similar to the many, the many copy down rote, and learning is tax break criteria that exist in the film industry, which boring. The way children engage with media has has a cultural test, and similar to—not exactly the changed radically over the past 10 years. They use same as—the tax break that is available to video game social media devices, they use Facebook and they developers in France, who also have a cultural tax work collectively together. It is the many helping the break. So, in terms of criteria, in order to pass the many—they are learning collaboratively. That ethos cultural test and therefore benefit from games tax of collaborative learning should be taken into the relief, you would, for example, get points for using classroom a lot more. Children should not be told to new technology, for having your production staff leave their media devices at the gates, rather like based in the United Kingdom, for if your game was a leaving their guns at the saloon. They should bring new game rather than a sequel, for using new these devices into the classroom and use them for technology, or for basing it on an aspect of British or collaborative learning, and they can help to teach each European heritage—that could be a book, film, other. Then the teacher is effectively a monitor as they historical event or sport. We think the latitude for a all learn from each other by using things like game getting through the cultural test for the games Wikipedia, which was supposed to be a sin at first tax relief is pretty flexible. and yet is a constantly evolving encyclopaedia. Hard We ran a test involving 18 games last year, just to see copies of encyclopaedias date, as do books, but how it worked out. We took 18 titles, pretty much at Wikipedia is constantly evolving and upgrading with random—a sample of publisher-owned, studio- new knowledge constantly coming on. Those devices, developed games and independently developed game and engaging with media and collaborative learning, titles. Bearing in mind that none of those studios had should absolutely come into the classroom. tried to get their games through the cultural test, Also, why should children make a choice between art because they didn’t know what it was, we found that and science? That is preposterous in a digital age of out of those 18 titles, about 44% passed. That was the creative industries. Computer games are the pretty much the same proportion as exists in France. marriage of art and science. People need to know the We imagine that if the games tax relief was workings between the two disciplines to be able to introduced, clearly games companies would try to make the best digital content going forward. There are make sure that they could benefit from the tax break many ways in which the curriculum should change to Scottish Affairs Committee: Evidence Ev 9
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson be more up to date with today’s technological Q40 Mark Menzies: Thank you, Chairman. Richard, thinking. you talked about the £415 million benefit that you feel the tax break would bring, and the £192 million cost Q35 Lindsay Roy: I don’t wish to sound cheeky, but of that. Can you talk us through the numbers and the when were you last in a school? In my experience, a assumptions in the calculation that got you to that lot of these things are happening. There is £415 million number? collaborative work. Dr Wilson: I’m afraid I can’t do that now. I am very Mr Livingstone I said in my opening remarks that this happy to send our report to the Committee, which will is actually happening in Scotland, which is great. It show how the figures were arrived at. What I can say needs to go forward throughout the rest of the UK. is that the Treasury adopted that figure—in fact, I They also use programming in Scotland, which they think both parties did. Before the election, they used do not do in the rest of the UK. Scotland has been a our estimate of how much the games tax relief would shining example of the way modern learning is cost in a given year. After the games tax relief was realised. removed in the June Budget, the saving that the coalition Government assumed would take place was Q36 Lindsay Roy: So how do we get that continuum again based on how much money they thought we from schools through FE to university and link it in would spend on games tax relief in a given year— with businesses like your own? about £40 million. I suppose that all I can say to you Dr Wilson: There is some happening already. We find at the present time is that the figures we presented that about 40% of our development studios already were being accepted as robust. has a relationship with universities or further education colleges. A smaller number has a Q41 Mark Menzies: Do you believe that the relationship with schools, but there is some interaction Treasury has fully bought in, more or less, to that happening between game development and education £415 million figure? providers. Dr Wilson: I believe that the Treasury, in the run-up to the March Budget, looked at our report. As I said Q37 Lindsay Roy: In relation to universities, how a moment ago, we were told that the Treasury did well served are you by Dundee and Abertay its own calculations and that those calculations were Universities? slightly different to what we suggested, but not that Dr Wilson: We have enormously high regard for not far out. We believe that they’re pretty accurate. simply Abertay University, but other Scottish universities as well. Q42 Mark Menzies: Bearing in mind that this is predominantly about tax relief and the costs and Q38 Lindsay Roy: I am not one for league tables— benefits, I think that it is quite important that we really Abertay is not high up in league tables—but I think understand how we got to that number. If you want to we need to do something about that, because they send it back to us at a later point that would be great. seem to be providing a more integrated collaborative Also, it is important for us to be able to understand approach to learning, well focused on problem- from the Treasury whether those numbers are robust solving approaches. enough, and if it is the case that is really the premise Mr Livingstone From my understanding, the UK on which much of this case is built. If those numbers average is that 6% of universities engage with local don’t stack up—if the Treasury doesn’t think that industry, which is preposterous if you want to keep up those numbers stack up—it really starts to bring into with what is happening in the real world. We would question much of the benefit and the return that this ask any Government to ensure that there is more is all based on. If you can send that to us at a later incentive for universities to engage with local stage it would be useful to the Committee. industry. Abertay is a shining example of best Dr Wilson: I would be very happy to do that, and I practice, and that should be replicated throughout the will send you the report. I agree with you. A strong country. part of our case has been that games tax relief was a net revenue generator for the Treasury. Q39 Lindsay Roy: Would you agree that, if we are going to have league tables, there may well need to Q43 Mark Menzies: That’s fine. be different definitions of success criteria, for example The other thing is that, operating in an environment in relation to employment and outcomes? where money is very limited, if a tax relief was off Mr Livingstone And they should be financially the table, what other things do you think could be incentivised to offer the skills that we certainly done, either by the Government or other bodies, to require: computer science, maths, art, animation and bring benefit to the games industry and, for example, physics. It seems to be that, historically, universities in Dundee in particular? have been funded on a bums-on-seats basis—excuse Dr Wilson: I am sorry to be repetitive, but I am my language—that incentivises numbers rather than probably going back to what I mentioned more or less quality. So, you are stripping maths out of your at the beginning of the session: if we couldn’t have curriculum to get more people on a course and to get games tax relief the next best thing would be to have greater income for the university, but it should be done very enhanced R and D tax credits. But that would, of the absolute opposite way, with less money for media course, incur additional costs for the Government, and studies rather than hard skills studies. R and D tax credits cannot be specialised, or focused Chair: Right, could we turn to Mark? on just the video games sector. In many ways, to use Ev 10 Scottish Affairs Committee: Evidence
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson a familiar phrase, they would be poorly targeted games tax relief as being the top measure, I can name because we would be using the research and a lot of others who would be supportive of it. It is development tax credits not simply to help the video important to emphasise that. games industry but to try to help a swathe of other sectors as well, and that could well end up costing the Q46 Jim McGovern: I think it is fair to say that in Treasury more. Canada, it is not just about tax breaks, but employee I am sorry to be tedious and to repeat this, but our incentives. industry wants to be able to compete on a level Dr Wilson: Yes. It is worth emphasising that skills are playing field, particularly against Canada. They have important—of course they are. But one of the reasons very generous tax breaks—37.5% tax relief in why there is a skills shortage, which has been Quebec. A dozen states of the United States—the land important in the UK, and which has affected the of the free and the laissez-faire economic attitude— development sector is again because our competitors have tax breaks or incentives to get video game in Canada have this enormous tax incentive, which in developers to focus in particular jurisdictions. We turn allows them to spend more money on poaching want to be able to compete on a level playing field individuals from the UK to work in Canada. and the best way to do that would be with the games tax relief. If we can’t have that, the next best thing Q47 Mark Menzies: At what point do you think you would, as I say, be R and D tax credits. But it wouldn’t will be able to do some analysis on the NI changes be a game changer, it would not draw in those and corporation tax? Is it something that your overseas publishers to invest in the United Kingdom company is looking at? or stimulate new investment in the UK games Dr Wilson: We are looking at that. TIGA has set up a industry. committee that will look into the tax changes that have Mr Livingstone Clearly we all want production tax been announced in the Budget. We don’t believe it credits but two other things spring to mind. One is will change the essence of the argument, but we intend perhaps to extend the EI scheme, so that it could be to look at it. more widely used as a slave model rather than as a With regards to the corporation tax measures that were per-project model. Also, I hear that the proposed announced, we have taken informal soundings with patent box is to be taxed at 10%. If you could extend some overseas publishers. Everybody likes to have that to IP, with IP owners paying corporation tax at corporation tax cut, of course, but no one is saying 10% rather than 28%, that might incentivise IP that the changes in corporation tax are significantly retention as well as creation in this country, because substantial enough to make them change their if you tax IP at source there is a great incentive for investment decisions. If you have a 37.5% tax break people not to offshore their IP. in Quebec, obviously it looks much more attractive than lowering the rate of corporation tax in the UK. Q44 Mark Menzies: I am conscious of time. When It is also worth emphasising that corporation tax we took our informal evidence session, and were reductions are very useful if you are making a profit, speaking to some of the companies in Dundee, it is but a lot of the smaller developers, many of whom probably fair to say that the people were not speaking you may have come across in Dundee, were going with one voice when it came to the benefits of the tax through a period when they were making a loss. A changes. People were highlighting other things that change in corporation tax at that point doesn’t really could be done to help them. That was really the help them a great deal. thinking behind that question. The other thing that I’d just like to try to understand Q48 Dr Whiteford: Thank you gentlemen for being is whether you have done any analysis of the benefits here and for your forbearance earlier when we were that the changes to national insurance contributions, running around the voting Lobbies. corporation tax and so on that were announced in the As Mark has just been saying, when we were in Budget, would bring to companies that are Dundee, we heard a range of views on the tax issue, essentially SMEs. from people who thought it would have a very Dr Wilson: I have just two points. On the issue about marginal impact to others who would welcome it. But there not being a uniform voice when you went up to one thing that came across very strongly was that Dundee, we did a survey back in December 2009, many of the games producers seemed to have which showed that 84% of developers supported problems with banks and access to sustainable games tax relief. I think that it would be unusual in finance, particularly finance for development and any voluntary association to have complete unanimity credit when things are in the pre-production stage. I on a particular tax proposal. wonder what your reflections on that issue are. That struck me, as I came away from Dundee, as being a Q45 Mark Menzies: In one particular company we more substantial issue that we need to address for the spoke to, the senior person pretty much pushed it to future of the industry than tax, but I would be one side, saying that there were bigger things on the interested to hear your thoughts on that. table—IP ownership and various other things. It left Dr Wilson: Again, our survey evidence from me with great doubt as to whether this was over tax December 2009 seemed to show that developers had relief, or were there other things that we needed to problems accessing finance. I think that probably no focus on. sector in the UK particularly loves the banks at the Dr Wilson: But for every example you can find of a moment, and are able to say that they are getting developer saying that they weren’t convinced by stacks of cash from them. That much is probably Scottish Affairs Committee: Evidence Ev 11
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson general in nature. Developers will fund themselves in pointed out earlier, the need for a cultural test enables a number of ways, such as through publishers, through us to overcome the state aid rules that would normally their own resources—in particular smaller developers, apply for providing sector-specific support. That is which rely on their own resources—and of course how France has been able to offer tax relief for its they will look to banks to help them out. video games production. But again, one of the things that was advantageous or seemed appealing about the games tax relief proposal Q50 Dr Whiteford: It strikes me that the cultural test that we put forward was that if a developer could seems to be a pretty low bar, and that it might well be show that their game had approval to benefit from open to challenge. I am concerned, because what we games tax relief—as I said in the beginning, 30% tax don’t want is a race to the bottom. We do not want relief on their particular product—that could in turn these proposals to create a race to the bottom and attract external investors in that game, because they replicate the existing problem that we are complaining could see that there would be money coming; in about in other places. essence, there would be money available to invest in Mr Rawlinson: I think that we all agree with that. that company. That makes the small developer a more You’re absolutely right. If your only selling feature is attractive organisation or opportunity to invest in. price, there is only one way and it is the bottom. That Mr Rawlinson: I think it is fair to say that any is not where we are. We are an industry and a country creative industry is a high-risk, high-reward industry, that has a rich heritage of excellent—indeed, the very and the video games industry probably stands at the best—games production. We look at the success in very top of that list of high risk and high reward. Scotland, in particular of “Grand Theft Auto”. We do Therefore, the underpinning of a tax relief will not look only at that product, but it is a world beater. improve the opportunity for the return on investment, We have the skills and the creativity, and I think it is and make it a better investment potential for the uniquely British that we have success across a whole banks, particularly with small start-ups and SMEs, range of creative industries. We can look to other which I think our industry is creating a lot of at the countries that are successful in particular creative moment. For the normal high street bank looking at industries, whether that be architecture, furniture that business, it is incredibly difficult for them to design, art, painting—whatever it might be—but we assess the risk and understand the proposition. In fact, seem to have skills and expertise across a very broad both Richard and I attended a meeting with other range of creative industries. That enables us to move creative industries in the summer, and the forward in our industry, where, as Ian said, we are a understanding of the decision makers within the banks marriage of technology and creativity. was one of the key issues that we were discussing across all the creative industries. Yes, banks are a Q51 Dr Whiteford: I was interested in what you problem. were saying at the outset about the diversification into Mr Livingstone Not just banks though. Private equity, iPhones, Wii games and so on, not least echoing some VCs and angels still have trouble understanding our of the questions that Fiona was asking about the move industry, and quite right too, because it’s not just one away from simply violent computer games. That has format and one way of consuming content. There are to be a very welcome development if the industry is diverse platforms and diverse ways of playing, to improve its credibility and perceptions of that. I whether it is small casual games played online, or wanted to ask you about potential growth in that games played on iPhones, handheld devices, mobile sector, which perhaps echoes someone else’s question. phones, social networks, or high-end consoles. With What are the things, apart from tax relief, that will diverse content device skills and budgets from a few help us maximise potential? hundred pounds to £30 million, it is very difficult for Mr Rawlinson: Growth will come through anyone, even in our own industry, to understand the opportunity and talking up our ability in this country. economics, let alone outside funders. We need an Having a Government, an education system and a educational process too, so that people understand the trade and investment department that really trumpet whole process. our industry as open for business and open for capability will give us the opportunity to lay our wares Q49 Dr Whiteford: The other big issue that I came out and show what we are capable of. Underpinning away with from Dundee was this whole issue of the that is this tax relief system that we are advocating. level playing field. It struck me that if countries such Although it will support the industry, and we do not as Canada and France are creating an unfair want us to become a low price-based industry, it will competitive advantage by subsidising their industries, provide an incentive for that inward investment. That that is an issue that we should be raising at the WTO, is really important. so that the unfair subsidies are taken out of the Women in games is absolutely key, because then we equation. That might be a more effective way of get a diversity of content that we can create and can creating the level playing field that we all want to see meet the needs of a growing market. We should our industry on. recognise that the industry is growing well above the Dr Wilson The previous Government looked into that, average. It is a leading growth industry, not just in and they found that there were no grounds for terms of creative industries that are growing above appealing to the WTO. They have already been down the national average, but we are the leading creative that route. industry in respect of that growth. The opportunities Mr Rawlinson: Canada sits outside the EU, so it is are exponential: marketing that, promoting that, not restrained by EU competition rules. As Richard diversification of the work force and definitely Ev 12 Scottish Affairs Committee: Evidence
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson bringing in minorities and women that will create new Dr Wilson: In the rest of the UK, the most up-to-date game formats. figure I have is a 4.4% decline in the UK as a whole To echo the words of the Chancellor when he says, this year.1 “Yes, we want a low-cost economy because we are going to generate new jobs.”, when asked where the Q58 David Mowat: So Scotland has been jobs are coming from, we do not know. I cannot disproportionately hit for whatever reason? specifically say where they are going to come from, Dr Wilson: That is right. but I think the opportunity that we will create will Mr Rawlinson: The demise of Realtime Worlds had a give us new jobs and new employment. disproportionate effect. Q59 David Mowat: That was in these numbers, was Q52 David Mowat: I want just a piece of context, it? first of all, in a couple of numbers that you gave. I Mr Rawlinson: That was in these numbers. think you said that there were 650 development employees in Scotland and 9,000 in the UK as a Q60 David Mowat: Okay. Thank you for that. whole? Going back to your point about the size of the tax Dr Wilson: Yes. relief and what might come of it, £192 million is the figure that you have suggested and that will save and Q53 David Mowat: What that is saying is that this create 3,500 jobs. That is quite a lot per job. That is industry is no more significant in a sense to Scotland £60,000 a job. To echo the points made previously, it is very important that we can see other benefits than than the rest of the UK, because those proportions are that. There are other ways that we can create jobs for roughly the relative size of the countries and £60,000 each. There has to be something else that we populations. Is that true? are going to create in terms of revenue. Dr Wilson: It depends precisely on what measurement Mr Livingstone It is IP creating as well. We need you are looking on. I said in my evidence, which I more IP to reside in this country. The value of IP is have written down here, that Scotland has 46 hard to put on a balance sheet, but if you look at Lara development companies. That represents about 10% Croft, which everyone says is quintessentially a UK to 11% of development companies in the United digital icon, the reality is that “Lara Croft: Tomb Kingdom. In terms of head count— Raider” is developed in California and it is owned by the Tokyo Stock Exchange. It is not British any more. Q54 David Mowat: I think you said 9,000 in the UK. A lot of our IP has gone offshore not just to be developed, but it is owned offshore. Dr Wilson: Yes, 9,000 in the UK. In terms of Scotland having a share of that head count, that 651 figure Q61 David Mowat: I agree, but even with IP unless which is up to date is about 7.2%. you can either translate the ownership of IP into jobs or tax revenue— Q55 David Mowat: Yes, so obviously, this is a UK Mr Livingstone We don’t want to become a work-for- issue? hire nation. Dr Wilson: It is. Q62 David Mowat: No, we don’t. The nature of the Q56 David Mowat: We all went to Dundee. Is the tax relief is a sort of rebate, isn’t it, so you actually structure of the industry in other bits of the UK—the get it while you’re doing a development? Is that right? Is that what the Canadians do and what you need? It’s other 93% of it—fairly similar to what we would have not something that only goes to profitable games? seen in Dundee or are there structural differences in Mr Livingstone It comes at the end of the fiscal year. other ways? They come with their 37.5% cheque. Dr Wilson: In Dundee, you probably have a larger number of small independent developers. Most of the Q63 David Mowat: But you don’t have to have made developers up there probably do not employ roughly money yet? more than about 25 people now. The big employer Mr Livingstone Not at all. To offset the costs of there, Realtime Worlds, went into administration. In production is the great problem during the time of other parts of the UK—for example, Brighton, production. Dundee, west midlands and London—you will get clusters of development studios, both overseas Q64 David Mowat: It would be quite important for publisher-owned studios and independent developer- me to see the figures that show the benefit over and owned studios. Dundee might have been a little more above the £60,000 per job, because that is a lot of different in the sense that there probably is a greater money to create a single job. We have to have a case. proportion of small independent developers. Dr Wilson: I am more than happy to send the information about how the figures were calculated to you. I would emphasise the fact that in the evidence Q57 David Mowat: Okay. I think that you used a figure of an 18% decline in Scotland over the past 1 I now have received more recent information from Games Investor Consulting which suggests that the decline in the year. Would that be a similar number to the rest of the UK as a whole between July 2009 and September 2010 is industry in the UK? 5%]. Scottish Affairs Committee: Evidence Ev 13
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson we put forward, which we are confident about, it is quoted that the global market for video games—not a net revenue generated for the Treasury. It is worth just software but hardware—was worth about £50 emphasising that point. billion this year, and they predict that by 2014 it will It is also worth emphasising something about the be worth £80 billion, very approximately. Forgive me nature of the video games industry, which others for going back to Canada very briefly. While our work mentioned earlier. The video games development force have declined over the past two years, the sector is extremely export-oriented. A typical Canadian games industry has continued to expand in development studio would generate 62% of their terms of head count by another 33% over the past two turnover through the export of their games. Almost all years. The key difference again is the tax relief. You developers in the UK export their content, which is may think it’s expensive to keep those jobs in really important. operation, but none the less it clearly has a significant impact on growth or decline. Q65 David Mowat: Can I just ask about that? One Mr Livingstone The thing is that the industry is still of the things I took away from being in Dundee was growing. Software sales are increasing year on year. a little bit of knowledge about the structure of the industry. You have things that they call publishers who Q68 David Mowat: Globally? tend to commission these guys to produce what they Mr Livingstone Yes. We will be reaching a tipping produce. I don’t know how typical this is, but it was point—some say 2012, some say 2015—when a bit of an IP issue that quite often the publishers own revenues from network sales, or online delivery of the IP and they were using the firms in Dundee a little games revenues, will be larger than those from box bit like creative software developers—nothing wrong products. with that; high added value and everything—but structurally it doesn’t stand up. If the publishers are Q69 David Mowat: That’s over the internet? somewhere else, it sounds like there could be a Mr Livingstone Yes. structural issue in the industry. Eventually you become—I think you used the phrase, Michael—jobs Q70 Jim McGovern: Could I put a point to David? for hire. You do become that in that model that I saw It wasn’t just coincidence that Dundee became the hub in Dundee. Is that something you think is happening? for computer games. I also point out that it is not just Dr Wilson: There are some developers who, as you about young lads sitting in front of a TV; there is a say, do work-for-hire work for overseas publishers. lot more to it than that. The Timex and NCR factories There are other developers—for example, Firebrand in Dundee started producing computers, and it was the Games in Glasgow is independently owned, owns a people who worked in those factories that ended up lot of its own IP and exports its games. It depends starting businesses; that is why Dundee is the hub for on the nature of the contract between publisher and the computer games industry in the UK. Obviously, developer. A lot of developers are increasingly trying Abertay University has a link to that. to sell their games directly to the consumer; for David Mowat: That is what I thought, but it does not example, as Michael mentioned earlier, over the appear to be wholly borne out by the numbers that Dr iPhone. It will depend on the particular game and Wilson gave us; he said that 7% of the video games developer. industry is in Scotland. That was all. Mr Rawlinson: The market is changing very rapidly, Jim McGovern: Yes, probably in Dundee. If I sound so we turn the clock back maybe as little as two or biased there, my apologies. three— Mr Rawlinson: The circumstances around the growth of Dundee as a hub are as Mr McGovern pointed out, Q66 David Mowat: Is it consolidating? but in different hubs around the country different Mr Rawlinson: It has been consolidating, or it was in circumstances have prevailed. You will have found a process of consolidation. Two or three years ago the that a small company that 20 years ago had a success global publishers who had the access to market for grew its business and had spin-offs, which then set up box products controlled the market more or less, and their own business alongside. So we do have these therefore the independent developers were under hubs in Brighton, Guildford, the midlands—around pressure to relinquish their IP. Now, as Richard has Leamington Spa, for instance—along the M62 rightly said, they have the opportunity to reach the corridor, including Manchester and Liverpool, and in global market through online distribution—whether the north-east, in Newcastle. All varied, for their own that be through the internet, console portals, particular reasons, but nevertheless these hubs have PlayStation network, Xbox Live or the iTunes grown and developed. network—direct to consumers, so they can retain the ownership of their IP, they can exploit their IP, and Q71 Cathy Jamieson: One of the things about this tax relief would enable those smaller companies speaking after everyone has asked a lot of questions to grow and blossom alongside the multinationals. is that you have a bit of a job in trying to sweep up and crystallise some of these things, and that is what Q67 David Mowat: A quick final question on scale. I hope to do. I have three quick questions to ask, so The UK declined by about 4% and Scotland 18%. that the Committee and I are clear and can take things What does the industry do globally—approximately? forward. First, in relation to IP, we have had a lot of Not just Canada. Broadly, is that number available? discussion about not wanting that offshore, and all the Dr Wilson: I haven’t got a precise figure in front of issues around that, and of how the tax incentives me, but PricewaterhouseCoopers earlier this year would assist. I wonder whether there is anything else Ev 14 Scottish Affairs Committee: Evidence
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson that the Government need to do, and that the Endowment for Science, Technology and the Arts. Committee could recommend that Government looked When I give my evidence, I’ll talk about how our at, in relation to the creation and protection of IP. prototype project would specifically relate to that Mr Rawlinson: I think Ian has already outlined the project and benefit it. extension of the patent box. I am not an IP or tax lawyer, but if the Government could produce Q73 Chair: Is there anything anyone would like to something that links IP to this country, or makes it add to that? beneficial to keep the ownership of the IP in this Dr Wilson: I would just like to add that, as a trade country, along with the tax receipts from the association, we try to provide best-practice worldwide exploitation of that IP, it would be very information and advice on self-publishing. We had an beneficial. event up in Dundee earlier this year—it was when the Mr Livingstone There are also hidden benefits that volcano went off, as it happened. We had some of our people might not appreciate, especially in the online experts from other parts of the United Kingdom come world. In the old model—the old world, where people up and speak about self-publishing. went into shops, bought their products and walked Mr Livingstone I would add that these companies can out—the shop will have paid corporation tax, and the create great content, but not everybody knows about Revenue would have got some VAT. In the online it, so they need help with not only accessing global world, which can be served from anywhere in the markets, but telling those markets that they are here. world, those revenues are no longer being had. If the They need help with marketing, promotion and getting IP was coming from the UK and serving a global visibility to drive users to their content. audience rather than the UK consuming IP from overseas, there would be additional tax revenue, Q74 Cathy Jamieson: I have a short question. I which is now lost in the online world. suppose this will put people on the spot, but we will Mr Rawlinson: VAT receipts are a big danger. We have to produce a report with recommendations. have already seen it with online trading of physical Could each member of the panel say in one sentence goods being serviced from the Channel Islands, but as what the top recommendation is that they would like Ian said, the server and the registered address for an us to make to the Government? online business could be in any low-cost tax Dr Wilson: I’m so sorry to be boring, but I hope that jurisdiction. the report will say that the Government should look Mr Livingstone Tax on IP alone would be a great again at tax relief, on the basis that we are supporting help. an export-oriented, highly skilled industry. We are supporting a sector that really has an opportunity to Q72 Cathy Jamieson: I was going to ask about VAT, take advantage of growth in world markets. So, games but you have probably answered that. One of the other tax relief should be the top priority, and I hope that the issues that came up in discussion with some of the Committee will be able to recommend its adoption. smaller companies was the issue of self-publishing. Mr Livingstone I think it’s a combination of things, I wonder whether you have any views on what the led by production tax credits and tax relief, but that’s Government could do to encourage more co-operation also matched with the skills that we need to make the among the smaller companies to promote self- games; we need hard skills, not soft skills, and we publishing. Have you any specific ideas on that? need people who know how to make a game, rather Mr Durrant: Is it possible that I can come in here? than who know the philosophy behind the games. We That was something that I was going to mention when need the perception of games to change. We need I gave evidence, because I had the benefit of being greater careers advice at a younger age to get people party to that discussion in Dundee. I think that you into the industry. We want IP-creation incentives—not heard that there was some kind of emergent plan to just creation, but retention. We need programming in create a consortium. I suggest that the Committee seek schools. We need broadband. Feeling great about 2 details from NESTA, which is acting as an honest broker to bring that project together, and the project megabits is misplaced; as more and more devices are is advancing. Essentially, NESTA is putting together used in the home, those 2 megabits will go down to a a consortium of developers, which will include lot less. If we’ve got four or five users in a home, we developers in Scotland, with the idea, in particular, of will need at least 8 megabits, not only to download taking advantage of digital publishing. It intends to games, but to play them online and to serve global create a developer-owned publisher, which will be markets from the UK. So, broadband is another issue. owned by a consortium of developers, who will share Of course, there is also piracy. not only marketing costs, but the revenue and returns. Chair: That was a very long sentence. It aims to reduce the publishing cost and the risk. It Mr Livingstone I hope there will be a lot of wants to create a portfolio of titles and use that as a recommendations. platform for raising finance. Mr Rawlinson: To cut it short, I would just reiterate The reason I was going to mention this when giving what my colleagues have said. We have covered the evidence is that we’ll be linking our prototype project points. with it, and I don’t want to jump ahead to that. But, essentially, there are opportunities, there is a project Q75 Mr Reid: Thanks for coming along this there and there is some public funding going into it to afternoon. Perhaps you could explain how you see try to stimulate it. As I say, I recommend that the games tax relief working in practice and why games Committee seek the precise details from the National tax relief, rather than other incentives, is so important. Scottish Affairs Committee: Evidence Ev 15
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson
Dr Wilson: Again, the reason why we advocated Q79 Mr Reid: I want to ask about the jobs that you games tax relief was that, over the last few years, think you could create if you got the tax relief. What game developers and publishers have been saying that would the people doing those jobs otherwise be the UK is competing on an uneven playing field and doing? Would they be working in Britain in other that we are losing jobs and investment to overseas sectors? Would they be attracted in from abroad? jurisdictions, particularly Canada. Typically, if you go Would they be unemployed? Where would they to a development studio, almost every person you come from? speak to will say that they have lost staff to Canada, Dr Wilson: Obviously, that is a very difficult question so there is a real brain drain. That is partly driven by to answer because you never know what a multiplicity Canada’s very strong tax incentives. That’s why we of people would do, but we do know that a brain drain proposed games tax relief. is taking place from development studios in the UK. I can send the Committee a copy of the proposal, but Again, I am very happy to send the Committee a copy in concise terms, games tax relief would benefit a of our report. Back in 2009, we carried out a survey company if it had a budget of at least £100,000 a of game developers. We found that just under 25%— game. As I think I mentioned, there would be three I think the figure was 23%—of development studios different rates of relief: 30%, 25% or 20%, depending said that over the previous 12 months they had lost on the exact cost— staff. Of those development studios that said they had lost staff, 75% said they had lost staff to Canada, and Q76 Mr Reid: Per cent. of what? those were typically the extremely high-skilled project Dr Wilson: Of the cost of the game. A company’s managers or experienced programmers. A lot of very game would have to pass the cultural test. As I high-skilled people were leaving to go to Canada. mentioned, we had to include the cultural test in our What would these people be doing if we didn’t have proposal. If your company was profitable, you could games tax relief? We don’t know precisely what they use the games tax relief to reduce your corporation would be doing, but we can be pretty confident that tax bill. If your company was making a loss and your some of them would push off to overseas jurisdictions. game qualified, you could use the games tax relief as a cash rebate from HMRC. Basically, it would be Q80 Mr Reid: So it is more a question of retaining increasing cash flow to the business in question. I the skills that we have? think I mentioned that one of the reasons why we Dr Wilson: It is a question of retaining skills, proposed games tax relief was that it would help a absorbing some of the new, very qualified graduates, range of companies in the United Kingdom—small or training people in the games industry who are companies, independent development studios and coming out of education. publisher-owned studios. Q81 Mr Reid: From what you have been saying, the Q77 Mr Reid: You keep referring to Canada. Is industry seems to be concentrated in certain hubs Canada the only problem, or are there other countries? throughout the UK. Does that mean that if the Dr Wilson: Canada is the most egregious example— Government changed their mind and granted the tax shocking example—of Government intervention relief, all the benefits would simply go into those providing very strong rates of tax relief. Quebec offers hubs, or would wider parts of the country benefit as the most generous relief, but other provinces of well? Canada offer very strong rates of relief as well. About Dr Wilson: The truth of the matter is that the game a dozen states in the United States provide either tax development work force that we currently have are relief for games production or similar strong very mobile. At the moment, they tend to be male, as incentives. France has a tax break for games we have already commented. They tend to be fairly production. I think that back in 2008 Singapore young, so they don’t have many restrictions or ties in launched a $200 million scheme specifically to help relation to where they are currently working. Clearly, the export of video games. It just shows the level of if we had games tax relief and some of the existing ambition and money that other countries are putting studios expanded, people would go to those towns and behind video games. Those are the main competitors cities—Dundee, Brighton, Guildford or wherever— I would refer to. but if there was a very strong university in another part of the UK and it was able to spin off new start- Q78 Mr Reid: Would the level that the previous up studios, there is no reason in principle why another Government proposed for the tax relief be sufficient hub might not emerge. to enable us to compete with Canada? One of the good things about the video games Dr Wilson: The Government informed me on the day industry—this is worth emphasising—is that the of the Budget that they were going to adopt our majority of the work force is not concentrated in proposal. As I said, we were proposing a 20%, 25% London. It is good that it is concentrated throughout and 30% rate of relief. We think that was a the UK. I think 85% of the development work force proportionate response to overseas developments. We are outside London, which is really good. We talked don’t think it would be a race to the bottom; we think about this earlier. All political parties have talked it would be a way of making sure that the UK games about wanting to rebalance the economy and promote industry was competing on a level playing field. We growth throughout the United Kingdom. The think the proposal we put forward was proportionate, development work force can be part of that solution. sensible and would have the required effect of helping It is fantastic to be able to have high-skilled jobs in us to compete on a level playing field. Jim McGovern’s constituency, to name but one Ev 16 Scottish Affairs Committee: Evidence
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson example. It is great that we can create these jobs in whole industry would qualify anyway? Would there different parts of the United Kingdom. Yes, you would be any change? see some existing hubs expanding, but it would also Dr Wilson: No. Obviously I was struck by your be possible to see new hubs emerging, particularly if remark about a low bar. When we did our test last there were a strong university in place. year, we found that 44% of the titles we put forward Chair: I should interrupt. I know, Mr Livingstone, passed for relief. We were obviously pleased that that you have to go, and I could see you becoming companies were able to benefit from the tax relief, but more and more itchy. If you must dash, I thank you we were conscious when we made our proposal that very much for coming, but if you can stay a bit longer it should be seen as a serious measure, and we knew it would be helpful; we were interrupted by the vote. that if something like 80% of companies were passing, I could see you getting more and more ready to go, the Treasury would probably show it the door, which so leave when you want to. I suppose in a way they did. We tried to frame the cultural test as a serious test. I said that 44% of titles Q82 Mr Reid: Mr Wilson, you were talking about a passed our test, and that seemed to be pretty much on mobile work force, and we are dealing with a par with the way the French tax credit works. I think intellectual property, which is slightly intangible. about 40% of French games typically benefit from Traditionally, if a Government give a company a production tax credit. I would not say that it is a shoe- subsidy to build a factory and put in machinery, the in, but it is an opportunity for game developers. No Government who gave that grant have some sort of one has to take advantage of it, but it gives an control, because you can write in a clause stating that opportunity if we can take advantage of a tax credit. the machinery cannot be taken away. Is there a risk You don’t have to believe me on the benefits of games that if the companies benefiting from tax relief get tax relief, because NESTA—the National Endowment a better offer from Canada or somewhere else, the for Science, Technology and the Arts—did a survey intellectual property and skilled developers may go last year of about 30 key people in the games industry. away anyway? It was not a big sample, but the people who were Dr Wilson: Our belief is that with the games tax relief interviewed were very important and included in place the United Kingdom is a much more financiers in the City of London, overseas publishers attractive place in which to do business. We have and key independent developers. Some interesting referred to the fact that we have a talented work findings came out of that research. First, game force—and some excellent universities—in the United developers thought that they would be able to hold on Kingdom games industry. With the tax relief in place, to all the IP. Secondly, the financial institutions—the we are confident that more overseas publishers will City of London—thought that the games industry had invest in the United Kingdom. One thing in our become much more attractive with games tax relief. proposal is that to benefit from the games tax relief Thirdly, everyone said that it would create more jobs. you must obviously pay corporation tax, so it seems Mr Reid: Thanks very much. to be a win-win situation. More companies will invest in the games industry—overseas publishers, to name Q85 Chair: Now, there are a couple of observations but one example—and will not only have the ability that I would like to make. I have three questions to to employ skilled people in the United Kingdom, but put to you, and then I will take the supplementary will also pay corporation tax to the United Kingdom questions that anybody else has. People shouldn’t feel Government. obliged to ask another five minutes of questions. First, could you send us some more information? We Q83 Mr Reid: And would you see it as a relief that are seeing the Minister next week, so obviously it is would have to be permanent, or could it be there for important that we get that sooner rather than later. a few years, after which you would be able to compete Similarly, if you have prepared any answers to on your own? Would it need to be a permanent questions that we haven’t asked, and you feel that we feature? would benefit from hearing them, by all means tell us Dr Wilson: At the very least, we would like a pilot if you think that, on reflection, there are a couple of project. As you know, almost every Government pilot areas that we haven’t covered. project becomes permanent, so we would be delighted The first point that I want to put to you relates to sex with that proposal. To be serious, we would want and violence. The title, “Grand Theft Auto”, does not games tax relief to be a permanent measure. We impress, in terms of social conscience, well-being, and believe—I can show you the statistics behind our all the rest, does it? The industry does have this image calculations—that it is a net revenue generator for the of being somewhat bloody, gory and encouraging of United Kingdom, so we believe it makes a lot of antisocial behaviour. How do you overcome that? investment sense. What sort of system of not censorship, but guidance, The United Kingdom Government decided that film do you have that would encourage us to be supportive tax credit makes sense for the film industry because it of the industry? promotes high-skilled jobs and attracts businesses to Mr Rawlinson: I am very happy to answer that invest in the United Kingdom, and we believe that the question. First of all, sections 40 and 41 of the Digital same argument applies to games tax relief, which Economy Act 2010, which was passed in the dying helps an important creative sector. breaths of the previous Parliament, amend the Video Recordings Act 1984 so that the industry’s self- Q84 Mr Reid: Would the industry change? Is the regulatory system for the age-content classification of cultural test restrictive, or is it such a low bar that the video games, which is called PEGI, is enshrined in Scottish Affairs Committee: Evidence Ev 17
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson law. That is due to be implemented by the spring of In terms of your rebuttal around 18-rated games, next year, so we will have a stand-alone classification exactly the same regime applies to 18-rated films, so system for video games that makes the classification I think that it would be inappropriate for our industry from 12 upwards mandatory and legally enforceable. to be singled out and treated differently to the film or It will be the first time that video games are covered other creative industries. I’m very happy to have a by such a benchmark. Those amendments were made debate around adult mature content and the legal in response to the recommendations of the Byron framework for its supply, but let’s do that in the round, review. It is very important for the Committee and not isolate our products. Parliament to know that video games are regulated, like films, obviously, but unlike books, the content of which is totally unregulated. Q88 Chair: I understand why you would say that. I In comparison with other creative industries—I have have heard essentially similar things from the cited films—we are a mature industry, so we should producers of cigarettes, and I think that the fact that be free to tackle mature topics and mature subjects you indicated that there was a peak in sales of games with our content and output, provided that it is when the new versions of “Grand Theft Auto” or correctly classified, regulated and signposted. “Grand “Modern Warfare” came out indicates the direction in Theft Auto” has always been classified as an 18-rated which the majority of the market is skewed. I listen product for an adult audience. That game was, in fact, to some of the youngsters in my constituency, and covered by the previous regulation, under which it they are not playing educational games; they are was illegal to sell that product to a person under 18 playing games in which you blow as many limbs off years of age. The industry has acted, and it continues as many people as possible, or steal as many things, to act, very responsibly in relation to adult content. or sell as many drugs, as you possibly can. That is the That is not to say that young children don’t play that nature of it, and the role models that these youngsters game, but that is the responsibility of parents. As part are picking up from your industry are not particularly of the introduction of the new regime, which will progressive or beneficial. come in next spring, the industry is committed to an Mr Rawlinson: First, the average age of a gamer is education and awareness campaign to ensure that now 33. It is not just a market for young people, it is parents, gatekeepers and carers understand that video a market for the whole population, and there is a broad games are not just for children, and that there is a range of products. We were asked a question about content classification system. It shows them what it is, women gamers, and, historically, one barrier to them how it’s used and how they can use it to determine what is appropriate or inappropriate for their children. playing games was the technological barrier. A joypad My final point is on scale. In 2009, 994 titles were with eight or 10 buttons on it was quite technically produced for sale through retail shops. Of those titles, challenging—I certainly can’t master it. Nowadays, only 53 were classified at 18, so it is a very small the Wii has a controller that you just hold in your percentage of the industry’s output that is actually hand and wave around, or a stylus that we can use to targeted at adults. As I have said, I don’t think that it’s write on the screen. Or you can use your finger on a unreasonable that, as we are a mature entertainment touch-screen. The technological barrier to engaging in industry, we should be permitted, with correct games is falling, and so I think— regulation, to supply and produce adult content. Chair: I understand that, but I’m not entirely convinced, so I think I’ll stop you before you dig Q86 Chair: Can you just clarify that? I am not sure yourself further in. that you are living in the real world if you believe that regulation stating that a particular video game should Q89 Jim McGovern: Can I make a point? not be played by people under the age of 18 has much Obviously, you’re involved in the entertainment side impact on what really happens in constituencies such of the games industry, but Professor King, the as mine. I think that belief is naive in the extreme. principal of Abertay University, calls it “pervasive Mr Rawlinson: I am not saying that young people technology”. don’t play “Grand Theft Auto”. I am saying that there Chair: That’s one of the other points I was going to is regulation that makes it an illegal offence for that make, actually. To describe these as video games product to be sold to under-18s. almost trivialises it. All of us who were in Dundee were quite impressed by the extent to which it covered Q87 Chair: In a sense, my reaction is, “So what?” a much wider range of activities. I see that you say You mentioned that only a small percentage of games are classified 18, but that does not relate to the number “interactive entertainment”, but I wouldn’t necessarily sold. Is there an equivalent percentage? describe it as entertainment; it is educational. There is Mr Rawlinson: In previous years, that percentage, in an issue there. terms of sales, was higher, but in the last year for Leaving sex and violence behind for the moment, the which I have figures, 18-rated products accounted for second point I wanted to touch on, in terms of your about 8% of the market. That was against units relationship with Government, is that when we are produced being about 3%. It varies year on year, talking to organisations, there are always two aspects. depending on the titles. To be honest, we get a peak The first is whether you can access the Government, when there is a new “Grand Theft Auto” or a and feel that you can give them your views and that “Modern Warfare”. they hear them. The second is whether they accept Ev 18 Scottish Affairs Committee: Evidence
13 October 2010 Mr Ian Livingstone, Mr Michael Rawlinson and Dr Richard Wilson and act on them—distinct activities. Do you feel that thank you for coming along, Paul, Michael, Richard you have had, and now have, appropriate access to and Ian, who has had to leave, and I hope we can stay Government, in terms of being able to communicate in touch on a regular basis. your views to them? Leaving aside the question of the Dr Wilson: Thank you very much. tax break, which is ongoing, on other issues do you Chair: Any other points that anyone wants to raise? think that they are responding appropriately? Mr Rawlinson: If I could just finish briefly, I would Q91 Mr Reid: I think you said earlier, when I asked say that we, as a trade association, have very good you one of the questions, that without this tax relief, relationships with our two key sponsoring you were losing developers to Canada. Do you have Departments—BIS and DCMS. We also have any evidence of that? Do you have records of people relationships with the Department for Education, and who have worked and trained here and have gone to I sit on the executive committee of the UK Council work in Canada? for Child Internet Safety, which is co-chaired by Tim Dr Wilson: We have a mixture of evidence. We have Loughton and James Brokenshire, who is from the survey evidence—the survey of game developers that Home Office. We’ve had contact in the past, and was carried out in December. As I said, I will send continue to have contact, with the Department of the Committee a copy of that report, so that you can Health. So I would say that as a trade body on behalf see the statistics. We have anecdotal evidence from of our industry, we have very good relationships with studios. I know it is never as satisfactory, but none the Government. They listen to our views and seek our less, there is anecdotal evidence. opinion and our input on a range of issues, and I think Also, in the run-up to the March Budget, I contacted we’re listened to. a number of companies to ask them for examples of Dr Wilson: I think we have a very good relationship people who had cleared off to Canada. I was given with all the civil servants whom Mike has just referred some information, but frustratingly, I wasn’t in a to in those Departments; it is a good relationship. Both position to pass it on to the Treasury at the time the previous and current Governments have had round because of data protection requirements. Those are the table meetings in the Department for Culture, Media three main sources of evidence. and Sport, which both our trade associations were present at, with the relevant Ministers from that Q92 Lindsay Roy: Do you have any evidence of Department. people from out of the UK, or out of Scotland, coming As you will have seen from my evidence, I was into Dundee? disappointed that we weren’t able to have meetings Dr Wilson: If I heard your question correctly, you with Ministers, even for just five minutes, before the asked about people from outside the UK coming into Budget, which I think was unfortunate. We would be Dundee. very keen to have meetings, even if they were for a very short duration, with Cabinet Ministers relating to Q93 Lindsay Roy: Yes, from outside the UK or our industry. The Department for Business, Innovation elsewhere in the UK to Dundee. and Skills would be one, and a Treasury Minister Dr Wilson: Absolutely. Sadly, before Realtime Worlds would be another, as well as the Secretary of State for went into administration, about a quarter of its staff Culture, Media and Sport. We know that these people came from outside the European economic area. In are enormously busy, and we don’t want to take up a fact, that is one point worth mentioning. It has been huge amount of their time. But I think it would be said to me by a number of developers and publishing good to be in front of them for five minutes just to studios that they are concerned about the possible highlight some of the key issues that are being faced. restrictions on migration that are being planned. Some You rightly made a distinction by asking whether we studios need to take very talented staff from their were being listened to. If, after listening to us, they studios overseas on occasion to meet skill shortages say, “We don’t want to do that,” that’s absolutely fine, in their companies and to complete particular projects. but I think it is important we have engagement with They would be concerned if they were to be Cabinet Ministers from time to time. prohibited from doing that. Although, as I mentioned Chair: Jim, you were bursting earlier on to make a earlier on, we have a skilled work force in the UK, couple of observations. Are there any other questions from time to time, there will be occasions when you or points that you want to make? need very talented staff who you need to draw upon as quickly as possible. Q90 Jim McGovern: I would like to say to Richard Chair: Okay. Thank you very much for coming along. that I think I said earlier, tongue in cheek, that I We are just about to go on for another hour and a probably see more of you than I see of my wife. You half with Paul. Can I suggest that we adjourn for five talk about getting in touch with politicians; I am not minutes for a comfort stop? If you want to stay to a member of the Government, obviously, but certainly listen to Paul, by all means do so. If, however, you you and I are pretty regularly in touch, and I regularly have to go off, then feel free to do so. I apologise for visit Abertay University, and speak to Professor King the delay at the start; it was because of the votes that on a regular basis. Just to conclude, I would like to we hadn’t anticipated. Back in five minutes. Scottish Affairs Committee: Evidence Ev 19
13 October 2010 Mr Paul Durrant
Examination of Witnesses
Witnesses: Mr Paul Durrant, Director of Business Development, University of Abertay Dundee, gave evidence.
Q94 Chair: I welcome you to the hearing and heard earlier in the evidence, there are 80-plus courses apologise again for the length of time you have had throughout the UK. We are also a university that has to wait. Thank you for hosting us in Dundee at what one third—three out of nine—of the Skillset all of us who were there felt was a very useful and accredited courses in the whole of the UK. So we are productive meeting, which certainly illuminated our focused on our role as a talent pipeline, if you like, understanding of the issues. It has helped with the serving both the local industry and the UK, and on questioning and, indeed, has probably saved us having being a magnet for talent. to make a number of points, because we understood I would like you to think about my evidence in the the issues from the meetings we had with you. The context of us trying to align our objective as a advantage of your having heard the previous witnesses charitable education institution, creating skills that is that you have been able to establish whether or not lead to economic growth, with how we can then you agree with it all. Would you like to tell us whether extend that to help small companies. We have been there are any points with which you disagree, or on trying to marry those two challenges so that, for which you would place a different emphasis than the example, when we help small companies it might people who spoke earlier did? provide work experience for students or graduates; Mr Durrant: I would add, as I said earlier, that I had that might then contribute to talent retention. That the benefit of being part of the industry round table probably sums up our position, but I would be happy session that we had in Dundee, which a number of to drill down into that in more detail, in terms of the Members referred to earlier. I hope I can bring some specific measures that we are undertaking to try and of that perspective to the discussions. achieve that. A lot of the discussion has focused around games tax relief, and we have made clear in our written Q95 Chair: The other point I wanted make, or just submission that we continue to support the idea of a to seek clarification on from you, is that when we games tax relief. From that perspective, we are very were in Dundee and met some people there, some of much agreed with the previous witnesses. One thing, them were not far short of telling us that you were the though, is that we are closely connected with the SME greatest university in the history of the world. Not all community. I know that is a position a number of of those were your relatives, so we have to assume Members have expressed interest in. We are also that that was a generally held view. Why do you think interested in start-ups and creating new IP. For that that they felt so favourably towards you, as compared reason, our interests lie in trying to make sure that to some of the other institutions that would also see some of these young companies have sufficient themselves as supporting this industry, or similar working capital very early in their cycle, so that they industries? I’ve never yet met a university or college are able to survive and grow. One of the challenges that didn’t say it was doing things for business and all with a measure such as games tax relief is that it the rest of it, but we don’t always get the same sometimes comes in a little way into the development enthusiastic response from the recipients of the cycle. It is a retrospective benefit that does not always services as we did in your case. What have you done bring the immediate cash-flow benefits that a SME differently that the others haven’t done? games developer, particularly a smaller micro- Mr Durrant: Let’s take this back a little in history. business, might seek. One of the grandfathers of the Scottish games We talked earlier about the characteristics of some of industry, Dave Jones, was a student at Abertay in the the games companies in Scotland, particularly in ’80s, and some of the small games companies began Dundee. They are relatively small, with some to have quite close links with Dundee. As they grew undertaking work for hire, as it is known, for and prospered, they began to tell us what they needed, publishers or other developers, either to do a whole which, particularly, at that time, was talented software game or certain parts of a game. While we do not see engineers to be involved in programming. Memories that as entirely negative, we also want to make sure of local Industry are long; to a certain extent we went that we stimulate or help those companies to create out on a limb to create our Masters in software their own IP. We have had a lot of discussion about engineering, which is a really tough programme with the value of original IP to Scotland and the UK, and a very high entry bar, and one that suddenly began to we firmly believe that. It is essentially a numbers attract entrants from across the UK to a relatively game. If you think about the innovation funnel, or any small university in Dundee. kind of hits-driven business, you need maybe several As the industry grew locally and matured, people hundred IP opportunities to have a number of hits. We began to see how responsive we had been. Particularly want to try and help small companies create that initially, the university came in for a quite a lot of volume. criticism in the media—ill-founded criticism. People If you can bear with me, I will contextualise that from didn’t understand the high entry bar and the high an Abertay University perspective. We were leaders levels of maths and physics that are required for this in the area of games education, being the first to offer industry, which you’ve heard about from other games development degrees—actually a software witnesses today. So, as the industry began to mature engineering masters—in the mid ’90s. Now, as you and develop, we were responsive and we involved the Ev 20 Scottish Affairs Committee: Evidence
13 October 2010 Mr Paul Durrant industry very much in designing the programmes. helped validate that the course we were taking with You’ve heard a lot about the arts and science this programme was the right one. development. It grew very much into making sure that With employers having seen that we had responded we created arts undergraduate degrees in computer and delivered what they asked for, they then began to arts. Then, around the year 2000, we recognised that ask us for other things. Before we adjourned, I was unless you created this real studio-based learning speaking about how we got involved in the arts side experience, this kind of workplace simulation, where of things, and how we brought arts and science the arts and science students came together to work together and created this whole idea of workplace on real world projects—[Interruption.] simulation. That really is something that is particularly innovative and unique to Abertay in terms Q96 Chair: Do you want to finish the sentence? of interdisciplinary working that is really focused. If Mr Durrant: Yes. That allowed us to create the “Dare you think about taking students on arts and science to be Digital” competition, which has run for 10 years. degree paths and making sure they work together on It has become an international standard, and has been project work that is industry-mentored, industry- part of our very productive relationship with the validated and fits industry standards, that is not British Academy of Film and Television Arts, in terms something that happens everywhere. of recognising young talent. That programme has involved industry mentors and judges. All those Q98 Chair: May I just come back to the question of factors combined—involvement in course design, the the evidence we are receiving from everyone else? Dare competition, hiring talented graduates and seeing You can speak openly now, because there is nobody that the output is fit for purpose—is why industry has except us and the television cameras here. Would you been strongly supportive of us. have a definite emphasis on any of it? I understand Chair: Thanks. We have always got eight minutes for that the general sweep of stuff would be common, but the vote; the more athletic and younger Members what were the other points that you thought they among us can quite easily make that. We have to go perhaps over-egged or underemphasised? and vote, I’m afraid. Mr Durrant: Again, in my opening remarks, for Sitting suspended for a Division in the House. various reasons—because there was a focus and a On resuming— high interest among members of the Committee in the part of your terms of reference that relates to games tax relief—perhaps we did not get enough opportunity Q97 Chair: Maybe we will start again. We were to think about other financial measures that might help touching on what you had done and how excellent it support this sector. I know we touched on it a few was, and so on. The thing that struck me as you were times, but as I was saying in my opening remarks, going through that, in terms of having links with because of our close links with very small companies industry, is that lots of other people would say that as and because we have tried to support a lot of graduates well. I am not quite sure what the USP is in terms of in starting up their own companies, this challenge Abertay. Lots of other people would give us the around having sufficiency of working capital at an rhetoric you are giving us now and it has not quite early stage in the business life cycle is something that worked. Is it about attitude of mind? It is not so much we see as a big issue. We see it as something that the mechanics, is it? Is the main driver of it the games tax relief does not necessarily provide all the attitude of mind that gave you that perspective, and answers for, because of the cycle. then you were able to deal with the unfounded criticism because you were sure you were right and Q99 Chair: Is that, in your view, something that is you had a perspective that was directed towards the unique to this industry, or is it something in general? external industry, and so on? We are trying to identify Mr Durrant: All start-ups obviously have a working what you did and whether we can bottle it and feed it capital challenge, but as we have heard and as we to somebody else. have read in the other evidence, there is this quite Mr Durrant: Certainly, as is always the case with lengthy cycle in the development process that means Abertay University, we carefully considered the that working capital is required in order to get you decision whether to get involved in this area in the through the development cycle and get you to market first place. We saw opportunities in terms of some with a product. Some other start-ups in other international recognition that was happening at the industries are able to generate revenue far earlier. The time associated with our early involvement in games other part of that is the challenges of finding the right technology in Japan, interestingly, and that helped route to market. For those developers who have been validate the path that we were taking with the course. using the conventional model of trying to find a deal Not only that, but our graduates began to speak for with a publisher, who perhaps would give them an themselves fairly quickly, in the sense that because we advance that would supplement their working capital, were responding to industry—I take your point that there is a fragility around the company all the time all universities would say that they respond to the that they are trying to negotiate that deal. Of course, needs of industry, but we were responding within they are not in a good negotiating position either. quite a close network of local companies who had this The other thing that was noted in our written particular need for games programmers—and because submission, around that fragility, was that while it is this was initially a masters course lasting just over one good to have a mix of large and small companies in year, the output was seen fairly quickly to be fit for the ecosystem, what we have seen is that when very purpose. Obviously, a good response from employers talented individuals are involved in start-ups— Scottish Affairs Committee: Evidence Ev 21
13 October 2010 Mr Paul Durrant particularly, talented graduates—they can easily be an honest broker to bring developers together so that hired away by a local, larger company, or perhaps by they can share the risk, the cost of marketing and the companies outwith Scotland. Suddenly, that start-up rewards. fragments, because that member of the start-up was Our intervention in the area is the public funding that unable to pay themselves a sufficient wage to live on we secured from BIS and the European regional and the temptation, because they were highly talented, development fund and contributed, as well as of taking a great job offer was too large. So, there is contributing from the university, in order to create our a fragility around the whole area of start-ups that we prototype funding scheme. Essentially, we are are conscious of. providing grant funding in Scotland and across the UK to small companies so that they can create Q100 Chair: How is that addressed? prototypes that they can use to secure funding or Mr Durrant: We have begun to try and address it in partnership deals of some sort which help to provide a small way with our prototype project, which I’ll the working capital to develop their game and to get discuss. There are, however, a whole range of issues it at least to a point at which they have a commercial that still need to be addressed around having partnership and a route to market. appropriate working premises for start-ups—the In terms of your point about the Minister—Ed Vaizey whole term of “business incubation” is something that launched that scheme, and obviously he is well aware often requires public sector intervention. For this of it. But the scale of it at the moment is relatively particular area and this industry, having the limited; from a non-Scotland perspective, for opportunity for small companies to be in some kind example, about 40 projects will be funded, and in of subsidised premises, or to be collocated with larger Scotland about 40 projects. So, the bias is towards companies or whatever, would be extremely valuable. Scotland, just because of the way that I secured the There is not really the public sector provision for that funding. But actually the reach is relatively limited. at the moment. What we need to ensure is that there are methods and measures that help some of those companies that have Q101 Chair: A lot of that would be devolved, would been in receipt of the prototyping grant to make the it not? When we are meeting Ed Vaizey, the Minister, next stage and to begin to grow and to become none of that is likely to be stuff that he would take sustainable. any of the blame for, or have any responsibility for. On the other point about the banks, those of us who Q102 Julian Smith: Paul, may I ask you a bit about were in Edinburgh also met members of the your job to begin with? Are you looking after business construction industry and the road haulage industry. development for the whole of Abertay, or for this People there were saying, “The banks don’t specific gaming area? understand us either.” The banks not understanding Mr Durrant: Yes. I have worked at the university for their customers is not an unusual phenomenon. What 15 years and in that time have taken a number of roles, I am trying to flesh out here is whether there is most of which have been across the whole university. anything that is unique in your industry which we At the moment I am working across the university ought to be picking up, as distinct from the generic but, because of our high interest in this area, it actually problems or devolved issues that somebody else takes the majority of my time. should be addressing. Mr Durrant: Let’s talk a bit about the challenges Q103 Julian Smith: What other industries? First, I around project finance that provides working capital. compliment your institution—it is a great university. That is something that, from a UK ministerial Secondly, I want to ask a bit more about the other perspective, is still a challenge around start-ups for industries that you work with. After gaming, what are this sector. Again, it is one that straightforward equity the others? investment and venture capital do not necessarily Mr Durrant: We work with a lot. We have quite a solve. high interest in environmental science, particularly We talked a bit about project finance during your visit areas to do with urban water, so we work with to Dundee, but this is essentially a way of funding the utilities, civil engineers and construction companies in development cost of a game, where the returns come that area. We have some involvement in life sciences to the investor of the project finance from shares or and biotechnology, particularly from a skills royalty from the sales, rather than taking an equity development point of view, so we work with a number stake in the business. There isn’t much of a fiscal of the local life sciences companies. stimulus to encourage that type of project. A lot of EIS funding, for example, works around equity-based Q104 Julian Smith: If all the industries that you deal investment. Financial services companies are not an with were sitting here today, in a similar scenario, eligible definition of a company within the EIS rules. would you still feel comfortable with the fact that you So, I don’t know—it was suggested earlier that there’s are, essentially, lobbying for a tax subsidy for one potential to extend or look at the definitions in some industry but not for another? That tax subsidy, way, which could help or support this industry, consequently—inevitably—would take away from the particularly in terms of stimulating other forms of aggregate tax reductions that can be given to the project finance. commercial organisations that you work with as a Finally, I mentioned earlier the concept of the games whole. Would you be comfortable with that? consortium. We see that as an extremely beneficial Mr Durrant: In broad terms, yes. As I said, I support development, where public funding is being used as the idea of games tax relief, but I think that there are Ev 22 Scottish Affairs Committee: Evidence
13 October 2010 Mr Paul Durrant other measures. But to answer your specific point, and help those businesses early in their life cycle. the reason that I and the university would support the Actually, many of those young people who are starting tax relief, is because of the unique nature of this long up companies are prepared to take some pain for some lead-in content development challenge, which is not future gain and they do put up with a reasonable necessarily supported. Now, life sciences has a amount of hardship. massive lead-in, but it also benefits significantly from R and D tax credits, because it fits very neatly into Q109 Julian Smith: But I think that my point would the research definition. It also attracts a lot more be that reductions in employer’s national insurance straightforward investment and venture funding. and a reduction in corporation tax for small business is useful to people starting up a business from scratch. Q105 Julian Smith: May I also ask about the cross- Mr Durrant: It is useful all the time that you are fertilisation of skills? You have your gaming courses paying people, and when they are not working on a and the courses that you described earlier. What sweat equity basis. That often happens in these start- proportion of those graduates go on to work in gaming ups, and in those cases the company would not be companies, versus those going and using those skills benefiting from national insurance reductions. Also, if elsewhere? I know that those gaming programming the company is not profitable, it is not benefiting from skills are incredibly useful for other industries. What corporation tax reductions. sense of the proportion is there? Mr Durrant: Probably about 80% to 85% of our Q110 Lindsay Roy: Paul, how do you gauge the graduates go into the games industry—pretty much value added from students who come into university, core games industry—and the rest elsewhere. They leave and go beyond that? Do you have a mechanism have a pretty high employment rate. to do so? Mr Durrant: We do. We have a particular set of target Q106 Julian Smith: Despite the fact that you have graduate attributes that we work to, which underpin referred to some money that came in from the the programme design for all our courses, not only Government earlier, you would say that on balance, those in games. Those attributes are designed to create with limited public finance, having this tax relief employable graduates who are confident thinkers, who rather than putting more money into your institution to understand complexity and who are able to drive develop skills and spin-offs as a whole from whatever change. We see those attributes as being really industry is a good use of taxpayers’ money. important for the graduate work force of the future. Mr Durrant: It depends what particular uses you are We work very hard to try to achieve that. By way thinking of putting the money to. of example, we have taken the concept of workplace simulation that we developed for games technology, Q107 Julian Smith: I am just looking at it from the and we are applying it across the whole university. It point of view that there is not very much money at is a core part of our postgraduate certificate in higher the moment. education teaching. Our new academic staff from all Mr Durrant: I certainly do not think that it should go disciplines will actually develop similar ways of on the record that there should be tax relief at the workplace simulation. expense of further investment in Abertay University. One would need to make a much wider consideration Q111 Lindsay Roy: How costly is the workplace of the cost-benefit analysis of investing in a university simulation within the overall budgetary framework for in certain ways compared with subsidising a particular these courses? industry through tax relief. Mr Durrant: How costly?
Q108 Julian Smith: My last question is about the Q112 Lindsay Roy: How costly is it overall? Is it an graduates that you have discussed. I am really excited added dimension that you wouldn’t have with other that so many are starting up businesses, and I accept courses? that there is a churn of those graduates out of those Mr Durrant: There will be resource challenges start-ups. In terms of those incentives to get people to around that. It is too early to say across the whole start up businesses, obviously there have been changes university, but where we have worked in games we to national insurance and corporation tax has been have been fortunate, because we have had a strong lowered for small businesses. What do you think are buy-in from, for example, the industry and the policy decisions that need to be considered to practitioners, in terms of their time and involvement. incentivise those graduates to start up companies? Do A lot of it, however, has to do with realigning timing, you think that policy should be focused on subsidies, calendars and resources to ensure that or do you think that it should be creating a more interdisciplinary projects can happen and to ensure benign and attractive tax regime? You talked about that there is alignment between arts and sciences in people wanting the bigger salaries at the bigger the case of computer games. That is something that companies, but surely with lower national insurance we have particularly focused on doing, but I do think and lower corporation tax they can keep more of the that there are opportunities. While I know that it is money that their companies make, which is a benefit. not within Mr Vaizey’s remit—and we touched on the Mr Durrant: That is assuming they make a profit area of higher education funding—for Abertay early on. It is a completely different picture, University innovating in the whole area of workplace particularly when you are talking about start-ups and simulation in the way that we are, there is very little graduates. As we have said, games tax relief does not that we can tap into to try to provide development Scottish Affairs Committee: Evidence Ev 23
13 October 2010 Mr Paul Durrant support or finance that backfills people—backfills role for Government agencies. I am glad that Scottish academic staff. We try to make things like that work. Enterprise was here earlier. Do you feel that the Lindsay Roy: That is very helpful. You have industry is supported enough in that way? answered my next question. Mr Durrant: There are a number of those networks, but this is one of those industries where informal Q113 Fiona O'Donnell: I do not know if colleagues networks work the best. However, one has to be agree, but it is interesting that of the two companies careful that they do not become too closed and we visited, one was growing and seemed to be healthy everyone believes that they are doing the right thing. yet the other had just paid off quite a few staff. There That is why we hope that our talent pipeline, bringing was a different feeling. I suspected that one had a new people from other parts of the UK who become better business model than the other. How much graduates and work locally, helps to have an impact awareness do you give your students of the on that ecosystem. importance of marketing? I do not just mean about There is one other thing that is still important to selling the product, but the testing of it beforehand creating that sort of diversity in those networks. We and the research as well as good product management talk quite a bit about cultural things to do with tax and management skills. Is that valued in the sector? breaks, but there is still a big thing in the media Basically, there was a creative atmosphere, but I generally about the fact that games are not fully noticed a striking difference between the two workplaces: one was succeeding, while one appeared recognised culturally. In The Sunday Times, games are to be struggling. with gadgets alongside Jeremy Clarkson and not in Mr Durrant: Absolutely all of those things are the culture section. On the BBC, they are on the embodied in our courses. It is difficult to comment on technology website not on the arts and entertainment two specific companies. In that context, the one that website, about which I have taken Rory Cellan-Jones had recently paid off staff was going through a short- to task a couple of times, without success. Because term pause because it had other work in the pipeline, of that, the industry misses out on talented people— and it would be rehiring. The other company is talented students and graduates—on the periphery of perhaps younger, more dynamic and on a slightly the industry, not necessarily coming through Abertay, different track. and misses out on them in those networks. Perhaps as the industry matures and it becomes more engrained Q114 Fiona O'Donnell: It was strange actually—I in mainstream culture, that will change. But that is a am sorry to interrupt—but the company that was not challenge, where we will see change over time. doing so well was saying that there was no work out there, and that no one was commissioning it, whereas Q116 Mr Reid: We heard evidence towards the end the other company was saying that there was lots of of the earlier session that the migration cap could lead work. Those two truths cannot exist alongside each to problems recruiting people from abroad with other. certain specialist skills. Why can’t we train people Mr Durrant: One of the challenges that I identified with those skills here in the UK? early on as I began to work with the sector was that, Mr Durrant: I think we are doing that. But, as is obviously in a creative team, you need everyone to be always the way with business in any industry, often a hands-on content creator, and that means that you when there’s rapid growth, one looks for short-term do not always have an entrepreneurial leader. You fixes. As you heard, Realtime Worlds was one of the might be lucky and have an entrepreneurial person companies that had a large number of overseas hires— who is also a content creator. I have worked for a long there were quite a few north American hires. That was time trying to develop graduate enterprise support and partly because of the rapid growth and the difficulty business incubation where you can try to marry that of having people with sufficient experience working kind of creative team with entrepreneurs to make sure in significant sized companies because they weren’t that there is someone in every team who has that real available locally. That will be a challenge again for a go-getting market focus. But it is a real challenge growing industry. because it comes back to the working capital thing in respect of a non-productive member of staff. It depends how you classify “non-productive,” but I Q117 Mr Reid: We heard earlier that the games tax mean in terms of the fact that they are not making relief would be paid to companies that are up and anything. Not building content means that they have running for the cost of producing the games. Will it to be carried, so the company needs more working help new companies to start up or is there another capital. mechanism that can be used for that? Mr Durrant: I do not think tax relief helps start-ups, Q115 Fiona O'Donnell: As a follow-on from that, as I have said. With our prototype funding, we are at the other thing that I noticed from our report of least helping a company that has started up have some Dundee was the existence of personal networks to funding, so that it can create a prototype and do a support people. That seems just a little loose and deal. But that company still has to have sufficient informal. It is great in Dundee that the sector meet, working capital on its own account because, as is the share ideas and support each other and, while the case with all public grant funding, the grant has to be market is healthy, people are probably comfortable incurred and defrayed before we can pay out the grant. doing that because they are working in different In other words, the company has to have some money sectors of the market, but I just think that there is a before it can actually receive the grant. Ev 24 Scottish Affairs Committee: Evidence
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Q118 Fiona Bruce: First of all, I would like to say afternoon? That relates really to what you might call thank you for the visit that we made. It was most the cultural question. One of the things I’ve noted is illuminating for me and really broadened my that you are an international centre for computer understanding of the definition of the video games games and entertainment and that you have academic industry. I was very impressed by some of the research in that field. I want to ask you whether you education that you were bringing forward, for are looking into an issue, which concerns a number of example in relation to the technology and medical us, regarding the kind of games that go online—we’ve provision. got a situation where youngsters only have to type in I am not alone in my view of the value of Abertay’s a date of birth, which can be invented, in order to work. I think that the BBC has stated that the new have access to games that are meant to be for a mature Government have given a “boost for Scottish games audience—and whether you are satisfied that there is industry” by providing a £5 million prototype project sufficient protection where games are played online over time. May I just check some facts and figures by streaming technology, or whether you think there with you, which we have been given in our brief? should be further R and D into this, if we are going Obviously, the project was announced in July 2010 by to invest in an industry with this kind of risk. Ed Vaizey, the Culture Minister. Initially, £2 million Mr Durrant: I think the whole area of analytics will be available from the Government through, I around users and the audiences is a really important think, your university—Abertay—to invest in new one, obviously for child protection issues, and broader computer game prototypes, create start-ups and help things, and purely from a market point of view; but it new companies attract further investment. It is hoped does actually bring me to one of the other challenges, that the project will create 30 new companies, support which is actually, as a university, it’s been very hard 80 existing smaller business and create up to 400 new to secure research funding in this area, because of the jobs. Are those figures correct? interdisciplinarity of it, and because of it crossing Mr Durrant: Those figures are correct, yes—for the many different areas, and because of the rather biased UK. method of research funding that you’ll all be aware of, that operates across the UK. So yes, I accept that Q119 Fiona Bruce: For the UK. It is very interesting this would be a very interesting area. Quite where it to compare that with the figures quoted earlier this could be funded from and how is perhaps a bit more afternoon as a return on the investment for the games challenging. tax relief. There is quite a stark contrast in those figures, not just in terms of value for money, which I Q121 Fiona Bruce: So at the moment you have no will refer to in a moment, but also because what you funding and therefore there is no direct R and D going are offering is a much broader spectrum of assistance into that? than tax relief alone would provide. By way of Mr Durrant: Not into that, no. We actually work very measuring this, the games tax relief at a cost of £192 hard at almost bootstrapping our research in this area. million would create or save possibly 3,500 jobs. To Jim talked earlier about the pervasive technology create the same number of jobs funds via this project thing, and I think you saw examples of that when you would I think cost under £20 million. It is a very were in Dundee; and it is an area that we work very interesting comparison, isn’t it? I wonder whether we hard at to bring this kind of pervasive technology in can honestly say that the tax relief, in a time of stark games to support other areas. I know that doesn’t economic challenge, is really something value-for- answer your question, which is a mix of a number of money, that we can as a new Government look to different disciplines again, but most of those projects fund, when we compare it with the kind of funding have been bootstrapped from quite small amounts of for innovation that you are providing. money that have been secured by academic members Mr Durrant: I accept the points. One of the comments of staff, and then the area developed, rather than being I’d make, though, is that we do need to be thinking a result of significant grants. about how we have a sustainable industry. Obviously our measure is very much to do with trying to generate Q122 Fiona Bruce: There is a pan-European gaming more original IP—part of that innovation funnel—and information body, isn’t there? Do you think the quality really creating the volume of IP; but to have a of that is satisfactory, or is that something that we sustainable games industry in the UK and Scotland we should be looking at if we are going to invest in this need measures that compete internationally as industry? companies hit growth phases. So I’m cautious about Mr Durrant: Do you mean PEGI? the horses for courses kind of thing, where our measure, our grant funding, is particularly targeted at Q123 Fiona Bruce: Yes, I do. the areas at small early stage companies rather than Mr Durrant: As Michael Rawlinson described earlier, high growth companies. the use of that system is enshrined in law and practice now in the UK and we actually worked with PEGI Q120 Fiona Bruce: I appreciate that you are even on our Dare to be Digital competition. All the cautious, but what we have is a limited pot, so it is a games were rated by PEGI for us before we put them matter of looking at how we can make the money go on show in the Edinburgh festival. So we are totally as far as possible. This is why I was very interested supportive of that system. to make that comparison with you. May I ask you a completely separate question, but Q124 Fiona Bruce: But there is more work to do in related to topics that we moved into earlier in the that area? 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Mr Durrant: There is a difference between certifying and supportive of, provided that we could access the products—we had that debate earlier—and the access appropriate funding. issue. Those are two different things, and there is a whole mix of sociological issues around that in terms Q128 Cathy Jamieson: And the third point was in of families—issues of access to computers and all relation to what you would see as the priority. sorts of things. It is an area that is fertile ground for Mr Durrant: I am biased because I am working with people to understand more. small companies in trying to stimulate and to take our prototype funding scheme to a point where those Q125 Cathy Jamieson: I want to pick up on a couple companies that have the prototype grant are of points that have been made and to ask a version of sustainable. That is why I am looking for much earlier the question asked about the recommendations. leverage. That is why I want to align the prototype First, given what was said about one of the problems funding with the games consortium that NESTA is being short-term, with people having to be laid off, stimulating. I think it is an excellent opportunity to cash flow and the rest of it, should one of our see developers working together on this kind of shared recommendations say that it would be more cost- risk and reward basis. You can imagine that if a effective to have a pot of money that funds could developer in that consortium was in receipt of apply to so as to keep people on; they could be prototype funding, there is a win-win because their involved in some socially useful work, perhaps in route to market costs are reduced, the risk is reduced conjunction with the university, rather than simply and they have a potential for returns coming from being paid off and put on the dole, with all that goes some of the other companies within that loop. So I with it? think there is a very good win-win with that. Secondly, given the questions that Fiona has raised, The fact that our prototype project might help people should one of our recommendations be to look at R to pick winners earlier might stimulate types of and D, particularly on child protection issues, and get project finance to come in to some of these young over some of the barriers that exist? companies, and that is also very important to me. Thirdly, we heard from the other panellists earlier that The hard question that Cathy is asking is about which tax breaks was the No. 1 priority. Would you see that one I prefer. From the perspective of my direct as a priority, or do you think that we should be involvement and Abertay University’s direct recommending something else? involvement with these companies, it is these kind of Mr Durrant: Okay. Three questions. What was the measures that will very much help companies at the first? early stage. Coming back to the point that Fiona made, however, we still need to see how we can have a Q126 Cathy Jamieson: It was about the stop-gap sustainable sector, in which we can support growth. funding to stop firms having to pay people off. Mr Durrant: It is an attractive proposition, but there Q129 Mark Menzies: First, I would like to thank are challenges around it in terms of state aid rules. Paul for the time that he took when we came up to Obviously one cannot just create funds that hand out Dundee. I was very impressed and I learned a lot from significant chunks of public funding directly to the time we spent out at Abertay. companies, without caution on state aid, but I think One of the things that I went away with that day was there is an attraction to it. What is useful to think a feeling that not only is Dundee a great centre of about is that much of what we compared in our earlier excellence around Abertay but there is an opportunity discussion on Canada related to employment to do so much more. I want to touch on how we can subsidies. Our discussion did not touch much on the use business rates or other forms of “subsidy”—or fact that a lot of the attractiveness of Canada is around whatever label we want to use—to make Dundee a employment subsidies, particularly in terms of its real centre of excellence—more so than it is at the equivalent of employers’ national insurance moment—and a bit of a hot hub, so that we have a bit contributions; some provinces offer a two-for-one of vertical flow-through so that all the money that is opportunity for people bringing in new companies. generated in Dundee can stay in Dundee and get There is no suggestion in the UK at the moment that reinvested. I wonder what thoughts you have about one might be bringing in employment subsidies like what we or the Government can do to bring that about. that, but perhaps it should be something that could be Mr Durrant: Yes, certainly in terms of that local looked at. It could be done on a regional intervention ecosystem that we talked about—the cluster effect— basis. In terms of your question about direct links to things can be done. I mentioned earlier the challenge employment and retaining employees, although I am of working premises and that really is a key area that keen to see lots of finance coming to projects, in the needs to be addressed. If there were ways of providing context of your question employment subsidies would subsidy for that, obviously that would be good. But be a measure. there is a kind of shopping list and priorities. Your second question? As is always the case, a joined-up series of measures that particularly focuses on the Dundee cluster would Q127 Cathy Jamieson: My second question was in obviously be very beneficial, because of the way that relation to R and D, particularly around some of the it could help to start and grow that type of ecosystem issues that Fiona raised on child protection. and make it more robust, creating some companies Mr Durrant: Again, a very interesting area, most with growth. suited to Abertay’s interdisciplinary approach, and The key thing that I really want to happen as a result one that we would be very keen to be involved in of Abertay’s talent pipeline is for it to lead to inward Ev 26 Scottish Affairs Committee: Evidence
13 October 2010 Mr Paul Durrant investment. We have seen some inward investment, industries, it tends to be technology-led rather than where companies have come to the city knowing that content-led, probably because of its title. But that does the university and the talent pool are there. However, not necessarily always help the type of company that I think that Scotland generally—and even the UK as we are trying to support or the university from the a whole—very rarely has a big win in this digital perspective of trying to develop the pervasive interactive sector from the inward investment technology of games and apply it in other disciplines. perspective and it would be very good if we could As we have all seen, there is significant opportunity pull that off by some kind of joined-up measure, such in that which we have begun to scratch the surface of as the one that you just described. at Abertay University. Certainly from a research and development funding point of view, there is an Q130 Mark Menzies: That is good. The other opportunity there. We have talked at length about the impression that I got was about the availability of type of measures that could help to stimulate project finance. People have already touched on the banks’ finance for companies that are going to help to willingness to lend, particularly in the very early reinforce start-ups and provide them with working stages of a company or a new game. In terms of capital and business premises early in their life cycle. “angels” or investors—whatever title you want to give Again, that is very important. them—how do they work when it comes to the games industry? Are there any specific people who need to Q133 Jim McGovern: Professor King also pointed be recognised in this field in the case of Dundee? out that the overwhelming number of graduates from Mr Durrant: Certainly there have been some Abertay University who study the computer games successes from angel-type investors and standard industry do not go on to become employees. They plain vanilla equity investors. However, it comes back want to be entrepreneurs. They want to start up their to my earlier point that there is a bit of a challenge own businesses. Is that a fair comment? around funding content from equity-type investments, Mr Durrant: Because of the history of our close because essentially that investment can be used up association with previous students who have gone on very quickly, before the product gets to market, and to start up businesses, there is that cultural ethos. But then suddenly a fragility creeps in around that as I said earlier, turning that into reality where you company. It either has to raise further finance with need hands-on content creators and you are expecting significant dilution, or it ends up handing over its IP them to be entrepreneurial is still a big challenge and to a publisher to get the project finance or the advance one on which across the UK we don’t match up to the that will take it to the next stage. US, for example.
Q131 Mark Menzies: Dundee is a centre of Q134 Julian Smith: Very quickly, there seemed to excellence, but you are not the only one in the UK. I be a slight contradiction in your evidence because you was wondering how you share best practice with talked about national insurance incentives in Canada, Salford or some of the other universities, for example. but the Government now have a national insurance Mr Durrant: The prototype project is UK-wide and holiday for regional start-ups. we intend to work with universities across the UK. Mr Durrant: Yes, okay, but we have yet to see the We are in the bid for the funding that came from BIS. effect of that. We are associated with the MediaCity initiative in Salford, and as that develops there will be ways that Q135 Julian Smith: I’m glad that you think that is we work with them, and as a result small companies in possible. Secondly—this is not meant to be those regions will benefit from the prototype funding aggressive—£5 million in this environment is because it is being granted on a UK basis as I staggering. It is not my job to tell you what to do, but described. my biggest message is, “Go away, lever that capital that you have been given and get money from Europe Q132 Jim McGovern: First, thank you very much and the private sector.” That is a staggering amount for coming along here. Hopefully the Committee is of money. I am not sure what the report will show, now better informed than previously, but the visit to but if there is a tax break on this industry it will make Dundee was excellent. I suppose I should just cut to “Grand Theft Auto” look a bit timid. In this the chase and ask what the UK Government could do environment, your university has a great boost and to support the computer games industry. When I say should make the most of it. You are doing great work, “computer games industry” I would reiterate a point I but I don’t think there will be a lot more in the kitty. made earlier: it is not just about people sitting in front Mr Durrant: I stress that that total includes a mix of of a TV screen playing games. There is a lot more to sources. It already includes European regional it than that. As Professor King said, there is pervasive development funding, money coming from Abertay technology. What more can the UK Government do to University and from reserves, and some £2.5 million support that? of it is from BIS. Mr Durrant: Let me pick up that last point first in terms of the pervasive technology thing. As I alluded Q136 Julian Smith: But you are pleased with it? to earlier, some of these definitions can be quite Mr Durrant: I am pleased with it, but I will be even challenging from the way that research councils work more pleased when I have achieved the targets that and the technology strategy board works in terms of Fiona has described. their funding and grants. Although the technology Chair: Thank you very much. I apologise again for strategy board has ways of granting to the creative holding you all so late because of the delay at the Scottish Affairs Committee: Evidence Ev 27
13 October 2010 Mr Paul Durrant beginning. Let me say to the members of this this long meeting, and also the one surviving member Committee that my understanding is that the minutes of the public, who possibly deserves a medal. will be available from tomorrow. I thank the staff for Ev 28 Scottish Affairs Committee: Evidence
Wednesday 20 October 2010
Members present: Mr Ian Davidson (Chair)
Fiona Bruce Mr Alan Reid Cathy Jamieson Lindsay Roy Jim McGovern Julian Smith David Mowat Dr Eilidh Whiteford ______
Examination of Witness
Witnesses: Edward Troup, Managing Director, Budget, Tax and Welfare, HM Treasury, gave evidence.
Q137 Chair: Good morning. I wonder, Mr Troup, for it, but I think it was perfectly designable if we had the record, could you just tell us who you are and continued with it. what your position is? Edward Troup: Yes. I am Edward Troup. I am Q140 Chair: Can you just clarify for me a little more Managing Director of Budget, Tax and Welfare at about what were the difficulties exactly of targeting the Treasury. this on the industry? Edward Troup: I am in danger of going beyond where Q138 Chair: You are aware that we are looking at we actually got to, but as we have seen with the film the video games industry. Particularly in this session, tax relief, which has taken 30-plus years to develop in we want to look at the question of taxation and its current form, initial attempts to define qualifying support for the industry. Can you just start off by expenditure for films ran into quite a lot of trouble. clarifying for us why you believe that the tax relief We ended up giving huge amounts of tax relief to that was initially endorsed by all the political parties people who invested in television series and television before the election was poorly targeted? programmes, and it took about 30 years until we Edward Troup: I am not sure I would say it was actually got back to the reforms inÐI am sorry, I can’t poorly targeted. It was targeted at the video games remember exactly what year it wasÐthe film tax industry. The current Government, having looked at industry three or four years ago. this and having looked at its overall approach to how Obviously we learnt a lot from that but I can’t say best to support the economy and growth, has taken the exactly how those problems would be replicated in the approach that, actually, the best way to support growth video games industry. Video games have some is through stimulating the economy as a whole by not similarities to films in its production and development picking particular sectors but by reducing the cost of techniques, but it is not exactly the same and it wasn’t taxation. just a matter of taking the film tax credit and crossing Chair: I understand that. We are going to see the out “film” and putting “video games” in. I am sorry, Minister in a little while. Indeed, no doubt, because we haven’t done the work in detail I can’t somewhere he will be lurking and listening to this, I actually tell you exactly what the problems would be. would have thought. Yes, we had noticed he is here. Edward Troup: I think you will find he is here. Q141 Chair: Can I just clarify though? Was there anything about the video games industry and its Q139 Chair: I just want to pursue with you the structure that makes it particularly difficult to draw up question I actually asked, which was whether or not a targeted tax relief programme? this tax, as proposed and endorsed by the three parties, was poorly targeted. Can you just clarify for me who Edward Troup: I don’t think so. Any targeted tax you believe the proposed tax break was targeted at relief is difficult to design simply because one and were there any disadvantages in that approach? person’s view of whether they work in this industry Edward Troup: First of all there was an or that may not be the same as somebody else’s view. announcement, as you know, earlier in the year that I don’t want to try and take parallels with other there would be a video games tax relief but that the businesses but— details of it would be consulted on with the industry in order to get the design and the targeting right. Q142 Chair: It would be helpful, actually, if you did. Obviously, the General Election intervened so we did If you assume that we don’t know very much at all, not get to the point of detailed design. We had looked which is always a good idea with MPs, it would at the existing film tax credit as a precedent and we probably help us understand the position. I see when had obviously seen the report from the industry. I said that a couple of people behind you are nodding. I think what I can say is that in looking at any support Edward Troup: I am glad they are being helpful. like this there are problems with targeting simply Again, you have got to realise I do not have a very, because very few industries are completely hermetic very detailed knowledge of this industry. My and defining who should benefit from the relief and responsibilities extend across the whole of the tax how they should benefit creates boundaries at which system, so I am aware of and have been briefed on people who are just outside complain. So we were this industry but not in the details of exactly who having some trouble working out exactly how to target does what. Scottish Affairs Committee: Evidence Ev 29
20 October 2010 Edward Troup
To take an example, we are interested in other Q145 Jim McGovern: I would certainly appreciate industries—and we have had representations about if you would forward those figures that you didn’t this before—about innovation, high-tech industries want to quote to me? promoting high-tech activities. If I say to you a “high- Edward Troup: I am happy to quote them. I don’t tech industry”, you probably think as I do, of my want to enter into a sort of, “My figures are betters iPhone or whatever it is but, often, what actually adds than yours”. value to these things are rather odd products like the kind of glass they use in the screen or the little plastic Q146 Jim McGovern: Part of the problem, certainly switch or something. Whoever is working designing with TIGA, the games association representative, is better plastic switches or better glasses for screens that prior to the General Election the Secretary of wouldn’t necessarily see themselves as being part of State for Scotland visited Dundee, the Chancellor a high-tech industry if a minister stands up and says, visited Dundee, a Minister from BIS and a Minister “We are going to have a tax relief for high-tech from Culture, Media and Sport. Following these visits, industries.” the then Chancellor, Alistair Darling, announced tax As I say, I have not been into the details of exactly breaks for the computer games industry. Between how the video games industries work, but there will March, when that was announced, and June, when we be problems of that kind; there will be the issues of were told it wasn’t going to happen, there seemed to people writing little bits of code and the artists who be no consultation whatsoever. Have you any idea? are providing support. Do these benefit from the tax Edward Troup: I know that you met the Exchequer relief or not? Secretary, David Gauke, last week and I am sorry I I don’t want to overstate the problems because I am couldn’t be at that meeting. I think you did raise this quite confident the Treasury and my colleagues in with him and I believe that he told you that the Revenue and Customs would, if given the chance and Treasury and Treasury Ministers had to put together given the remit, be able to write a set of rules, as they the June Budget obviously in less than 50 daysÐ47 have for the film industry, which define the relief. So days, I think it wasÐand that clearly limited the time I am sure we could do it. Whether everybody agreed available for consultation. But there were meetings that was well targeted I couldn’t say. with officials during that period, I believe. Generally, what has happened with all of the reliefs that we have introduced over the years is that at the Q147 Jim McGovern: Officials of? boundary the people who are just outside come back Edward Troup: Let me just check, but I believe that and say, “It is not very well targeted. You have the games industry met with officials in BIS and over-targeted it. You have missed me out.” I am sure DCMS. I am not sure that they met during that period exactly the same thing will happen here. But this with officials from the Treasury, but obviously we had would be possible. We could do this if we wanted to. had a number of meetings over an extended period There would be issues; there would be boundary with representatives of the industry. So while there wasn’t full consultation there were— issues, but it would work. Jim McGovern: A good Scottish surname, Troup. Q148 Jim McGovern: Edward Troup: It is, indeed. There is a Troup tartan Can I just clarify that between March and June meetings were held with officials I am told, but I don’t possess any. from the games association? Jim McGovern: I think it originates in Forfar. Edward Troup: Let me not go on the record and say Edward Troup: Yes. that definitely happened, but I do recall being told there had been meetings. I am not sure that, in a sense, Q143 Jim McGovern: With regard to the it really alters the point that David Gauke made to you comparison that you mentioned about the British film that, actually, we had to put together the Budget for industry, are you aware that the games industry June at very short order. generates as much for UK GDP as the film industry? The film industry gets some £110 million a year tax Q149 Jim McGovern: What David Gauke said was relief. that there wasn’t time to have many meetings. I said, Edward Troup: I don’t want to sit here and do too “Did you have any meetings?”, and he said, “No.” much of a classic Treasury thing of bandying figures Edward Troup: No. I have just been handed a note. around, but I am told that the video games industry, There were conversations with Treasury officials after based on 2008 figures, contributed £386 million to the election but there were no actual meetings. GDP. I am told that the film industry, based on 2009 figures admittedly, contributed £4.5 billion. Q150 Jim McGovern: Treasury officials and whom? Edward Troup: The industry—representatives of the Q144 Jim McGovern: But you don’t want to quote industry. I have not got the names and details but I figures? am told there were conversations. The industry spoke Edward Troup: I don’t want to bandy figures around. to Treasury officials, but there were no meetings. I am very happy to quote them. That would suggest the film industry does contribute 10 times as much to Q151 Jim McGovern: We have already heard from GDP as the video industry. Obviously, we would love the Chair that both parties who are now in the the video games industry to contribute 10 times as coalition had said prior to the General Election, “We much because that would be very good for the support tax breaks for this industry”. Why was it economy. scrapped? Ev 30 Scottish Affairs Committee: Evidence
20 October 2010 Edward Troup
Edward Troup: What members of the current network for promulgation of the existence of tax Government said before the election I think is schemes. There is quite a healthy relationship there something you must take up with them. In terms of because it doesn’t cost Government anything and, the reasons why it didn’t go forward, again, David generally, the professional firms are very keen, by way Gauke, I think, when you saw him last week, said the of their own advertising, to go around telling their Government wasn’t keen to extend the number of clients that this scheme or that scheme exists, to reliefs in the tax system unless there was strong mail-shot everybody in the film industry and say, “Are evidence of market failure. There had to be strong you aware that this tax relief exists?” So, actually, the evidence to support any intervention. As I said at the market is quite efficient at transmitting the details of beginning of these comments— tax schemes out to businesses when they exist.
Q152 Jim McGovern: Presumably, these decisions Q156 Lindsay Roy: So the responsibility doesn’t lie are made on advice from people like yourself? with you in terms of advertising. What about the Edward Troup: Indeed. monitoring of uptake? Is that a role that you have? If the uptake is small, what action do you take to try and Q153 Jim McGovern: Do you believe this sort of address that? one size fits all? Do you think that is appropriate? Edward Troup: Let me take that in two parts. First of Edward Troup: Me and my colleagues’ role is to give all, the monitoring uptake is done principally on tax advice. I think we set out and the question of what schemes through Revenue and Customs, through their advice we gave is a matter between us as Ministers, own data collection and obviously with, I am afraid, but there are clearly choices between selective something of a time lag, because of the nature of the intervention to industries and an approach which seeks business tax return cycle. HMRC will collect data on to create the conditions for growth more widely in the particular schemes from the corporate tax returns of economy. This Government has been clear that it is companies and the self-assessment returns for more in favour of the latter than the former, but I do unincorporated businesses. Those are all collated think this is a question of direction of choice rather together. Again, I think you will have to ask BIS how than, “We are definitely only doing this and definitely they collect data on business finance schemes, but it not doing that.” But in this case the view, as I have does happen. said, was as expressed to you by David Gauke last So far as tax schemes are concerned, yes, we do week. monitor them. First of all, there is what I might call the crude monitoring of just working out how much Q154 Lindsay Roy: Good morning, Mr Troup. Can they cost each year and we do publish, on a regular you tell us how you have made the SMEs aware of basis, the cost of individual tax reliefs. It has not different schemes where additional finance might be always been published every year but I think it has forthcoming to support them? for the last few years so that we do know how many Edward Troup: Sorry, tax schemes or business businesses benefit from any particular scheme and finance schemes? what the cost is. At a policy level at the Treasury, with the teams that Q155 Lindsay Roy: Tax schemes and additional I am responsible for, we do seek to keep all of the tax finance. reliefs under review. Clearly, the amount of resource Edward Troup: Right. I think you probably need to and effort we can put into reviewing any particular ask representatives of the Business Department about scheme does depend both on ministerial priorities and business finance schemes because it is not the on our own resource, but we would seek to keep an Treasury’s role to communicate business finance eye on the schemes and see whether they were issues to individual businesses. But, obviously, there continuing fit for purpose. I suspect it is probably the is an extensive Government network and there have case that existing schemes are not being withdrawn as been a number of bodies around the country quickly as perhaps they should be when they have sponsored by BIS as well as the Department itself fulfilled their purpose or failed to fulfil their purpose, which communicate and manage the various business but Ministers do come back and look at schemes finance schemes. pretty regularly on the basis of our advice, which So far as tax schemes are concerned, if we have a tax ultimately is driven by the data from HMRC. relief, again the Treasury doesn’t go out and advertise to taxpayers. But once the Government has decided Q157 Lindsay Roy: There is a purpose to that it is going to introduce a particular scheme it is monitoring. If the monitoring indicates a low uptake obviously very keen that one way or another that is what action do you take in relation to advice to the communicated to those businesses or individuals or Treasury? whoever it is who may take benefit of it. Edward Troup: Again, the question of our advice is In some cases that may be down to HMRC and so in between us and Ministers. But if you look back at a number of the reliefs that are available, the the historical record and see what has been done with availability of—I don’t want to pick examples but schemes, there have been two approaches generally. HMRC have had advertising schemes which have There has been an approach that, where there has been effectively notified individuals of their entitlements. low uptake of a scheme and the evidence shows that I think I am right in saying that in relation to business actually it wasn’t fulfilling its purpose, it would just schemes there has been a greater degree of reliance be withdrawn on the basis that it wasn’t doing what it on the tax agents and the accounting firms as a wanted to. Generally, when that has happenedÐand, Scottish Affairs Committee: Evidence Ev 31
20 October 2010 Edward Troup again, I don’t have any specific examples in my and it creates 100 jobs, the revenue which is directly mind—Ministers have been keen to find some other attributable to those jobs is additional cash for the way of pursuing the policy end because the policy Exchequer. objective has remained good. The other approach—and there are a number of Q160 Mr Reid: That is right but in this case, as I am examples of this—is where the schemes have been sure you are aware, TIGA assume or are alleging that tweaked, where if the scheme has not succeeded at these are trained people who are moving to Quebec first then, on the basis of advice from ourselves and because Quebec gives a very high level of tax relief. HMRC, some expansion of the scope of the relief or Have you done any surveys, any analysis, to work out change of the qualifying criteria has been made to how many people would leave the country if you increase uptake. don’t give the tax relief? Edward Troup: No. This is an extremely difficult Q158 Lindsay Roy: Finally, how do you know it is question to answer. This is not the only industry or not fit for purpose, for example, just where is it the only circumstance in which claims are made that advertised? we need to provide support because otherwise we will Edward Troup: I think there are two points. lose talent to the UK. The approach the Treasury takes Generally, most tax schemes people do know about is both looking at the micro-economics, looking at the one way or another for the reasons I have said, details of industry, but obviously we have to look at although there is evidence that there are businesses the economy overall. who are unaware of some reliefs. The question of Part of the assessment of how much revenue we are whether it is fit for purpose, in a sense, probably going to get in total and from individual taxes does brings us back to video games. Does the analysis depend on assumptions or forecasts about show that the impact on business behaviour and employment, about migration. We can’t, in a sense, activity, investment, employment, whatever it is, first start adjusting our forecasts because we say, “Oh well, of all exists, that it is material and it represents good we think this might keep 50 people or 100 people value for money, against the criteria which Ministers from leaving the country.” It is the aggregate level of may want to apply? Of course those criteria may employment in the UK and migration to and from the change from time to time. UK which ultimately drives our view on tax revenue. So, although I am perfectly prepared to believe that Q159 Mr Reid: Before the decision was taken were you could find an individual who would say that his any calculations done as to how much the tax relief or her choice would have been different and they would cost and, also, how much extra income would would have left the country, it is extremely difficult come into the Treasury because of people who would for us. It is impossible for us, effectively, then to say, otherwise not be working in the industry, working in “Oh well, that makes it worthwhile because this is the industry and paying taxes? part of a much larger aggregate picture of employment Edward Troup: On the first part of that question, you and migration.” will have seen from the Budget book in March that Chair: I wonder if I could ask if you could keep your we had estimated £50 million a year as the cost of the answers a little shorter because we are obviously relief. I don’t have in front of me the details of how trying to get through. We have in the past had that was calculated, but I think it was broadly people—witnesses—who have tried to play with a consistent with the level of tax relief which TIGA had straight bat as long as possible. I am not suggesting asked for in its submissions. for a moment— The question of what the fiscal impact would be of Edward Troup: I am here as long as you want me for. any relief—and, obviously, I have seen the analysis Chair: Fine. I have got something on at 7, so we are which the industry has put together—is more difficult. hoping to reach the Minister before then. I think we do take issue with some of the claims there. Edward Troup: I will need the Domino’s Pizza’s I think, without getting into numbers, this is about number if you are going to go on that long. what happens if you create a job. Particularly if you create a job with an individual who has graduate-level Q161 Mr Reid: Have you done any studies of how skills, that person may, immediately before he or she many people who were working in the UK games got the job, have been sitting at home looking for a industry have moved to other tax jurisdictions with job, but if that job had not been created, you would games tax relief? have to say, what would have happened? Would they Edward Troup: No, we don’t have the resource to do have spent the next two, three, four, five years sitting that. Obviously, we have seen the industry at home wondering where their job was going to come information. from? Of course the answer is generally not. They would have gone and got a job somewhere else, a Q162 Mr Reid: Just a final question, on a point of different job, possibly a lower paid job, possibly a principle, if another tax jurisdiction puts in a tax relief better paid job. But unless they left the country or that attracts people away from the UK, should we stayed permanently unemployed they would have retaliate or should we just ignore it? entered the labour market, they would have started Edward Troup: I think that is a wider policy question. contributing through PAYE and National Insurance We do not think that it is efficient on either a global and we would have had tax revenues from their or a national level to enter into economic competition. activities. So it is simply not right to say that, if we The principles of free trade and good economics introduce a tax relief or indeed give a cash subsidy would say that, actually, resources should be allocated Ev 32 Scottish Affairs Committee: Evidence
20 October 2010 Edward Troup to where they can be most efficiently used and that Q167 David Mowat: You did say earlier that your is in everyone’s interest. So if another country seeks, group in HMRC was responsible for looking at the through tax or cash subsidies, to attract business, this efficacy of tax systems, withdrawing them or adding is not something which we would favour. new ones? It is a policy issue for Ministers but, certainly, I think Edward Troup: Yes. the Treasury orthodox advice would be not to seek to retaliate simply because you get into mutually assured Q168 David Mowat: So, that being the case, it destruction territory. Where do we stop? would seem that it is slap bang in the middle of your responsibility to understand the distinction between Q163 David Mowat: TIGA last week said to us— the video games industry and the film industry and and the numbers I think are consistent with what you what it is that makes one worthy of Government said—that the cost of the tax relief was £192 million money and the other not. and it would create 3,500 jobs, which on the face of Edward Troup: I think two things. First of all, the film it is quite expensive; it is £60,000 a job. They also tax relief, which has had a long and slightly chequered said, though, that there would be consequential history, is now only costing the Exchequer about £95 revenue of £400 million. They actually said those million or £100 million a year. It is supporting an numbers were broadly agreed with you. I guess what industry which, as I say, contributes £4.5 billion to I am hearing is that the revenue one is the one that is GDP. So in terms of what the relative cost of this more difficult to have a view on. relief is and therefore if Ministers asked us, “Should Edward Troup: I am afraid we don’t agree those we get rid of it?”, we would say, “Actually, it is numbers. I know that they have said in public that we pretty cheap.” have agreed those numbers. We haven’t agreed those The second thing, as I say, is that this has been in the numbers. landscape for a very long time and the global film industry is adapted to and, in a sense, is slightly Q164 David Mowat: Okay. So those are their dependent on the existence of tax reliefs around the numbers? world. Edward Troup: Those are their numbers. I recognise If you are asking me is that where we might be with their numbers and I understand their methodology, but the video games industry in 20 years’ time, that is we disagree with it. an interesting question, and how Government would respond if every other country in the world in 20 Q165 David Mowat: I guess my question then is, years’ time was supporting a video games industry what is it about the film industry that, in your view, with massive tax and cash subsidies, I think would means they should have a tax credit—a tax relief in probably be quite difficult for Ministers. But at the this way—that does not apply to the video games moment both the global framework and the cost— industry? sorry, the Chairman is trying to stop me—don’t make Edward Troup: I think that is a difficult and this worthwhile. interesting question. First of all, the film industry, of course, has had support from Governments Q169 David Mowat: Just finally then, the fact that successively over a very extended period of time. It is we are discussing both of these industries, is the an interesting question as to whether, if there were no reason that their tax relief is even considered relief for the film industry anywhere in the world, the principally because the industries are very movable Government would seek to introduce it. So, to a and therefore the revenue can just move, or is it certain extent, this is something which has built up because there is a cultural element here that somehow over time. Whether it leads to better outcomes for the we perceive as being a good thing to have them done global film industry I am not sure. It definitely does in our country? support the UK film industry in a world in which other Edward Troup: I think what I would say is that sitting Governments worldwide do give support for their own where I am, an awful lot of industries come and see film industries. my teams and argue for tax relief—really an extraordinary number of industries. I have just come Q166 David Mowat: That argument cuts just the from breakfast with senior representatives of the same way as for video games, doesn’t it? Your first property industry who think we should reinstate empty point in respect of the film tax credit was that it has property relief. We have had quite a lot of lobbying been there for a long time. That doesn’t seem a about that and I am sure Members here have had brilliant argument. lobbying on all sorts of things. Edward Troup: The UK does have critical mass of I think what is different about this is that this is quite infrastructure and creative and technical expertise in visible. Whether that is a tribute to the industry and the UK to support the film industry. There is a very its ability to mobilise public and political opinion strong cultural element in the British film industry, as behind it or whether there is some intrinsic difference there would be required to be for any video games in this industry I don’t know. But, certainly, sitting support. So I do recognise that they are in the same where I sit and seeing a whole lot of papers and notes space, but I think I will probably just go, again, back and submissions coming across my desk, actually to my opening answer and say that the Government is there isn’t much to distinguish this from other making choices about new reliefs and its choice on industries who claim that talent is going abroad, that this is that it doesn’t feel there is sufficient evidence investment is needed here, that tax relief is the answer. of market failure to justify intervention. This is a good report, but, to be honest, there are other Scottish Affairs Committee: Evidence Ev 33
20 October 2010 Edward Troup industries which if you substitute their name for video compare it with how we could use other public funds, games in this report it wouldn’t look that different. say, for that scheme. I am interested that you say the figures that we were, Q170 David Mowat: The difference is, though, the I think, rather confidently given by TIGA are perhaps cultural element, isn’t it? What I was just trying to get questionable. They say that the games tax relief would to is why films got it in the first place because it was cost around £192 million and would create or save perceived to be good to do these sorts of things, around 3,500 jobs. What you are saying is that to look whereas property isn’t so sexy in that regard? at the creation or saving of those jobs without looking Edward Troup: It could well be. Obviously, in a at wider economic indicators, like other jobs that they sense, the cultural thing has now got tied up with the may be able to fall into, is really not something that fact that within EU rules we can’t give any tax relief can be confidently forecasted. That is interesting for a specific sector unless it falls within one of the because, when we look at the figure of £60,000 per exceptions of which a cultural element is one. So it is job which that scheme would create, that is a very difficult to say whether that has driven the claim for high figure. What you are saying is that that is based relief or whether the shape of the relief has been on unreliable indicators in the first instance. driven by the EU State Aid Rules. Comparing it with the Abertay University scheme, we had a witness at our last hearing from Abertay, a very Q171 Dr Whiteford: Thanks very much and thanks senior representative there involved in training young for being with us this morning, Mr Troup. You are people in computer skills and also in the pilot projects probably aware that Troup is part of my constituency that they undertake with small businesses in the area in Banff and Buchan. Troup Head is an important which they bring into the university. So they are nature reserve. cross-fertilising skills. They are not just providing, if Edward Troup: Excellent. My father has a photograph you like, cash benefits. They are really building skills of himself at Troup Head. into our young people in the next generation. Now, the witness there said that for the £2 million Q172 Dr Whiteford: I am conscious of time, so I which has been announced will be given to boost the will just try and restrict myself in my questioning. In Scottish games industry through the Abertay reaching the decisions to back away from a tax relief University training, they are confident—and we are system that was backed by all the parties prior to the looking at a professional who has been working in the election, were any direct comparisons done with the field for many years, working with small businesses, tax regimes in the countries that are direct competitors so indigenous businesses—they will create 400 jobs. in this sector, particularly France and Canada? That is £5,000 a job. Mr Chairman, you will be very Edward Troup: First of all, I have to go back to the relieved to hear that actually I am only asking for a point that the advice we have given to Ministers is very short answer. advice we give to Ministers. But, obviously, in doing Chair: Right. our own analysis, hence I think you would be entitled Fiona Bruce: Can we honestly say that the games tax to assume in giving our advice we have looked very relief is value for money when you look at how we carefully at the global position and we are very aware can use funds to promote our indigenous businesses and obviously the industry has been very good at in this field in that way—£60,000 a job on unreliable pointing out what reliefs there are in Canada, bits of indicators; £5,000 a job to the professional training? the US and, to a limited extent, in France. So, yes, we have done the comparisons and I know Canada Edward Troup: I did see the evidence from last week stands out. and I thought it was very interesting. I am not an It is quite interesting in relation to Canada that they expert in these areas, but it did seem to me that this first of all have a Corporation Tax rate which, was quite an impressive return for money and Mr although they are bringing it down, is very much Vaizey may want to say something about it. But if the higher than ours; and they do have much more of a question is do I agree, from a Treasury perspective, culture of giving certainly at a province level tax relief that £5,000 a job is better value than £60,000 a job, for all sorts of things, some of which are quite even if I accepted that number, did I think that was a unusual, like processing pig manure and things like good thing, I would say, yes, it sounds like better that. So there is a different economic approach. value for money. Again, coming back to my opening remarks, the Chair: That was a surprising answer. Canadians appear to have taken more of an approach Fiona Bruce: Thank you. That is all I want to ask. of more selective tax reliefs, rather than a broader approach to supporting growth, at least in relation to Q174 Cathy Jamieson: I just wanted to pick up on these industries. a couple of points in relation to some of the cross-departmental work that is potentially going on Q173 Fiona Bruce: I just wanted to tease out some in relation to this because the written submission came further detail regarding some of the points raised from DCMS and BIS talking about consulting around earlier and, really, compare and contrast this proposal a review of taxation of intellectual property, additional with some funding that Ed Vaizey has recently support for research and development, tax credits and announced only this year for Abertay University to a whole range of things as a result of the Dyson boost the Scottish video games industry and really review. I just wonder, who is actually in the lead on look at whether we can honestly say that this games all of that currently? What discussions are already tax relief would be value for money when you under way with the Treasury and when do you think Ev 34 Scottish Affairs Committee: Evidence
20 October 2010 Edward Troup that is likely to come to a conclusion and make a Q178 Julian Smith: The final question was, really, report? on the recent change in IP tax relief. There has been Edward Troup: The taxation and intellectual property a bit of a relaxation on that for companies that aren’t review, as with all tax matters, is very much a owned in the UK, which I think came in the second Treasury lead. We are hoping to get something out on Finance Bill. I just wondered if you had any comment that quite soon. I am sorry, I don’t think we have a on that. date, and I certainly don’t have the date with me. As Edward Troup: This is getting into a level of detail I I think you said, certainly it is the case that we are don’t have the answers for. I am aware there was some looking at R&D tax credits as part of that. change. I don’t think it has any direct impact on this In a sense it comes once again back to my opening industry, but it may do. point of actually providing a broader stimulus to Julian Smith: Thank you. support intellectual property and intellectual development in the UK across industries. I think, of Q179 Chair: Thank you very much. Can I just ask, the R&D tax credit, in the most recent year for which before I ask my colleagues if they have any other we have got data, about £50 million of the £700 questions, if there is any information or figures that million or £800 million of support went to software you think might assist when we are producing a report development. So it is not as if the industry isn’t that would help illustrate some of the points that you already able to access some support. But we do see have produced? I take the point that we don’t want to this as an important broader plank in supporting a bandy figures, but if we are adding figures to a report whole range of industries but particularly in the that help make points then that would be useful. So if intellectual property field. there is anything, upon reflection, you would like to Cathy Jamieson: In view of time, Chair, I will leave let us have after this, could you do so? it at that. Edward Troup: Yes. I did note there was a question as to whether we wanted to put a written note in. Can Q175 Julian Smith: Can I ask you a bit about your I confer with my colleagues and actually have a word calculations or the Treasury’s calculations of the three with David Gauke to see whether he would like to general fiscal announcements that were made for back up any of the points he has either made to Mr small business in the Budget, so specifically the McGovern in meetings or I have made with a further cancellation of the previous Government’s jobs tax, note? reduction in Corporation Tax and the NI holiday for Chair: That would be helpful. Jim, you wanted to businesses outside London in the regions and what make another point or ask another question? benefits those general fiscal decisions have made on this industry? Q180 Jim McGovern: Two points actually, Chair. Edward Troup: Obviously, I can tell you what the I have been in regular contact with Richard Wilson, aggregate figures were for the amounts of money who is the Chief Executive of TIGA. Although quite involved in those, but I can’t tell you how those break a few of us here have said we don’t want to bandy down for this particular industry than I am afraid I figures about but have then gone on to do so, is it fair could for any other industry of comparable size. The for me to go back to Richard Wilson and say, “Mr industry is probably better able to answer that Troup disagrees with your figures. They are question than I am, so, no, I don’t have those figures. inaccurate.”? Edward Troup: Absolutely; no, completely. Let’s be Q176 Julian Smith: But you would confirm that for clear. I am not saying his calculations are an industry with quite a large number of new start-ups arithmetically wrong. I am saying that the this might have some benefit? assumptions on which they are predicated we would Edward Troup: I would expect them to benefit. disagree with. I have not checked it myself but I am Indeed, once again back to my opening point, there sure the arithmetic is fine, but the assumption about are a number of measures which the Government have the creation of a job actually being an addition to the taken through National Insurance, through UK economy and hence an addition to our revenues Corporation Tax, through the NICs holiday for we just do not accept. start-up businesses, which are generally applicable to the whole range of businesses and which this industry, Q181 Chair: Perhaps it would be helpful if you just along with any other growing or existing business, can let us have a note indicating which of his assumptions benefit from. you believe are wrong and how, in order that we can just have a more informed debate going forward. I Q177 Julian Smith: Just in terms of international think that might be helpful. competition, would you confirm the information that Edward Troup: If you are asking for a note to explain we have had? You talked about Canada having reliefs the point that I have made about displacement and for this industry but, actually, large gaming markets dead weight costs of tax incentives, I am very happy such as Japan and Korea don’t have any. Can you to do that. My colleagues are probably blanching confirm that? behind me because they are going to have to write it. Edward Troup: As far as I am aware there is no tax Chair: That will teach them to nod earlier on when I subsidy in either Japan or Korea, although I have read was saying that Members don’t understand very much. that Korea do provide cash subsidies to their industry, but I do not know if that is the case. I am not aware Q182 Jim McGovern: On the second point, I take of any Government support given in Japan. issue with what you said earlier on that if someone Scottish Affairs Committee: Evidence Ev 35
20 October 2010 Edward Troup doesn’t get a job in the computer games industry will Q183 Jim McGovern: To Canada or somewhere? they sit in the house for five years doing nothing? No, Edward Troup: The evidence is there has not been they will get another job. mass emigration of graduates. They have found jobs. I am obviously an MP for Dundee. In recent years, it I don’t have any evidence on internal migration. One has been transformed. It now regularly comes in the of my sons has just graduated, was at a graduate fair top 10 of the knowledge economies throughout the yesterday and is looking rather alarmed about the world. I would take issue with what you have said and prospects, but he is quite prepared to move to I would actually quite resent it. If they don’t get a wherever a job is and I am confident he will find a job in the computer games industry they can go to job. I think that applies to a graduate who would McDonalds or Tescos or B&Q and get a job. Is that otherwise have been employed in the video games what you are saying? industry if they didn’t get the tax relief. Edward Troup: No, I am not saying that. I don’t want Chair: Okay. Can I thank you very much for coming to get too much into the details of where the graduate along to see us? We have finished bang on time. market is now at the moment, but the historical Thank you. evidence is that graduates do find graduate-level jobs in the main. They do sometimes have to move location in order to find those jobs.
Examination of Witness
Witnesses: Mr Edward Vaizey MP, Minister for Culture, Communication and Creative Industry, Department for Business, Innovation and Skills, and Department for Culture, Media and Sport, gave evidence.
Chair: Minister, if you are ready, we could just make Troup is where he said, of course, that many different a start. Can I thank you very much for coming along industries put forward their case for a tax break and I to the Committee today. The light isn't shining directly think therefore the Treasury took a view they were in your eyes, is it? looking at the bigger picture. I think, if one is talking Mr Vaizey: It does feel a bit like an interrogation, about the politics of this, you look at how the coalition Mr Chairman, but I am not giving anything away. Government has approached various issues. There are certain policies that they put in place since the election Q184 Chair: If you move that way it will shine right and certain policies they haven’t proceeded with in your eye. That’s excellent, excellent. Thanks very because of the nature of the coalition Government and for much for coming. Could I start off just by referring the changed circumstances. to various quotes that we have had from the industry. We are told that on 29 March you, then the Shadow Q185 Chair: I understand some of that, but the Cabinet Minister, told Develop that the Conservatives difficulty that I have is that the quotes we have been “are going to support tax breaks for the video games given said that you—not as the Treasury Minister but industry” in the Conservatives’ first Budget. On 26 as the Shadow Cabinet Minister for this industry— April, he added: “We are fully behind game tax said that you were going to do it and you said that breaks. This is my unequivocal statement.” He said: George Osborne was on board for it. “It’s been approved by George Osborne.” Then we I am not clear, from your answer, why that was said have quotes from Don Foster saying something then and then changed afterwards. Do you understand similar. What changed between those statements being what we are searching for and why the industry is made prior to the election and the announcement that unhappy? I want to come later on to whether or not it you were not going to proceed with games tax relief? was the right thing to say but, as my children used to Mr Vaizey: Not wishing to obfuscate right from the say to me, “But you promised”. I think there is a first off, that is a question for Treasury Ministers feeling from the industry that this was promised and because obviously George Osborne, the Chancellor of they don’t quite understand why the promise was the Exchequer, took a view in terms of his Budget broken, particularly since both partners in the about what was the appropriate way forward. Reading, coalition said that they supported a games tax break. as it were, between the lines, my view is that the Mr Vaizey: I think that is the key point. Don Foster Chancellor took a view that in terms of the business made similar quotations and again had a similar support package he was putting together in the assurance in terms of the Liberal Democrat position, Budget, which covered all business sectors in terms although I don’t believe that a video games tax break of reducing business taxation, the holiday on National was specifically in the Conservative election Insurance contributions and not putting forward the manifesto. I couldn’t speak for the Liberal Democrat increase in National Insurance contributions, he was election manifesto. But, to put it completely bluntly, creating an environment which was a good place to as far as I am concerned, after the election all bets do business whether you were in the video games were off in terms of the financial situation and in business or in the widget-making business or whatever terms of how the Chancellor wanted to approach his and that he didn’t therefore want to proceed with a Budget. specific sector tax break. I think they felt that they were approaching things I think one Government insight perhaps into the afresh, both in terms of the Budget deficit, what they Treasury thinking from the earlier evidence of Mr could afford, but, also, the bigger picture in terms of Ev 36 Scottish Affairs Committee: Evidence
20 October 2010 Mr Edward Vaizey MP the fiscal support they wanted to put in place for someone introduces a better one and you are under business as a whole. So the Chancellor took that pressure to introduce even more. It was certainly decision and that was absolutely within his right to never my view that we could ever match, as it were, make that decision. the kind of generous financial support that the It may be that we can revisit a video games tax break Canadians give to their industry and they have clearly in the future. I heard Edward Troup mention a made a decision that they are going to try and attract timescale of 20 years; it might be shorter than that. I as much of the video games industry as they am not trying to dodge the question, but I think the possibly can. Chancellor is entitled to make a decision when he is The tax credit was there as a potential stimulus to putting together his Budget. I think there were things inward investment but there is also a recognition that, we would have liked to have done in the run-up to the for example, Germany, which has a growing and General Election that just simply proved impossible successful video games industry, doesn’t rely on a tax after the General Election, looking at the state of the credit and that Japan and apparently Korea as well public finances but also looking at the approach the don’t. Chancellor wanted to take going forward. I am now in a position, given that the Chancellor has now made his decision in terms of the tax credit in Q186 Chair: In your last answer and the last couple the light of whatever circumstances were presenting of clauses there are almost two separate things. The themselves to him when he was presenting his Budget, one I want to pursue just now is: was it badly to look at whether there are other ways in which I can targeted? Was it the wrong thing to do? I understand support the video games industry. your point that financial circumstances meant there were a whole number of things junked. Q188 Jim McGovern: Obviously you heard what What I am not clear about is that the argument also was said previously, so you will have heard what I seems to be being put forward that this was badly said about consultation prior to Alistair Darling’s targeted. In a sense, that is almost a criticism of the announcement to proposed tax breaks for industry. promises that were made beforehand because I don’t Numerous Government Ministers visited Dundee to know whether or not, once you got into office and see for themselves what the industry involved. The once you found support from the Treasury and so on, main gripe of TIGA was that prior to the Budget in things were then revealed to you that indicated that June no consultation took place prior to the decision this was not such a good idea as you had previously to withdraw any tax breaks. Could you explain why thought. That is a different defence from the defence there was no consultation? of saying, “The economic situation was so poor that Mr Vaizey: I don’t think there was time. I think that we couldn’t possibly do it.” Can you just clarify the the last Government came very late to the conclusion position for us? that a tax credit was, from their perspective, the right Mr Vaizey: I can’t clarify the position for you. I didn’t way forward. You will have seen the statements made get a chance to lobby the Treasury directly on the in various Budgets and pre-Budget reports by the last video games tax break. I lobbied indirectly and made Government in the run-up to that, initially ruling it my views known, but I wasn’t aware the Treasury out, making sceptical noises and gradually moving regarded the tax break as poorly targeted. So I can towards that position. only really extrapolate in terms of why they decided I personally find it slightly frustrating that the last to describe it as poorly targeted and that would Government came to that conclusion in its last Budget probably be unhelpful. at a point where it seemed likely it wasn’t going to be in a position to see that through after the election. I Q187 Chair: So, from our perspective, the relevant don’t think that there was— Minister dealing with the cultural industries still takes the view that this was adequately targeted, but, as they Q189 Jim McGovern: Why did it frustrate you? were a bad boy, they did it and ran away? Mr Vaizey: Because I felt that if they had been serious Mr Vaizey: No. My view on tax credits is more about the video games industry and the video games nuanced than that. If you start, as it were, from the tax credit they would have been putting this through beginning, do I, as a matter of principle, think that tax two or three years beforehand, rather than in a last- credits are a good thing? Not necessarily. Did I, as a minute Budget before a May election. shadow Minister and Don Foster as a shadow spokesman for the Liberal Democrats, take a view that Q190 Jim McGovern: But you supported it? we were effectively in tax competition with other Mr Vaizey: You heard the quotes from me, absolutely. jurisdictions? Yes, quite possibly. In terms of what was an emergency Budget of the What would a tax credit bring in terms of the video Chancellor in June, he had 50 days to put together an games industry? I think it is very important to be clear emergency Budget which, from his perspective, was on a number of points. First of all, it could act as a about stabilising the public finances and putting in stimulus to inward investment. It wouldn’t necessarily place long-term measures to support British business. support, as it were, the indigenous British or, indeed, So in that sense he would have been superhuman, I Scottish video games industry. It might attract foreign think, to have had the chance to consult in detail on a investment from foreign companies. video games tax credit. The Treasury, I think in its written evidence, has indicated that in a sense one is in a never-ending spiral Q191 Jim McGovern: Thank you. When you say at that point, that if you introduce a tax credit then that the Government’s view is that a cut in Scottish Affairs Committee: Evidence Ev 37
20 October 2010 Mr Edward Vaizey MP
Corporation Tax and National Insurance etc. is the to prototype their models and development is a good way forward, do you actually believe that there is no way of supporting the video games industry. case to say that specific industries need specific help? I think, again, what the industry wants is to see active Mr Vaizey: I look after a range of different industries Government investment in key areas, particularly in my position as minister for the creative industry. I skills, but also in, effectively, research and always look ruefully at some of, as it were, the heavy development. Again, we shouldn't lose sight of that manufacturing industries that still, I think, get a lot and when we look at the competing jurisdictions it of political support. One looks at things like the car is not necessarily just tax breaks that are attracting scrappage scheme from the last Government. I am companies or helping the development. It is therefore happy to go in to back what perhaps have straightforward financial assistance. been seen as frivolous industries like the fashion I certainly think we need to look, as the landscape industry, which I think is absolutely incredibly emerges in terms of local enterprise partnerships and important to the success of this country. So if you are so on and regional growth funds, at how we can also asking me should the creative industries receive the use that to support the video games industry. same amount of attention and support from Government as perhaps manufacturing industry has in Q194 Lindsay Roy: I think all universities will say the past, then of course I absolutely agree with you. they are the greatest thing since sliced bread in terms From my perspective I think that as the Minister for of particular initiatives. Can I probe you further about the video games industry my job now is to make sure what in particular secured the investment for Abertay that existing Government schemes are tailored or and, also, how are you going to measure the impact? tweaked to support so that the videos games industry How are you going to monitor the impact of this can have access to them. So, for example, we have investment? been talking about R&D tax credits. There is going to Mr Vaizey: I think what secured for me the investment be a review of R&D tax credits. So I regard it as my for Abertay was that it was a scheme that was pretty role to try and ensure that that consultation takes into far down the road and Abertay has a reputation that is account the needs of the video games industry. unparalleled, I think, around the world. I think it was We are going to look again at the Enterprise pretty clear that any investment in Abertay would be Investment Scheme and venture capital trusts. So, a sensible investment and a well-used investment by again, I want to make sure that the video games a university that stands absolutely at the top of the industry is able to access those schemes without too tree in terms of its educational value to the video much burden. games industry.
Q192 Jim McGovern: Finally, as I said earlier, Q195 Lindsay Roy: If you look at the league numerous Government Ministers prior to the General tables—I am not a great fan of these—Abertay doesn’t Election came to Dundee to see Abertay University feature highly in the university league tables. Have we and to see what the computer games industry involves. got the indicators wrong? Do we need to do something Unfortunately, the public perception in a lot of cases about re-evaluating in terms of outcomes? is that they think of young lads sitting in front of Mr Vaizey: I wasn’t aware of that point and I would computers playing at APB or Grand Theft Auto but it certainly be open to a discussion about ranking has, actually, massive implications for medical universities in terms of their support for either the research and medical science. So would you be video games industry or creative industries as a whole. prepared to come to Dundee to see for yourself and I have commissioned a skills review which you might possibly go back to your Government and ask them want to talk about later on, but I hope that will to reconsider tax breaks? highlight the importance of universities like Abertay Mr Vaizey: I think I am coming on 3 February and I in terms of providing the absolutely first-class think I am taking David Mundell with me. education in this sector that it does. So I would Jim McGovern: Oh right. That’s bad news. certainly be open to specific league tables. That is an Chair: Moving on. Lindsay. idea that I hadn’t considered but I will take away and consider. We will call it the Roy table. Q193 Lindsay Roy: I want to focus on the talent pool. Would it be fair to say that the lack of tax relief Q196 Lindsay Roy: Thanks very much. So you was compensated by the project investment in would be considering the possibility of continued Abertay? Was that a deliberate decision so to do? It differential support? has been broadly welcomed and is, I think, a Mr Vaizey: Yes. recognition of the pioneering role of the university. Lindsay Roy: Thank you very much. What, in particular, secured that investment for Abertay? Q197 Julian Smith: Thank you, Minister, for Mr Vaizey: I think that it was an opportunity for me. coming. You talked a few moments ago about the IP I think the grant had been considered under the last review, the review of IP and the consultation period. Government. It didn’t come out of the blue and it was Do you have a timetable for when you expect that to an opportunity for me to confirm it and take it be completed? forward. It also included grants to MediaCityUK in Mr Vaizey: No. I think that is, as far as I understand Salford. We have also given money to Bournemouth it, in the hands of the Treasury, but I would expect it University as well. I think direct funding of incubators to be completed in time, or my supposition is it will and areas where video games companies get a chance have been completed in time, for next year’s Budget. Ev 38 Scottish Affairs Committee: Evidence
20 October 2010 Mr Edward Vaizey MP
Q198 Julian Smith: One concern generally on certainly that there are clear digital agendas in each of consultation is just that industries get truly consulted. the nations as well as in Whitehall. Will it be possible? Will the Treasury be really reaching out to this industry as it will with other Q201 David Mowat: You mentioned in your last industries to the gaming industry? answer that you had a vision of, I think you said, film, Mr Vaizey: I will be making sure that the industry television and video games coming together in a does respond. As far as I am aware, for example, the seamless way. I am interested, then, to explore why it industry didn’t respond to the initial consultation with is that one of those is subsidised or continues to be the IS and the VCT reform, so I want to make sure and the others are not, in your view? that they do respond to the R&D tax credit Mr Vaizey: I think it is a historic issue and it was consultation. They have got to be in there making obviously at the front of my mind when I was their case and I will certainly support them in doing campaigning for a video games tax break before the so. election that the film tax credit is in place and supports a great deal of inward investment by the film industry Q199 Julian Smith: I also wondered if you could into this country and the kind of skills that emerge as talk more generally about the digital vision that your a result of that and the industries that emerge as a Department has for Britain, and, I guess, for Scotland result of that. more specifically, and how you see that helping the One shouldn’t get the idea that the film tax credit has gaming industry, whether it is broadband or the other been a stunning success from year zero. It has had a initiatives that have been taken? It will be quite lot of bumps in the road. Indeed, at one point in the interesting to see how that will benefit this industry mid-2000s it was really a very large tax evasion that we are talking about today. scheme. But the film tax credit now is working I think Mr Vaizey: I’ve got a whole range of different very effectively. responsibilities but, obviously, one of them is broadband rollout, so we want Britain to have the best Q202 David Mowat: What I have had difficulty with superfast broadband in Europe by the end of 2015. right from the start of this is distinguishing what it is That is absolutely about making Britain a good place about the film industry which says that they should to do business. have a film tax credit and the video games industry I think that we have what I would call an element of that says, as you rightly said, the Chancellor looked at the fiscal position and said, “Okay, we can’t do that, convergence going on, so not only do you have the but we continued with the film one”. I am just web but you have also got film, television and video interested in the thinking behind that from a cultural— games, I think, coming together to form a nexus, as it I guess you were an influencer in that dialogue. were, where the barriers, the silos between these Mr Vaizey: I think it is politics. I think an existing tax different industries are rapidly breaking down. credit is in a stronger position than one that doesn’t So, from a policy point of view, as a minister that exist. covers these areas, I want to put in place structures that allow these industries to talk to each other and Q203 David Mowat: So the fact that the films get it feed off each other. That involves support from the and video games don’t is a historic anomaly? Regional Screen Agencies; it involves NESTA; it Mr Vaizey: Yes. I wouldn’t want to use the words involves the Technology Strategy Board, which I “historic anomaly” because that might give the think is a very important player in all of this. It could impression that we found the film tax credit even involve the Arts Council, surprisingly enough, anomalous. One thing I can reassure you is that the because we, I think, have a unique combination of Government is 100% behind the film tax credit, but it being a series of nations that are very creative. We are is a historical circumstance, yes. known around the world for our creativity but also, actually, quite a lot of high-tech technical skills which Q204 Jim McGovern: It is not 100% behind the I think come together very neatly. games industry? Mr Vaizey: No, I said 100% behind the film tax credit. Q200 Julian Smith: One of the things that confuses Jim McGovern: Not 100% behind the behind the this Committee sometimes is where London stops and games industry? Mr Vaizey: No, I said 100% behind the devolved Administration starts. How does your the film tax credit. Department work with the devolved Government on Jim McGovern: By implication then, notÐokay, sorry. these sorts of issues? Mr Vaizey: I think we work reasonably well. I think Q205 David Mowat: I just want to push a bit further the Scottish Government, to a certain extent, could because it does seem the best point that the video take credit for continuing to pioneer in that area. They games fraternity have is that this other industry did put together, for example, Film Scotland and the get this tax credit over a number of years and it did Scottish Arts Council to create Creative Scotland. apparently make a difference. Yet, I think the reason The Scottish Government has a broadband strategy you gave for it not being given to video games was and I think is taking the digital agenda very seriously. inertia, “We’ve got one; we haven’t got the other. So I certainly feel that I, as a Minister, can learn from Therefore, it is all too difficult to bring in another one my Scottish colleagues but also from my Welsh but we will keep the old one going.” You see, had you colleagues as well about what they are doing, and got rid of both of them it would seem to me that the Northern Ireland as well. I think it is interesting to see Government’s position was more tenable in a way? Scottish Affairs Committee: Evidence Ev 39
20 October 2010 Mr Edward Vaizey MP
Mr Vaizey: Yes. You can argue for intellectual industry faces in this country are similar to some of coherence. If you were going to try and examine our other creative industries in terms of creating scale. potential differences between the film tax credit and Certainly a lot of businesses, when they reach a the video games tax credit I think, as we are now back certain size, get sold either to Japanese or American on to the video games tax credit, it is worth perhaps publishers which have much bigger scales. So those reminding ourselves that not everyone in the video are the kinds of structural problems in terms of games industry necessarily thought the tax credit was creating business of scale in this country. a good idea and there are a number of reasons for that. I think there are massive opportunities for the industry First of all, the film tax credit, because it depends on in this country on a range of options. First of all, the European Commission approval, has to be based on a reason I commissioned a skills review is that, if I take, cultural test, not just on the labour force being British for example, one conversation I had with a potential but also on the narrative, as it were, of the film having inward investor in this country, there were three legs a British angle, which is why, for example, Harry that they were looking at, as it were, to encouragement Potter can qualify as a British film even though it to invest. One was skills, which is a big tick for this is made by an American studio. So whether you can country; one was ease of doing business, which should translate a cultural test to a video game like Angry and is a relatively big tick in terms of the general Birds is an interesting philosophical discussion worth burdens on business and running a business, having. Obviously, given that the Prime Minister plays regardless of whether it is video games; and thirdly it a lot, it probably would pass the cultural test. was fiscal support. The other issue is the way that video games are I think if we get the skills review right so that we can changing. More and more games are going online. get out there and tell the industry that this is a great They are multiplayer games, so, much more than in place to pick up talent, that will encourage them. I film, the publishers—as it were, if you take the think that if we continue to put in place a good parallel of the American studios, the publisher of the business environment and a benign business film—are perhaps not falling away but may play a less environment, that will encourage investment. important role going forward. Developers will be able As I say, if we can put in place some element of to put their games online and get a global audience financial support, either through direct support through business support schemes, or indirect support through iPhone apps and iPads and things like that. through research and development schemes or access So there was a feeling, for example, and quite a strong to finance schemes then I think that will also continue feeling among some elements of the video games to support it. But I also do think—and this is my job— industry when we were talking about a tax credit in that we need a clear narrative for the industry. We the run-up to the election, to say, “Well, actually, are need to set out why this is a great place to have a you simply going to put in place a system that video games business. supports an old model of making games and doesn’t I don’t want to give the impression that I am in any actually stimulate the new model?” Which is why, for way criticising UK trade and investment. I am not. I example, if one can tweak the R&D tax credit and think they do a very good job. But I certainly think also look at investment schemes to encourage we need to learn perhaps from the aggression of some investment into the games industry, one might actually of our competitor countries in terms of their active bizarrely end up with a better result by supporting, as wooing of different companies. I think we need to be it were, the future of the games industry rather than bolder in terms of going after organisations and what some people would characterise as the past. actively encouraging them to come here.
Q206 Dr Whiteford: We have obviously heard a lot Q207 Dr Whiteford: I think that is helpful, of evidence over the last few weeks, but one of the particularly in terms of the research and development things that has really troubled me is that it is clear side, because we did hear a lot that finance for that there is a growing and rapidly diversifying global development was a particular issue for some industry, yet we are witnessing a contracting UK companies. industry. The UK and Scotland in particular has been I am concerned about the skills issues, though, a significant player in this sector to date but it appears because we do have the example of Abertay, but the that we are losing market share to a range of historic problem in Scotland has been brain drain. I competitor countries, some of which are promoting think moving away from an expert labour economy, their sectors very aggressively and others which which is what we have had, where we lose our highly aren’t. skilled people often to Canada historically, Australia I suppose my question is, really, how interested is the and the US, has been very bad for the country and it Government in retaining this sector in the UK as a has resulted in a lot of people on low paid jobs rather significant player? If the original commitments around than highly skilled people in better paid jobs, which I tax are something that the Government is now backing think has to be an aspiration. So I would strongly urge away from, what do you intend to do to create a us not to be simply just skilling people up to get jobs conducive environment for this sector to flourish and overseas where the talent is lost. what kind of timescales are we looking at for Mr Vaizey: Absolutely. implementation? Mr Vaizey: I am very interested in ensuring that we Q208 Fiona Bruce: Good morning, Minister. You have a successful video games industry. I think that, heard me asking earlier about the comparable cost of to a certain extent, the problems that the video games the investment that is proposed through this tax. Ev 40 Scottish Affairs Committee: Evidence
20 October 2010 Mr Edward Vaizey MP
Really, the figures don’t seem to stack up. Given the products—and I am quoting; I checked with one of severe financial constraints that we have inherited my colleagues earlier before I put this to you—where, from the previous Government, you cannot, I think, when we went to Dundee and we talked with the video do other than accept that the tax relief proposal simply games producers and someone asked one of the isn’t value for money? developers, “Well, what sells?”, he said, “Well, Mr Vaizey: As I say, I think that George Osborne had basically, it is shooting and killing.” That might have to consider a range of factors when he was putting his been, if you like, not the whole picture but it is part Budget together. I think the Treasury had a figure in of the picture. It is very concerning for mothers like mind about how much tax relief would cost and, as a me, just finally touching on one point—and this was Minister who has been through the spending review, I picked up by a previous witness when I asked about know that Departments literally are looking at the it—on the streaming of online games where there smallest possible sums that you could imagine. So I might be a certification of the age range but there is, could see that if George Osborne was considering the really, no effective way of prohibiting youngsters from very difficult financial circumstances that we are in, accessing these games. I think if we are going to the actual potential cost of a tax credit, which would invest in this industry then we need to address the effectively be additional public expenditure at a time very real concerns that there are on the part of parents when he is trying to reduce it, would be a factor that like me about support for the products which are would certainly have influenced him. coming on the market. Mr Vaizey: I absolutely, obviously, understand your Q209 Fiona Bruce: Absolutely, but what, clearly, concerns. I am not the father of teenage children but you brought out this morning is that, notwithstanding I will be, hopefully, in a few years’ time. That is, I that, you are looking very constructively at how you have got two young children but they are some way can use the limited funds that we have to really make off being teenagers. a difference for this industry in Scotland and Obviously, violence in video games is a perennial elsewhere. debate. I took the view, as a shadow spokesman on Mr Vaizey: That is what I am very keen to do. As I this issue and I now take the view as a Minister, that say, I was keen to use what money was available to my job is to support this industry as much as I can support particular centres of excellence across the because it does tend to get some negative headlines. I country—so Bournemouth, Manchester and Dundee. feel that the negative headlines are somebody else’s Also, I am keen to use existing fiscal support responsibility. My responsibility is to get the positive mechanisms to ensure that the video games industry, headlines. I do think, in the last two or three years, as it were, gets a fair crack of those. So I don’t think, the industry itself has been extremely good at getting in those circumstances, I am adding to the burden of out there and explaining the enormous range of public expenditure or pushing the boat out. I am benefits it brings not just to interactive entertainment simply trying to make sure that all the mechanisms and leisure but to support for the disabled, the kind of which the Government does think are the effective technology that will allow someone who is a ones to put in place are relevant. quadriplegic to interact with people through eye movement and things like that, and, as you say, in Q210 Fiona Bruce: When I talk about value for terms of simulation for the emergency services and money, I am talking about the comparable return on indeed our armed services. So there are a range of investment. massive benefits. Mr Vaizey: Yes. In terms of 18-rated games, I think they make about 3% of the total games available. There will obviously Q211 Fiona Bruce: I am very pleased to hear all that be, occasionally, questionable matters of taste and we you have said today. Can I talk about something that have seen that in recent weeks in terms of some is, if you like, for many people, an elephant in the particular games focused on the war in Afghanistan. room regarding the video games industry? I was very So there is no doubt that those issues arise, but what pleased to go to Abertay University because I saw I always say is you could say the same about film and there the constructive side of this industry and how you can say the same about literature. Tastes do much they are doing there in terms of medical change and evolve. But, as I say, my job is to promote development. Only last week actually I visited my this industry and I will let others highlight its flaws. local fire station and saw the technology being used there to help in fire training—exactly that kind of Q212 Fiona Bruce: I will just come back very briefly excellent technology. That is the kind of investment on this; thank you. You are absolutely right in so many that I think everyone would want to see such funds as respects and I wanted to ensure that I emphasised the there are put into developing them—the small, local, positive side. I think the difference between, say, film indigenous businesses developing skills, keeping our or even literature, is that it is the monitoring which is expertise and our intellectual property here. the issue because we now have, obviously, a What a lot of people like me, and I am a mother of generation which has direct access to these products two teenage boys, are very concerned about is when in a way that, with regard to the other products, they we use the term “video games industry” it might be don’t have. So I simply wanted to highlight this perhaps worth thinking again about that very title because certainly the witnesses from Abertay because at the moment it encompasses so much that University did say that they would very much like to is positive. It is about, really, whether it is right that look into and have some R&D support for looking we should be looking even at tax relief for certain into this area but, at present, it doesn’t perhaps seem Scottish Affairs Committee: Evidence Ev 41
20 October 2010 Mr Edward Vaizey MP to be available as it could be. Perhaps that is take a view. He is the Chancellor; I am not. He is something that you might be willing to look into. perfectly entitled to reach his own conclusions for his Mr Vaizey: That is something I would certainly own Budget and for his own priorities as well. I am happily look into and it might be something that, for not going to be in a position to write his Budget for example, I could talk to the Technology Strategy him, nor would I want to be. Board about because that provides a test bed platform for people to test out their games. It would certainly Q215 Cathy Jamieson: With respect, Minister, you be an interesting way to test technology to see whether have made some play that you are the Minister you could monitor, as it were, the age of people responsible for the creative industries. I am now playing games. I am also a member of the concerned that you feel that you are so far down the Government’s UK Child Internet Safety Group of food chain for a very important industry that the Ministers. So we sit around a table on regular Chancellor would not take account potentially of what occasions to discuss how to keep our children safe you say. If you heard the questions that I asked of the online, which is very important. previous witness, it was around what is going to Again, it is not a problem I would argue is specific to happen in the future as a result of the review, for the video games industry. It is a whole issue about example, on R&D credits. If you didn’t get a result how children are kept safe online and how parents the last time around, what confidence can we have monitor what they are doing online, and how parents that the Treasury are going to listen to you next time? in particular get the kind of instructions and education Mr Vaizey: All I would say in response to that is that that will enable them because, let’s face it, not all I walked right into that one, didn’t I? That will teach parents are as tech savvy as their teenage children and me to make a flippant remark at a Select Committee they do need clear guidance on how they can try and hearing. It is up to me to try and deliver for this keep their children within bounds. industry, so I will do my very best to do that. Fiona Bruce: Thank you. Q216 Cathy Jamieson: Could I ask you a question Q213 Cathy Jamieson: Thanks so much and thanks that I asked previous witnesses at earlier hearings as for what you have told us so far. I am very pleased to well, because we have to make some hear your support for the creative industries recommendations obviously arising out of this report. particularly, as you have mentioned, the fashion What I asked the previous witnesses was: what did industry which of course is very important as well to they want to see as our top recommendation? I am not Scotland. I had the pleasure of seeing the Scottish going to walk into anything when you tell me that that Textiles Exhibition at the ICA last week. Interestingly, is my job, but what I would like to ask you is what some of the points that designers and people involved recommendations could we make that would be in the industry there were making were similar to the helpful to you in making those representations to the points about the computer games industry. Chancellor for the future of the games industry in But I want to take you back, if possible, to some of Scotland? the things you said right at the beginning of the Mr Vaizey: I think you could say that the Chancellor evidence that you have given us. I understand the should certainly, when he considers the review of R& position there, you know. You said the Chancellor had D tax credits and when he considers issues such as to take certain decisions as he was entitled to do. But, access to finance and business support, maintain that surely, in a situation where everyone seemed to be he sees the creative industries as being central to that suggesting that tax breaks were a good idea prior to and that he, in particular, looks to ensure that the the election, it would have been incumbent then on the video games industry is not inadvertently excluded Chancellor to seek the views of the Minister directly from the opportunity to participate in any future fiscal responsible for promoting the creative industries support schemes that he thinks are appropriate for before he took a decision to scrap it. You seem to British businesses on. suggest that hadn’t happened? Mr Vaizey: I am quite low down on the food chain. Q217 Mr Reid: Good morning, Minister. Thanks for coming along. Here we have a situation where we Q214 Cathy Jamieson: But you have responsibility have a successful British industry but another country, for this industry. Canada—Quebec, in particular—gives its own Mr Vaizey: There is a famous anecdote about an industry tax breaks. It means that our successful obscure Minister under the Thatcher Government industry is losing a brain drain to Canada. What is the which I don’t have time to tell. But, obviously, you Government’s reaction to that? have the Secretary of State for Business who would Mr Vaizey: Again, if you take a step back to how we have—I imagine the Chancellor would potentially got in a position where we are effectively talking consult his Cabinet colleagues on issues. But, at the about tax breaks, it was all effectively down to same time, as we all know as politicians, the Budget Canada. So if Canada wasn’t doing what it was doing is very much the province of the Chancellor and the I am not sure it would be so high on the political Chancellor is perfectly able to access the information agenda. he needs. He knew that all three political parties had Again, looking back at the last Government, which spoken up in support of the tax credit but he was also in effect took the credit for a tax credit that it never able to access all the information, particularly for introduced and it only said it was going to introduce example the information that Edward Troup was it in its last Budget, one of the frustrations I found as putting forward in the earlier evidence session, and the Opposition spokesman was that when I raised the Ev 42 Scottish Affairs Committee: Evidence
20 October 2010 Mr Edward Vaizey MP issue of Canada two or three years ago I was told weren’t bothered so much about the bad headlines. It again and again that this was a matter potentially for does seem to me, as the General Culture Minister, that the World Trade Organisation to look at and that you ought to be concerned about the general turned out, really, to be a red herring. So if I was coarsening of cultural life that is just symbolised by being more robust than perhaps I have been in the last the video games. I heard the argument that it was only 40 minutes I would say that the last Government, to 3%. I am not sure that amongst, particularly, a certain extent, did sit on its hands in the face of youngsters in my constituency it is 3% by usage Canadian competition. because I do get the impression that maybe they are Again, I do feel pretty confident that we can continue selling only a relatively small proportion of these but to support this industry and continue to compete with they are available to a much, much wider group and Canada. Canada is putting a lot of direct Government they are breeding an attitude which suggests that support in and, again, it is at the state level rather than violence is a way to solve problems. Relationships and the federal level, so you have got states now so on and so forth are all softy things. It is chopping competing against each other. But we remain, as it people’s arms off and running them over with a car or were, a very important jurisdiction in terms of our breaking and entering and all the rest of it. Grand skills. Britain will become a very good place to do Theft Auto is not a childcare video and it just seems business, regardless of what business you are in. to me that you ought to have a responsibility or take Provided we ensure that the fiscal support mechanisms it more seriously than you perhaps gave us the and Government investment and support for industry impression that you were doing. Can you just clarify takes into account the needs of the video games whether or not you see yourself as having any role in industry then I am confident about the future. that sort of area? Mr Vaizey: What I was going to say was that I thought Q218 Chair: I wonder if I could touch on one or two this Select Committee and the decision to hold an other points that have come up at various stages inquiry into video games was a great opportunity for during our inquiries. Relationship with the banks: we the video games industry, because I think that one of have had the impression from a number of people in the issues and problems has been that the games the industry that the banks don’t understand them, that industry has not been taken as seriously by politicians they are risk averse and that some of the firms in the as it should have been. One of my regrets about the industry are having difficulty finding capital to industry has been that the only time it has featured in develop. Do you see yourself as having a role in that Parliament is when individual members of Parliament in any way and, if so, what have you been doing and have wanted to use it as an example to pick on violent is there anything on the stocks that would make these video games. So while I absolutely accept that it is problems of the firms in the industry ease? possible to have a view on a particular game and Mr Vaizey: I have had one roundtable with the video whether or not it is tasteful or appropriate, what I games industry. We are having another one to talk would strongly argue back at you, Mr Chairman, is about inward investment and how we co-ordinate the that these seem to be the only way that some various functions of Government to ensure that we are politicians think that you can get headlines for the getting the message out to companies abroad to invest. video games industry when, in fact, what this inquiry I also want to have a roundtable on access to finance. will show is that you have got a fantastically Again, I think it is a problem that is wider than simply successful industry with a huge range of applications. the video games industry. It is to do with the creative There is a ratings system for video games. They are industries and it is to do, again, with why talks about subject to the same kind of controls that film is. So tax breaks tends to enter this discussion because, to why is it that in terms of our cultural climate we tend put it bluntly, I have also heard the same anecdotes to celebrate the success of British film? We stay up where people will say they will go to a bank and be for the BAFTAs; we stay up for the Oscars; we love told, “Well, frankly, if you were coming to me with a looking at pictures of our film stars in the newspapers proposal for a pizza delivery business of course you and celebrate in their success. Yet, we seem again and would get the money because I know how that again only able to come back to the violent nature of works”, whereas the video games industry is video games. inherently risky because you are depending on hits. If Obviously, we know and we could all name films we your game is not a hit, as Realtime Worlds saw only have been to where we have found the violence to be too tragically, that can have very, very serious very much pushing the envelope. What I object to is consequences for the business. So I think that what I that we don’t then come out and say, “The film can do in particular is also use my knowledge of the industry is coarsening our children.” We say, “That film industry as well to work with the banks and was a violent film and I certainly want to make sure investment houses that are specialists in investing in my kids don’t see it.” You can certainly take that the creative industries and ensure that there is a attitude about the video games industry. You can say, coherent landscape for people to talk to banks that are “That is a violent video game and I don’t want my more au fait with their sectors. children to play it.” But you shouldn’t say, “That is a violent video game and the video games industry is Q219 Chair: The second point follows up, really, coarsening our children.” I just don’t agree with that from the points that Mrs Bruce raised about the observation. violence in films. I must say I was a bit concerned by your response, which basically seemed to indicate that Q220 Chair: That is something for us to report. Can you were interested in the good headlines and you I just clarify as well whether or not, in terms of Scottish Affairs Committee: Evidence Ev 43
20 October 2010 Mr Edward Vaizey MP supporting the industry, the Department is involved in Q227 Chair: The thing that strikes me on that is that any way in providing support to what seems to me to the focus of the lobbying and the views expressed by be a novel suggestion of some sort of collaborative the games industry has tended to focus on a video tax publishing? We met people in Dundee, we were relief. I must confess I am not entirely sure whether discussing routes into marketing and so on and the or not they have hung their hat on that because it is difficulty that sometimes people developing their the peg that is available in order to raise the profile or games had about finding somebody who was willing whether or not there is a genuine conviction that that to undertake all the marketing. One of the suggestions is the way to go. That is why I am just trying to clarify was that various people involved in the industry with you whether, given your functions now and would try and collaborate and almost have a mutual having had the opportunity to see more and do more of some sort to try and access markets in a more with the industry, you are now of the view that there constructive way than they have been up to now. Is are a number of other things that would achieve the that something that you would see as being your role, same objective in a better and more targeted way, or to help that sort of thing, or would that just simply be whether or not you still think, “Yes, notwithstanding seen as a business problem that was passed on to BIS? some difficulties with tax relief, it is still better than Mr Vaizey: It would certainly be something that I any other proposal.” would be interested in knowing more about. But, Mr Vaizey: I think, Mr Chairman, one understands again, it would be something where I would regard how these things work and that a particular policy somewhere like Abertay University or the Technology proposal gets a certain element of momentum. I think Strategy Board or NESTA—the National Endowment the industry can be in danger of seeing it as the for Science, Technology and the Arts—having an panacea and I just don’t think it is a panacea. opportunity to research that area, promote it and I would never rule out potentially looking again at a perhaps make it more widely known. tax credit or returning to the issue, as I say, as a potential option. I personally feel that if it was to Q221 Chair: Two final points if I could, just to get come back on table it would be an inward investment clarification. Arising from the points that were made vehicle, as I have said in my opening remarks, not by Mrs Jamieson, is it correct that you were not necessarily a vehicle that would see the size of the indigenous in British industry grow significantly so consulted before the Chancellor abandoned the there will always be that controversy. I am now manifesto commitments to introduce games tax relief? focused on looking at other options to how we support Mr Vaizey: I had a chance to put my point of view the video games industry. across, so I felt that I had had a chance— Chair: Fine. Thanks. Jim, you had another point you wanted to make? Q222 Chair: So you were consulted? Mr Vaizey: I felt I had a chance to make my case. Q228 Jim McGovern: Yes. First of all, Ed, I look forward to meeting you and David in Dundee, and my Q223 Chair: Sorry, is that yes? Yes, you were earlier remark was flippant, obviously. I would just consulted? like to ask you if you would take this thought away Mr Vaizey MP: I felt I had a chance to make my case. with you. It is a quote that was just given to me yesterday and it is from a man named Danny Bilson, Q224 Chair: Sorry, is that a “yes”? Yes, you were who is the chief executive of a global video games consulted? publisher called THQ. He had just announced that Mr Vaizey: I felt I had a chance to make my case. they were investing in Quebec. In response to a question about whether a global Q225 Chair: So that is a “yes” then, is it? publisher would invest in the UK Danny Bilson said, Mr Vaizey: Yes. “Well, it’s all about money. The talent in the UK is extraordinary…. I got to know a lot of teams in the Q226 Chair: Fine. I wasn’t quite sure why you were UK—it’s one of the greatest talent centres in the phrasing it in that way. Can I just clarify? I understand world. So there’s no issue with talent; it’s just that the guns in the tanks of the Chancellor are greater economics—and if the Government finds subsidies than yours, but can I just clarify whether or not in there, absolutely we would build out….but I’m sorry, principle you remain in favour, if the economic it’s all about money”. I don’t think you should sell situation was different, of a games tax relief, or do yourself short. I am sure you have got the ear of the you take the view that it is so badly targeted that it is Chancellor and possibly the Prime Minister. I could not actually worth supporting and that we ought to be forward this to you if you want? pursuing other routes entirely? Mr Vaizey: No, I have seen it already. Mr Vaizey: I remain of the view that we will continue to debate a video games tax credit, that it doesn’t have Q229 Jim McGovern: Have you? Were you keeping universal support in the industry and that there are a it a secret? whole range of other options that we can and should Mr Vaizey: I read all the websites. look at in order to support the video games industry. So I do not take the view that the fact we do not have Q230 Jim McGovern: Okay. I am sure you will take video games tax credit means the game is up and we that back to the Chancellor. might as well just all pack our bags and go home. I Mr Vaizey: THQ do have a UK investment, as you think there is a hell of a lot to play for. know the interview makes clear. But, obviously, that Ev 44 Scottish Affairs Committee: Evidence
20 October 2010 Mr Edward Vaizey MP is why I have made the point about the tax credit as came before you, if, upon reflection, there is anything an inward investment vehicle. that you want to let us have in a written form that you Jim McGovern: Yes. think would illustrate the points that you made we Chair: Thank you very much for coming along. That would be grateful to have that. has been very useful. Again, as with the colleague that Scottish Affairs Committee: Evidence Ev 45 Written evidence
Written evidence from the Department for Culture, Media and Sport (DCMS) and the Department for Business, Innovation and Skills (BIS) Introduction 1. This memorandum is jointly submitted by the Department for Culture, Media and Sport (DCMS) and the Department for Business, Innovation and Skills (BIS) which since 2005 have shared the policy responsibility for the video games industry. It aims to provide background that might be helpful to the Scottish AVairs Select Committee’s inquiry into the video games sector in Scotland. The paper does not respond directly to questions relating to tax policy, which is the responsibility of the Treasury.
Background 2. The video games sector is inherently innovative, IP-rich and oVers good opportunities for growth and high-value, high-tech job creation in Britain. Estimates from PWC suggest the global market for video games will grow from $52.5 billion in 2009 to $86.8 billion in 2014, representing an estimated 10.6% CAGR.1 This makes video games the second largest growing entertainment and media sector after online advertising. The UK computer games industry is part of the wider creative industries which contributed £59.9 billion to our GVA in 2007 or 6.2%. These industries have continued to grow through the economic downturn and the software, computer games and electronic publishing sectors showed growth of 5% per annum between 1997 and 2008, the highest across the creative industries.2 3. The wider context to any discussion about public policy for the games sector is the Government’s overarching aim to tackle the deficit, rebalance the economy, and create a stable platform for long-term, private sector-led economic growth. At this point it is not possible to set out detailed plans for pursuing these aims; the Comprehensive Spending Review is ongoing and Government is currently in an intensive policy development process which includes several public consultations. 4. Government is considering options for ensuring that the UK is not so dependent on a narrow range of economic sectors, with a particular focus on supporting areas of comparative advantage including advanced manufacturing, low-carbon manufacturing, the life sciences, and service and the creative industries (including video games). BIS is developing a strategy in this area over the summer with a view to publishing a cross-government White Paper in autumn 2010. 5. Priority issues for the UK video games sector include diYculties in attracting finance, problems for small companies in creating and exploiting IP, ensuring a steady supply of appropriately skilled employees and growing global competition. These problems are not unique to video games companies—access to finance for example is reported as a problem in the wider creative industries and indeed by small, creative businesses in other sectors, such as biotech.
Access to Finance 6. Several UK schemes oVer additional finance for SMEs. The Enterprise Finance Guarantee scheme provides bank lending to viable businesses lacking collateral to secure a normal commercial loan. The Enterprise Capital Funds address a market weakness in the provision of equity finance by using Government funding alongside private sector investment to establish funds that operate within the “equity gap”. The UK Innovation Investment Fund (UKIIF) is a UK wide Fund of Funds that will invest in underlying technology funds that target businesses in advanced manufacturing, clean technologies, digital and life sciences. 7. The Government is working with businesses and the financial community to consider all the options for ensuring that access to finance is not a barrier for companies looking to invest and boost growth in the economy. A Green Paper on business finance was published on 26 July by BIS and Treasury.3 We hope to see a substantial response from the games sector to this consultation.
Business Support 8. Business support and its delivery in Scotland is a matter for the Scottish Government which oVers a number of support measures, such as Regional Selective Assistance.4 9. For businesses located in England, BIS is currently reviewing the Solutions for Business portfolio and also the services provided by Regional Development Agencies, including business support delivery via Business Link. The outcome of this review will be dependant on the conclusion of the Comprehensive Spending Review.
1 PWC Global Entertainment and Media Outlook 2010–14, published 15 June 2010. 2 DCMS Creative Industries Economic Estimates, February 2010 http://webarchive.nationalarchives.gov.uk/!/http:// www.culture.gov.uk/reference library/publications/6622.aspx 3 Financing a Private Sector Recovery, BIS 26 July 2010 http://www.bis.gov.uk/Consultations/financing-private-sector- recovery?cat%open 4 http://www.scotland.gov.uk/Topics/Business-Industry/support Ev 46 Scottish Affairs Committee: Evidence
Business Tax 10. The Emergency Budget announced that the Government would not be introducing a tax relief for the UK video games industry. The sector will benefit from the wider package of reforms to business taxation announced in the Budget, which included reducing the main rate of corporation tax to 24% by 2014 and the small profits rate to 20% from April 2011. The changes will reduce the corporation tax rate for nearly one million companies. One of the principles underpinning this reform is that a simpler tax system with lower rates for all is usually the most eVective way to support economic growth and investment. As part of the next steps in reform, Government will consult with business in autumn 2010 to review the taxation of IP, the support R&D Tax Credits provide for innovation and the proposals of the Dyson Review. The Government will welcomeevidence from the video games industry in response to this consultation. 11. The Budget also confirmed a relaxation of the IP rules for the SME R&D tax credits scheme which will be of benefit to many innovative companies, including independent games development studios working on projects on a work for hire basis.
The UK Video Games Industry 12. The UK has a reputation for innovation, creativity and talent in video games development. A number of highly successful games and technologies have originated in the UK including franchises like Tomb Raider (from Eidos) and, created in Scotland, Grand Theft Auto (from Rockstar North). The UK has a large mix of independent and publisher-owned studios in clusters all around the UK, including in Guildford, Brighton, London, Dundee, Edinburgh, SheYeld, Leeds, Newcastle, Liverpool, Manchester, Cambridge, Oxford, Leamington Spa and Birmingham. It has been the location of choice for the European HQs of many of the large video games publishers, such as Activision and Sony Computer Entertainment Europe. 13. Definitive data on the UK’s video games sector has been hard to source, particularly in the absence until recently of a separate Standard Industrial Classification (SIC) relevant to the sector and varying distinctions between games development and other computer software and services activities. Data published by trade association Tiga and analysts Games Investor Consulting (GIC) estimates that in 2008 the UK’s games industry employed 28,000 people including over 9,000 in games development and UK studios made £2 billion in global sales.5 In a separate publication for NESTA, GIC suggested that in 2008 there were 47 publisher-owned and 166 independent games development studios in the UK.6 14. Following agreement at European level in 2007 of revised SIC codes, some more specific oYcial statistics are beginning to emerge. The Inter Departmental Business Register (IDBR) oVers an assessment of the size of the sector though it has limitations. The IDBR snapshot for June 2010 estimates that there are 635 video games “local units” in the UK employing around 6,000 people (the number of local units in the UK for all sectors is 2,548,630 employing around 27,708,300 people). However, it seems likely that these figures may feature significant undercoverage. Each business in the IDBR is allocated an industry classification based on the companies’ predominant business activities. Therefore where video games activity is undertaken but it is not the primary activity, employment and business estimates for the video games sector would be underestimated.7
The Video Games Industry in Scotland 15. 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. Grand Theft Auto IV for example reportedly sold some 6m copies in just the first week of release and is argued to be a key reason why the UK was placed third in the world rankings for games development in 2008. 16. The IDBR snapshot for June 2010 estimates there are 20 video games “local units” in Scotland employing around 200 people. However, as previously noted we believe the figures feature significant undercoverage. The snapshot shows the number of local units for all sectors in Scotland is 192,170, with employment of 2,392,200. 17. Dundee has had a particular reputation for excellence in games development. Recent redundancies in Dundee and particularly the news in August 2010 that major local employer Realtime Worlds had experienced far less than anticipated sales of its game APB and subsequently had gone into administration was obviously very disappointing.
5 Tiga/Games Investor Consulting, January 2009. 6 Raise the Game, NESTA/GIC December 2008. 7 Here the video gaming industry is defined as SIC 2007 codes 58.21 (Publishing of computer games) and 62.01/1 (Ready-made interactive leisure and entertainment software development). Units counts have been rounded to the nearest five and employment counts to the nearest 100 in line with ONS requirements. Despite improvements following the move to SIC 2007 codes, at this level of detail the IDBR dominance rule may mean some video games businesses, and all their employment, are being classified under a diVerent SIC code. As an example a business that is undertaking both video game development and computer consultancy, would have all activity and employment classified under computer consultancy, if the majority of the activity was in this sector. It is likely that this classification problem is more of an issue for certain industries and will be magnified when very detailed industry classifications are being considered. Scottish Affairs Committee: Evidence Ev 47
18. Dundee is recognised for the close, productive relationship between the University of Abertay and local games businesses. The University was the first to achieve sector skills council Skillset’s accreditation for games-related courses back in 2004. To date four of the nine courses to be awarded Skillset accreditation are in Scotland—three at Abertay and one at the University of West of Scotland.
19. In December 2009 BIS announced a £2.5 million Strategic Investment Fund grant to the University of Abertay to support a new video games centre of excellence. Total investment in the centre—including aid from the European Regional Development Fund—will total more that £8 million. The project includes the creation of a new prototyping lab and other facilities at Abertay, scheduled for completion this year.
20. Key to this project is the creation of a £2 million fund—formally launched by Abertay in July 2010— to help small companies develop new games prototypes, address issues with attracting finance and improve their prospects for bringing their new games concepts successfully to market. The fund oVers valuable help to Scottish companies but eligible companies elsewhere in the UK can also apply. An innovative aspect of the project is the opportunity it oVers to undergraduates to work on games development projects using Abertay’s very successful “Dare to be Digital” model, helping increase the supply of “industry-ready” new entrants to the workforce.
Global Competition 21. Like all sectors, the UK games sector is challenged by competition for investment from overseas territories. Measured in revenue, the UK was for many years the world’s third largest producer of games placed behind the US and Japan until 2007 when, according to GIC, it fell to fourth place, displaced in the rankings by Canada.8 GIC’s ongoing monitoring claimed that the UK regained third place in 2008 though they suggested it was likely to have fallen to fifth place in 2009, overtaken by Canada and for the first time South Korea.9
22. In 2007, GIC’s Playing for Keeps report for UKTI and BERR listed aid available to games companies in several territories, including Canada.10 Though this information is now out of date it may be of historic interest.
Policy for Video Games 23. The Emergency Budget announced a package of reforms as a first step in the Government’s long-term aim to create the most competitive corporate tax system in the G20, promoting the UK as a more compelling environment for both our indigenous and inward investor games companies.
24. Additionally we want UK video games businesses to be particularly well placed to respond to the new opportunities oVered by the rapid growth in global demand for interactive entertainment, the new routes to market we see from the growth of online delivery, the broadening demographic for games and the potential for SME games businesses to create new business models.
25. DCMS and BIS are talking to the video games industry regarding what Government, industry and others might do to promote the sector’s competitiveness, including by ensuring the games sector is fully considered in broader ongoing exercises such as Government’s focus on supporting growth and on business access to finance. Specific new activities initiated to date include:
— the appointment of Ian Livingstone OBE, Life President of Eidos, as a skills champion for video games, building on his role as Chair of Skillset’s Games Council to drive forward work to produce a better skilled workforce for the sector;
— an independent review, led by Mr Livingstone and Alex Hope, and carried out by NESTA and Skillset, of education and training in the UK games and visual eVects sectors. This is likely to report in January 2011;
— a series of ministerial roundtables with the sector on themes such as finance and skills; and
— work with UK Trade and Investment, the industry and others to update and better define the proposition the UK oVers for video games inward investors/potential inward investors. 9 September 2010
8 Playing for Keeps, Games Investor Consulting for UKTI and BERR, October 2007. 9 Raise the Game, NESTA/GIC, December 2008. 10 Playing for Keeps, Games Investor Consulting for UKTI and BERR, October 2007. Ev 48 Scottish Affairs Committee: Evidence
Written evidence from Abertay University Executive Summary — Abertay University is making this submission in order to provide written evidence to the Scottish AVairs Committee regarding the above. — Our submission is made in the context of our high level of involvement with the games development industry in Scotland and the UK through a range of activities and our leadership in computer games education. — The games development sector has high growth potential with opportunities for both positive economic impact and cultural leadership. — Games development requires a significant upfront investment before revenues are generated. Content IP is less attractive to conventional equity investors than, say, technology IP. There are challenges associated with the suYciency of working capital. For these reasons we continue support Games Tax Relief. — We also believe that additional financial incentives could be developed to grow the availability of working capital. These include project finance funds using private capital, encouraged by an existing instrument such as EIS, if such a scheme were to be modified to promote this area. — We have noted the relevance of a number of these areas to the BIS Green Paper Financing a private sector recovery which although UK focused could have an impact in Scotland.
1. Credentials 1.1 Abertay University’s Institute of Arts, Media and Computer Games is the UK centre of excellence in computer games education. The Institute’s taught portfolio includes highlights such as three Skillset accredited programmes and a Masters in Professional Practice in Games Development with forty publicly funded places allocated for UK and EU students. All courses reflect the high level of industry involvement in our activities, underpinned by academic rigour and innovation. The Institute is also the home to Dare to be Digital, the international talent competition that provides the exclusive pathway to the BAFTA Ones to Watch Award, which this year attracted entries from students from over eighty universities world-wide. Abertay University also has a portfolio of innovative interdisciplinary research associated with the visualisation of complex data associated with games technology and also new models for new media audiences. This work spans the whole University and also includes disciplines within Arts, Media and Computer Games. The Institute’s new business support project is run by a team recruited from industry and draws on all of the successful facets of Abertay University’s activities described above.
2. Context 2.1 The context in which this submission is made is the University’s high level of interest in the stability, survival and growth agenda for games developers and related businesses in Scotland. This interest is driven by a number of factors: — Direct employment and business start up opportunities for our graduates. — Our close relationship with industry via accreditation, programme design and input, guest lecturers, University Court membership and visiting professors. — The Developer Accord—an association of games developers and related organisations that contribute mentors and other support to the Dare to be Digital competition, the international talent competition that is the pathway to a BAFTA award. — Our significant experience of supporting fledgling creative teams and small companies. — Recent public investment in our Centre for Excellence in Computer Games Education and our Business Support projects providing prototype grant funding for SMEs, matched by significant investment by Abertay University. — Our studio-based learning approach and distinctive workplace simulation activities which provide real-world experience for students and contribute to the widely recognised, positive attributes of our graduates. — Interdisciplinary and research dimensions, for example where we have used games technology in the visualisation of complex data demonstrating the spill-over potential of this sector.
3. Submission 3.1 We recognise that the Committee will already have significant evidence regarding the contribution made by the Scottish video games industry to the Scottish and UK economy. We also recognise that the Committee will be well aware of the competitive threat of incentives in competitor countries. We wish to highlight the following, based on our direct experience: — The Scottish and UK strengths in original IP generation. However, more new starts and original IP are needed to feed this growth opportunity and reach critical mass. Scottish Affairs Committee: Evidence Ev 49
— Changing business models (eg online, short lifecycle apps, proprietary platform dominance) as representing both threats and opportunities. — The inseparability of talent from IP evidenced by the history of creative teams and IP moving ownership in tandem. — The diVerent nature of this business in terms of business failure. Failed development businesses do not leave a long tail of unemployment because it is driven by talent and the talent is hired elsewhere. Better ways of retaining talent in Scotland are required. — Our ambition to promote greater IP retention and ownership (alongside properly resourced routes to market)—this could be in the context of anything from direct online sales to enhanced developer/publisher relationships (to ensure maximum buy in) as evidenced by our prototype grant fund. — The particular characteristics of content development businesses—eg long lead in to revenue but costs primarily labour. — The evidence contained in the CIHE Task Force Report on the Creative Industries. 3.2 A consistent theme in our wide-ranging engagement with industry is the challenge of suYciency of working capital for games and other interactive content development businesses. Our support for the Games Tax Relief scheme outlined by the previous government was given in recognition of the contribution that such a scheme could make to liquidity for medium-sized and well established developers. We would continue to advocate such a scheme. 3.3 A further reason why we continue to support Games Tax Relief is the potential for such a measure, when combined with the distinctive and vibrant development cluster in Scotland and the availability of talent, to drive future inward investment. 3.4 Our work with small creative teams and emergent companies has shown the diYculties faced in securing up-front funding for content development ahead of commercial deals. Equity finance models have limited potential in funding content creation for small companies. The limitations of equity funding, including the equity funding gap, are highlighted in the BIS Green Paper Financing a private sector recovery. 3.5 Interestingly, the emergence of start-ups in the heart of a vibrant games cluster exposes additional frailties because of the potential for key team members of start-ups to be hired to more secure jobs before a commercial deal is secured for the start-up and because working capital in the start-up is limited. Games Tax Relief would not help such start-ups so we believe that additional measures are necessary. 3.6 We have secured £5 million of funding to operate a UK prototype grant scheme (which includes a £1.5 million contribution from Abertay University) to help improve working capital in small companies and start-ups. We are also actively seeking private investment partners to establish project finance funds which are not equity based and provide returns from an upside through sales revenue sharing. We anticipate that our prototype grant fund will help to de-risk private project finance investments if we can link with such a fund. We are keen to encourage the investigation of stimulating the establishment of such private project finance funds through tax incentives. This could be achieved by creating and carefully defining an eligible category within the EIS scheme for example. There is presently a blanket exclusion on financial activities as an EIS eligible business. 3.7 We note that the BIS Green Paper Financing a private sector recovery also highlights supply chain finance, primarily in the context of Buyer Driven Receivables Programmes and the like. Consideration of supply chain finance stimuli should extend to digital content businesses where the challenges are diVerent from advanced manufacturing etc in that the pre-sales costs are nearly all related to labour.
4. Relevance to terms of reference 4.1 Our submission notes our continued support for Games Tax Relief but is also particularly relevant in the context of the term of reference regarding alternative financial incentives for the industry. We are particularly keen that ways to stimulate a greater availability of private project finance are investigated. 9 September 2010
Written evidence from the Association for UK Interactive Entertainment (UKIE) Executive Summary The Association for UK Interactive Entertainment (UKIE) is the trade association that represents a wide range of businesses and organisations involved in the video games industry. UKIE exists to ensure that our members have the right economic, political and social environment needed for this expanding industry to continue to thrive. We welcome the Committee’s interest in our industry. Scotland is home to nearly 25% of UK video games companies. The industry’s strength lies in its highly skilled workforce and development of original intellectual property (IP). However the industry’s growth is being stifled by financial incentives oVered abroad, specifically tax breaks. Ev 50 Scottish Affairs Committee: Evidence
The video games industry is the jewel in the crown of the UK’s creative industries. In 2009 the UK was the largest games market in Europe, the Middle East and Africa and the third in the world after the US and Japan.11 However, the industry faces problems and requires government support to ensure it remains competitive in the global marketplace. UKIE was disappointed by the decision of the new government not to proceed with tax breaks for the industry, despite previous statements by then senior shadow ministers to the contrary, and restates its case that without tax breaks the UK is not able to compete on a level playing field with other leading countries around the world. Tax breaks aVect the investment decisions of global publishing companies and have a knock-on eVect on UK games development, particularly relating to original IP. As companies locate abroad, our home-grown talent goes with them. The UK has fallen to fifth place in global video games sales rankings, by country of origin, and is not developing games to match demand both domestically and in the global market place. UKIE, formerly ELSPA, has supported TIGA’s campaign for tax breaks for the video games industry and continues to believe that such support measures are is essential for the UK video games industry continues to flourish and remain globally competitive. Furthermore, we also urge the government to work with the industry to develop alternative financial incentives, specifically: practical guidance and support on how to monetise IP and modification of the R&D tax credit to ensure that the video games industry can make full use of it.
Contribution to the Scottish/UK Economy 1. The video games industry is the jewel in the crown of the UK’s creative industries. In 2009 the UK was the largest games market in Europe, the Middle East and Africa and the third in the world after the US and Japan.12 2. The Technology Strategy Board has projected UK games sector growth of 7.5% between 2009 and 2012.13 3. Scotland is home to over 50 video games industry companies, predominantly in Dundee and the Tayside area, but also in Edinburgh and Glasgow. This represents nearly 25% of UK videogames companies. 4. Grand Theft Auto IV, largely developed in the Edinburgh-based studio of Rockstar North, sold more than six million units and generated sales of £250 million in its first week alone; it took £150 million on its first day. Of the top 20 development studios in the world four are based in the UK, including Rockstar North, which generated £16.30 million in UK revenue in 2009.14 5. UKIE believes the video games industry is central to rebalancing the UK economy and boosting private sector employment. Overall the computer games industry comprises approximately 220 business including 155 games development companies, 30 games publishing companies and 35 games support companies.15
Consultation with Government before GTR was Abolished 6. UKIE, formerly ELSPA, together with TIGA has consistently made the case for a video games tax relief over the last five years. The success of this campaign was reflected in the March 2010 Budget, which announced a tax relief for the industry. 7. In March 2010, Mr Ed Vaizey MP told the games industry that a Conservative government would honour the previous administration’s commitment to introduce game development tax breaks. 8 However, in the Budget statement June 2010, the Chancellor described the tax breaks as “poorly targeted” and announced that they would not proceed. No detailed explanation has been given to date for why these tax breaks are now considered to be “poorly targeted”.
Impact of the decision to abolish Games Tax Relief 9. Until recently the UK was the third most successful video games development location in the world, behind the US and Japan. However, it has fallen to fifth place in global video games sales rankings, by country of origin. 10. Britain’s fall in ranking is certainly not demand-related, as interactive entertainment is more popular than ever. Half of UK households own at least one video games console.16 In 2008–09 video games software sales were £1.62 billion, with 114.2 million units sold.17
11 Technology Strategy Board, Creative Industries Technology Strategy 2009–12. 12 Technology Strategy Board, Creative Industries Technology Strategy 2009–12. 13 Technology Strategy Board, Creative Industries Technology Strategy 2009–12. 14 GFK-Chart Track. 15 Skillset, Computer Games Sector—Labour Market Intelligence Digest (2010). 16 Ofcom, Digital Participation Metrics Bulletin (2010); Ofcom, Communications Market Report (2010). 17 GFK-Chart Track. Scottish Affairs Committee: Evidence Ev 51
11. Despite the increasing consumer demand for video games globally, the development and production of games in the UK is declining. NESTA concludes that the UK’s fall to fifth position in global sales rankings in 2009 can be attributed in part to high costs of development, lack of access to finance, and limited government support, all of which prohibit UK (based) games development.18 12. Competitors in other countries such as Canada enjoy considerable tax incentives which encourage inward investment. Consequently, investment in games production studios by global companies are made abroad, instead of in the UK. 13. In addition one has to understand the common business model in which the video games industry operates. The recoupment model—where a project’s development costs are paid in advance and then recouped by the publisher before the developer receives any royalties—remains commonplace in the industry. But, as production costs continue to rise, there is very little surplus finance left over for developers to (re)invest in the creation of new games. Consequently, the independent developer base shrinks, as talent moves to where additional sources of finance exist, for example Canada. 14. Two thirds of studios questioned in 2008 believed that tax relief would help original IP development, an area where the UK has a competitive advantage: in 2008, the UK scored 10/10 in NESTA’s comparative indicator table, for ability to create new IP and genres in oZine games. 15. The Canadian approach is a prime example of the way in which tax breaks aVect investment decisions: In the late 1990s Canada sold a fifth of the games it sells today, and the industry employed fewer than 2,000 developers. The total number of staV working in games development in Canada has grown by 42% since 2006, a growth largely driven by Quebec, where the widespread availability of generous tax incentives for games development companies has seen global companies relocate there. Quebec is estimated to have generated a net £667 million in inward investment over the last decade from an outlay of £332 million.19 16. By contrast the computer games workforce in the UK is currently at its lowest since Skillset started measuring the size and shape of the industry.20 Not only are large publishers locating in subsidised territories such as Canada as opposed to investing in the UK, but our qualified labour is migrating with them. 17. The decline in developer numbers is expected to accelerate from 1% in 2008 to between 3% and 5% per annum as global studios relocate investment and staV from the UK to subsidised territories.21 18. Tax breaks aVect the investment decisions of global publishing companies such as Activision. Despite having two development studios in the UK, Activision’s global investment decisions have largely focused on Canada, specifically on Quebec. Having purchased a studio in 2005, the company were able to realise its full potential and expand this studio, encouraged by the tax breaks on oVer. From a base of 29 people, this studio has now grown to employ 180 people. An additional 450 jobs have also been relocated to this Quebec studio from Los Angeles. 19. Activision feel that any further delay in introducing tax incentives could permanently harm the UK videogames industry, especially as a new console cycle is approaching, with investment decisions being made about where to develop new titles. 20. The Committee may also wish to note that Warner Brothers, Eidos/Square Enix and Ubisoft have all recently established studios in Canada. 21. Without tax relief the UK’s highly skilled production base is hit on two fronts: independent studios cannot aVord development on their own, and the cost of publisher owned production in the UK is prohibitively high compared to other areas. Conversely, a tax break would act as an incentive for global investment in the UK and would allow the UK workforce to continue developing British games, including original IP.
Alternative Financial Incentives 22. With tax breaks apparently oV the Government’s agenda for the foreseeable future, we welcome the Committee’s focus on alternative financial incentives for the industry. 23. UKIE is part of the TIGA-led group to examine the value of tax breaks and alternative means of financially supporting the video games and interactive entertainment industry. 24. UKIE will also be looking at other ways of helping the sector and working more closely with its members to identify new business models that support industry growth. 25. An important share of global games sales is generated from the development of original IP, an area where the UK has traditionally been strong. However, with developers increasingly reliant on overseas publishers for finance, and with our UK developer base shrinking, original IP development has fallen; our potential is not being realised.
18 NESTA, Raise the Game (2008). 19 Ibid. 20 Skillset, Computer Games Sector—Labour Market Intelligence Digest (2010). 21 NESTA, Raise the Game (2008). Ev 52 Scottish Affairs Committee: Evidence
26. Alternative support is needed, particularly in the form of practical guidance and support on how to monetise IP. As the Technology Strategy Board has noted, the need for new business models to monetise output is currently one of the greatest challenges to the development and support of creative talent in the UK.22 27. UKIE’s latest academic member, Abertay University, has a new £5 million prototyping project. This is an excellent example of alternative financial support for original IP, and is expected to create up to 30 new companies and 400 new jobs. Successful applicants receive up to £25,000 to help build a prototype game or creative product to present to investors. 28. Innovation can also be costly. NESTA’s 2009 report on innovation concludes that most of the UK’s investment in innovation takes other forms than traditional scientific research and development.23 Yet, the definition of research and development for the purposes of the R&D tax credit remains scientific, making it diYcult for the video games industry to qualify and/or benefit fully from this source of finance. We look forward to working with the government in the autumn to help them understand better the needs of our industry and how R&D is too generic for our purposes. 10 September 2010
Written evidence from the National Endowment for Science, Technology and the Arts (NESTA) NESTA Overview NESTA is the National Endowment for Science, Technology and the Arts, the UK’s foremost independent expert on how innovation can solve some of the country’s major economic and social challenges. Its work is enabled by an endowment, funded by the National Lottery, and it operates at no cost to the government or taxpayer. NESTA is a world leader in its field and carries out its work through a blend of experimental programmes, analytical research and investment in early-stage companies. We are building a significant body of evidence on the creative industries, which according to our research are worth over £50 billion to the economy every year. Much of this work has focused on the UK video games sector, the challenges it currently faces and how policy can help to overcome them, as well as practical programmes to support innovation and growth in the sector.
Executive Summary The video games industry is an economic success story for the UK. As recently as 2008, the UK was ranked as the third video games development territory after the USA and Japan, with global revenues worth £2.03 billion and 10,000 directly employed by the sector.24 However, the trade sector body, TIGA, reports that the UK risks losing its place in the global rankings: between July 2008 and July 2009, 15% of all video games companies in the UK went under, and the sector shed 4% of its workforce. It is feared that, without targeted support, the UK will drop from the forefront of global development. Indeed, according to industry insiders, the industry has already fallen to the sixth position globally.This trend has been blamed on the generous subsidies available for video games companies in countries such as Canada or France. However, NESTA believes that there are other factors behind the UK’s decline as a global hub for video games development; these include skill shortages, unsustainable business models and a lack of innovation. This submission outlines urgent actions to address these problems, including: — The Livingstone & Hope Independent Skills Review for the video games sector in which NESTA is currently engaged, in close collaboration with Skillset. — Adjustments to the R&D tax credit scheme to make it more relevant for UK video games companies, and focus on promoting innovation in the sector. — Changes to existing incentive schemes for investors to attract more external project finance into the sector.
Nota Bene This submission seeks to outline the value of the video games sector to the UK economy, and all figures cited refer to the industry as a whole; this reflects low levels of geographical concentration of the industry. Unlike other creative industries, and despite notable clusters such as Dundee or Brighton, no region or nation hosts more than 10% of the video games workforce overall.25
22 Technology Strategy Board, Creative Industries Technology Strategy 2009–12. 23 NESTA, The Innovation Index (2009). 24 GIC (2008), Raise the Game, NESTA: London. 25 Skillset (2009), Computer Games Labour Market Intelligence Digest, London: Skillset. Scottish Affairs Committee: Evidence Ev 53
1. A high growth sector where the UK is a global player: The future prospects for video games as a mass entertainment medium are bright. According to available estimates, video games markets will experience annual growth rates of 10.3% between 2008 and 2012—twice as much as film.26 This is a high growth sector where the UK has in the past shown a competitive edge thanks to its creativity and technical excellence27— indeed, until 2008 it held the third position on development rankings by turnover, after the USA and Japan. It is already the second global market in terms of size.
2. The economic contribution of the UK games sector is significant: in 2008, global revenues generated by UK video games were worth £2.03 billion, and contributed £1 billion to GDP.28 It is worth bearing in mind the economic contribution of the sector as an employer: the industry directly employed 10,000 people (and a further 18,000 indirectly) in 2008.29
3. But the UK is becoming less attractive as a place to make video games: The trade sector body, TIGA, reports that the sector is in decline, and risks losing its international advantage. Between July 2008 and July 2009, 15% of all video games companies in the UK went out of business, and the sector shed 4% of its total workforce. While the economic downturn has undoubtedly contributed to this decline, the industry view is that this is symptomatic of a longer-term trend which has its roots in an uneven international playing field. It is thought that, if the current trends continue, the UK could drop down to sixth position in the global development territory rankings in terms of revenue.30
4. Other countries have lavished generous subsidies on the sector in a bid to attract talent and investment. For instance, France and Canada alone have already invested public funds worth, respectively, over £500 million and ƒ180 million on the sector.
SUMMARY OF TAX FISCAL INCENTIVES FOR INTERACTIVE CONTENT PRODUCTION (INCLUDING VIDEO GAMES) IN CANADA AND EUROPE
Territory Montreal Ontario France Full name Refundable Tax Ontario Interactive Intellectual Property Le credit d’import Credit for the Media Tax Credit Development Fund jeu video. Production of (Pilot Program) Multimedia Titales— Specialised Corporations Description 90% of all eligible 80% of all labour 30% of all 20% rebate on expenditures in expenditures in expenditures to qualified labour multimedia titles Ontario are subject “bring a product expenditures for are subject to a to a rebate of up to closer to the projects that pass a rebate of up to 40% completion of a cultural test 37.5% functioning prototype or market ready stage,” including content, technlology and business model development activities (eg experimentation, prototyping, etc) Annual Spend (last (not available) C$12.4 million C$10 million pilot ƒ170 million available year) (2008–09), program (2009–10)), (2008) including non- with C$3.9 million games interactive remaining as of May projects 2010
5. In addition to the schemes outlined in the table above, territories such as Montreal provide other incentives such as tax holidays for foreign experts, Intellectual Property development funds for independent games studios, and direct subsidies for publisher investments. In British Colombia, tax incentives are available for venture capitalists to encourage investment in the sector.
26 PwC (2008), Global Entertainment Outlook 2008–12. PriceWaterhouseCoopers: London. 27 GIC (2008), Raise the Game, NESTA: London. 28 GIC (2008), Raise the Game, NESTA: London, Oxford Economics (2008), The Economic Contribution of the Games Development Industry. Oxford Economics: Oxford. 29 Oxford Economics (2008), The Economic Contribution. 30 Crossley, R. (2010), Braben fears UK’s drop to sixth in dev league, Develop Online 21 January 2010. Available at http:// www.develop-online.net/news/33703/Braben-fears-UKs-drop-to-sixth [Last accessed 10 September 2010]. Ev 54 Scottish Affairs Committee: Evidence
It would be hard to argue that such comprehensive support doesn’t put UK video games companies at a disadvantage against their overseas competitors. This is compounded by the emergence of “naturally cheaper” territories (including Eastern Europe, Singapore or China) as credible development hubs which are attracting significant levels of investment from global publishers. 6. Video Games are thriving in other countries without generous public support: it is worth bearing in mind that other arguably “expensive” development territories are managing to compete without the sort of subsidies and incentives available in Canada or France. Japan and South Korea remain at the top of global rankings without targeted large-scale support, and German games studios have become a force to be reckoned with in emerging online and mobile markets in spite of a marked lack of government support. Likewise, the Nordic countries and Australia have attracted significant levels of foreign investment without the sort of measures available for their Canadian and French competitors. This suggests that tax credits are not the only explanation for the challenges that the UK video games sector is currently facing. 7. Staving oV the decline of the UK video games sector: The trend that this submission has described is not irreversible, even in the absence of the production tax credits that the sector has been calling for. But urgent action is needed in several areas. 8. The Livingstone/Hope Independent Review of Skills in the video games and visual eVects sector for the Rt Hon Ed Vaizey MP, Minister for Culture, Communications and Creative Industries, will set out actions to address recurrent skill shortages: The UK video games industry has long complained about the low quality of specialist video games courses at universities. Indeed, according to 2007 data, only 18% of those who graduated from these courses managed to gain a job in the sector. A third of respondents in a 2009 NESTA survey reported that “skill shortages” remains one of the main barriers to making video games in the UK.31 9. Ian Livingstone and Alex Hope’s Independent Review for at the request of the Minister for Culture, Communications and Creative Industries, which NESTA is leading in close collaboration with Skillset, is tasked with producing a blueprint to transform the UK into the best source of talent for video games and visual eVects production in the world. The Review is examining the talent pipeline for the games and visual eVects industries, beginning with schools, through to Higher and Further Education and into industry itself. It will make recommendations to government, education providers and business which will leave the industries better placed to react to and shape future changes in their technologies and markets. 10. The Research and Development (R&D) Tax Relief scheme needs to be made more relevant for UK video games companies: Innovation in technologies, content and business models can make UK video games companies more productive and eYcient, and enable to develop the new products and services to stay ahead of the international competition. By supporting the innovative activities of UK video games companies, policy can help the sector to step away from an unsustainable “race to the bottom” on the basis of costs, and instead continue at the top through the creativity and technical excellence that drove it there on the first place. 11. The R&D Tax Relief scheme is one of the main mechanisms through which the UK government encourages innovation in the private sector. However, many innovative video games companies are unaware of its existence, or face substantial barriers in benefiting from it. The way that the credit is configured means that it is particularly hard for video games companies with distinctive innovation processes to prepare claims, or get them approved; these companies usually lack the scale or in-house resource to access the legal and tax-related expertise required to prepare their claims. In addition to the barriers to application that companies face, there is a degree of uncertainty about whether a claim will be approved by HMRC, as well as its value. Other things being equal, the greater the uncertainty, and the longer the lag between claim and tax relief, the less likely it is that a company will file a claim.32 12. NESTA recommends adjustments to the existing R&D tax relief scheme to make it a more eVective means of supporting innovative video games companies. These have the twin objectives of encouraging companies to apply and improving the approval rate from HMRC without opening the floodgates of claims from other sectors. These include: — Raising the profile of the tax credit for video games companies, and improving access to information about how to apply: There is a lack of case studies showing how the tax credit can benefit companies in the sector. HMRC and BIS could help by providing examples of innovative video games companies which have benefited from the scheme, as well as templates and guides, describing in more detail than is currently available, the sorts of data and reporting formats that HMRC requires from applicants. — Clarify the HMRC guidelines about important innovation expenditures in the sector: Currently the status of important innovation expenditures for video games development is unclear: companies need to know whether spend on tools which are publicly available or usability testing (both of which are areas of expenditure the sector considers vital for games development) fall within the scope of the tax credit.
31 NESTA (2009), It’s Time to Play, NESTA: London. 32 Of course, some of the costs that a company will incur to prepare a claim (ie legal advice and consultancy) are aimed at reducing those uncertainties. Scottish Affairs Committee: Evidence Ev 55
— Use data collected as a by-product of development to assess R&D tax Relief Claims: The nature of innovation in the video games sector makes it very diYcult to apportion R&D activities to a single stage of a project, making it harder and more expensive to collect data for the purposes of tax relief. HMRC should explore the possibility of using the data collected via the control version systems (CVS) that games companies have in place to manage their development processes as evidence for the purposes of assessing R&D Tax relief claims.
— Provide R&D specialist units with video games specific expertise: There is a perception that HMRC’s lack of sector-specific expertise is hampering take-up of the tax relief. One way to address this is to organise training workshops for HMRC personnel along the lines of those held by Intellect, the trade body for Software and IT. It might also be useful to set up one specialist unit as a single point of contact for video games companies across the UK.
— Improve access to data on the R&D Tax Relief scheme for evaluation and assessment purposes: Currently the information available on the scheme is too high level to assess the benefits of changes to the scheme to particular sector. More consistent reporting and collation of data would enable the ready identification of bottlenecks in the system and the sectoral destination of taxpayers’ money.
13. It is crucial to improve access to external finance for the sector: Past NESTA Research has highlighted that UK studios rely excessively on global publishers as a source of capital for their development activities.33 In most cases, these publishers contract UK studios for specific projects following a “work for hire” model with meagre rewards. There is generally little space for innovation in these projects- Instead of staying ahead of overseas developers through the generation of original IP, the UK is forced to compete on costs, which as was argued above is not a sustainable option.
14. In the increasingly rare occasions where publishers fund the production of original IP by UK studios, they do so through a “royalty advances model” where the developer relinquishes ownership over its original IP in exchange for funding: innovation may happen, but commercial exploitation doesn’t.
15. All of this means that UK studios usually have little to show for their development eVorts at the end of a project. Lacking funds to reinvest on innovation and growth, or to buVer themselves against market uncertainty, they fall in an “IP Poverty Trap” which is hard to escape.
16. NESTA believes that external finance focusing on projects rather than companies may have a role to play in enabling the sector to access capital for innovation and growth. Again, relatively inexpensive actions and adjustments to remove biases against the sector in existing schemes could have generate substantial benefits. They include:
— Raising awareness of the external project finance instruments in the UK video games sector, particularly among studios.
— Changing the established application criteria to enable external investors who use project finance models to benefit from existing incentive schemes such as Venture Capital Trusts (VCT) and Enterprise Investment Schemes.
— Develop standardised legal templates for project finance to lower the currently prohibitive costs of organising video games project finance vehicles.
Given the economic importance of the sector, we also consider that there are grounds for the redeployment of some of the Lottery finance available for films into video games development. 10 September 2010
Written evidence from TIGA Executive Summary Video game developers in Scotland and the UK are at a competitive disadvantage. Many of our key competitors provide tax breaks for video games production. No such tax breaks for games production exist in the UK. Investment and jobs are drifting away to other countries. TIGA’s proposed Games Tax Relief would create a more level playing field and boost investment, job creation and innovation. Other financial measures should be considered to strengthen the industry but Games Tax Relief would have the most positive impact on the Scottish games industry.
33 Bakhshi, H and Mateos-Garcia, J (2010), The Money Game, London: NESTA. Ev 56 Scottish Affairs Committee: Evidence
The Contribution made by the Scottish Video Games Industry to both the Scottish and UK Economy34 1. Scotland has produced some of the world’s most successful video games including Grand Theft Auto, Lemmings and Crackdown. This has reinforced Scotland’s image as an innovative place to work. The Scottish games sector is diverse, with companies working in mobile, online, casual and console markets. 2. The presence of a strong Scottish games industry strengthens the appeal of Scottish universities, providing direct employment and business start-up opportunities for graduates in suitable disciplines. The video games industry sustains a “digitally literate” workforce whose skills are valued in other sectors including health, education, film, TV and music. 3. Scotland has 46 development companies, representing 10.8% of the UK total. 4. Scotland’s games development sector supports an additional 1,190 indirect jobs. 5. 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 HM Treasury, and make a direct and indirect contribution of £66.8 million to the UK’s Gross Domestic Product (GDP).
TIGA’s Games Tax Relief 6. In August 2009 TIGA submitted a proposal to the UK Government to introduce Games Tax Relief. It was envisaged that Games Tax Relief would be calculated and applied in a similar manner to the existing tax relief for British films; video games would need to pass a cultural test to benefit from the tax break; there would be tiered rates of relief to reflect a range of development budgets; any interactive product, including entertainment, educational and commercial products, could potentially benefit from the relief. 7. Over a five year period Games Tax Relief was expected to: create or save 3,550 jobs, increase and safeguard £457 million in new and saved development expenditure, cost £192 million in tax relief but generate £415 million in new and saved tax receipts.35
What consultation was held by the UK Government with the industry before the decision was made to abolish a Games Tax Relief 8. There was no consultation by the UK Government with TIGA before the decision was made to abolish Games Tax Relief. TIGA wrote letters requesting meetings with Vince Cable MP, Secretary of State for Business, Innovation and Skills (1 June), Danny Alexander MP, Chief Secretary to the Treasury (3 June), David Gauke MP, Exchequer Secretary to the Treasury (3 June) and to Ed Vaizey MP (3 June). None of these requests were accepted prior to the Budget on 22 June 2010. 9. On 29 March, Ed Vaizey MP, the then Shadow Culture Minister told Develop that the Conservatives “are going to support tax breaks for the video game industry” in the Conservatives’ first budget”.36 On 26 April he added that “We are fully behind game tax breaks. This is my unequivocal statement,” he said. “It’s been approved by George Osborne.”37 On 30 April, Don Foster MP, the then Liberal Democrat Shadow Secretary of State for Culture, Media and Sport, said in a statement to TIGA that: “Liberal Democrats support the introduction of a Games Tax Relief. Following consultation on the details, we would implement the Relief as soon as possible.”38
The Level of Tax Breaks or Incentives Offered in Competitor Countries Canada 10. In 1997, revenue generated by Canadian made video games were well below those of the USA, Japan, UK, France, South Korea and Scandinavia. By 2006, Canada had secured third place in the global sales rankings, partly because of significant tax breaks for games production. 11. The main type of relief are tax credits for games companies’ staV salaries and other costs, which are set at 37.5% in Quebec, 30% in Ontario, 35% in Prince Edward Island, 45% in Manitoba, and 35% in Nova Scotia. In addition, British Columbia oVers a 30% tax credit for investment in new media projects. 12. Canada’s provinces and territories oVer a range of additional measures to support the video games industry. Quebec oVers income tax holidays for foreign experts of 75% for five years. Ontario oVers grants and prototype funds. 13. Quebec is estimated to have spent the equivalent of over £500 million in tax credits and grants between 2004 and 2008 on Ubisoft, Electronic Arts and Eidos, generating £1 billion in net investment.39 Canada’s studio staV overall have grown 43% between 2006 and 2008. Montreal’s development community has grown
34 The figures in this section are based on a telephone survey of 75% of Scottish games companies commissioned by TIGA and undertaken by Games Investor Consulting (GIC) in August and September 2010. GIC calculated the economic impact of the games industry. 35 Gardner, P, Gibson, R and Wilson, R, Investing in the Future: a Tax Relief for the UK Video Games Development Sector (TIGA, 2009). 36 http://www.develop-online.net/news/34341/Tories-come-clean-Well-oVer-tax-cuts-in-first-budget 37 http://www.develop-online.net/news/34619/Vaizey-you-have-to-trust-us-on-tax-breaks 38 http://www.tiga.org/PressReleaseDetail.aspx?id%c12d4346-17e2-47ce-bb77-12d5b8a4f298 39 Mateos-Garcia, J, (ed), Raise the Game (NESTA, 2008), p 18. Scottish Affairs Committee: Evidence Ev 57
by 960% from 500 to 5,300 in 10 years. Investment in development in Montreal has grown by 1,280% in 10 years from £21 million in 1999 to £290 million in 2008.40 Games businesses have an incentive to invest and locate where there is access to talented staV and generous tax breaks.41
France 14. France provides a tax credit which rebates 20% of production costs on games that pass a cultural test. France also has the National Video Game Fund which funds up to 35% of game prototypes and R&D tax credits which rebate 5% of R&D expenditure.42
Finland 15. In 2008, Government technology funding body Tekes provided the games industry with „10 million.43
Japan 16. Japan has funded a stimulus package which includes the promotion of the export of video games.44
Nordic region 17. The Nordic Game Programme (2006–11) supports work bringing games from concept to a level needed to secure the necessary production funding. Six million Danish crowns have been granted for development support to Nordic game companies in 2010.45
Norway 18. The Norwegian Film Fund distributes funds for film, TV internet and games projects, of which approximately £1 million is available for video games in 2010.46
Singapore 19. Substantial grants are given to games companies locating in Singapore.
South Korea 20. In addition to R&D funds, in 2008 South Korea announced a $200 million programme lasting until 2012, aimed at expanding the country’s game exports.47 In 2009 South Korea announced the creation of a $144 million agency to promote video games, animation online and television content.48
USA 21. The following states provide tax credits for games production: Louisiana (20%); Wisconsin (25%); North Carolina (15%); Georgia (20–30%). Connecticut oVers 30% tax credit for production of digital media including games. Florida, Hawaii, Maine, New Mexico, Rhode Island and Texas oVer a range of incentives and grants to film, TV and games companies.
EU 22. The EU has a games support programme called Interactive Works. Grants range from 10,000 euros to 150,000. The total budget for 2010 is two million euros. The criteria have been changed and an applicant now needs a film IP in order to apply for a game grant.49
What potential impact the decision to abolish Games Tax Relief will make on the video games industry in Scotland 23. Video game developers in Scotland and the UK are at a competitive disadvantage. Investment and jobs are drifting away to other countries. Over the period July 2008 to July 2009, 15% of UK video games firms went out of business. Between July 2008 and March 2010, 7% of the development workforce lost their jobs. This decline has been driven by a powerful force: many of our key competitors provide national or regional/state tax breaks for video games production. No such tax breaks for games production exist in the UK.
40 Investing in the Future, pp 40–41. 41 Maple Story, Develop, November 2008. 42 Raise the Game, p 30. 43 http://www.develop-online.net/news/32323/Finnish-Government-devotes-10-million-to-game-development 44 http://www.guardian.co.uk/world/2009/apr/10/japan-manga-anime-recession 45 http://nordicgameprogram.org 46 http://www.nfi.no/english/aboutnfi/index eng.html 47 http://www.gamasutra.com/php-bin/news index.php?story%21368 48 http://www.gamasutra.com/php-bin/news index.php?story%23510 49 http://ec.europa.eu/culture/media/programme/producer/develop/interactive/index en.htm Ev 58 Scottish Affairs Committee: Evidence
24. Removing Games Tax Relief will accentuate this trend. Between July 2009 and September 2010, the UK games industry workforce declined by 4.4%. Scotland has suVered a deeper fall than the rest of the UK, due to the collapse of Realtime Worlds. Scotland’s games development workforce has declined from 798 in April 2010 to 651 by September 2010, a fall of 18.4%. Over the same period, Scotland’s share of the UK developer headcount has fallen from 8.7% to 7.2%.50 25. Some Scottish developers are putting expansion plans on hold or investing abroad: one Scottish developer is opening two studios outside of the UK over the next 12 months; if Games Tax Relief was in operation he would be tripling his existing Scottish studio. There is a risk of a brain drain of talented game development staV leaving for other countries. 26. Other things being equal, in the absence of Games Tax Relief, over the next five years a further 150 development jobs could be lost and investment by games companies in Scottish jobs could fall by £21 million. Over the same period, the Scottish games industry’s contribution in tax revenues is predicted to fall by £19 million and the industry’s contribution to GDP by £47 million.51 Without Games Tax Relief it will be harder to attract talent and investment to Scotland. 27. Conversely, estimates suggest that Games Tax Relief over five years would create 130 new development jobs, trigger £16 million additional investment in Scottish development jobs by games businesses, fund 31 game projects, result in £14.5 million in new tax revenues and contribute £35 million to GDP.52 28. If Games Tax Relief was implemented it would also forestall the predicted decline, so the net position is that the tax credit could safeguard or grow a net 273 jobs, £37 million in investment, £33.7 million in tax revenues and £82 million in GDP contributions. Games Tax Relief would enable companies to take more risks and create more new and original titles. The tax break for Scotland would cost £13.8 million.53
Alternative Financial Incentives for the Industry 29. R&D tax credits should be retained and enhanced. Existing R&D tax credits only support research that has a technological focus. Some developers have called for a new R&D scheme which is aimed at the creation of new IP and original game content, which would encourage new studio formation and stimulate creativity. 30. Scotland should be marketed aggressively as a place to do games business. Dundee lost out to Galway for the Big Fish Games European QA and localisation base in April 2009.54 31. Start up developers should receive business mentoring and advice on how to create and retain IP. Abertay University is oVering up to £25,000 of support for applicants to create a prototype of their own IP. Funding should encourage developers to move away from the work for hire console teams and instead try new business models (online/mobile and perhaps console download) which enable developers to create their own routes to market. 32. New graduate start ups should be encouraged by providing business incubators (eg waive commercial rates for 24 months), legal assistance and business mentoring. This could stymie the emigration of educated people and help regenerate the economy from a proven base. 33. A pilot SME Training Tax Relief could be introduced so that SMEs could oVset expenditure on training, supporting student placements and education outreach activities against corporation tax. 10 September 2010
Written evidence from Rt Hon Michael Moore MP, Secretary of State for Scotland I am pleased to have the opportunity to contribute to your inquiry into the video games industry in Scotland. My colleague, Ed Vaizey MP, as Minister for Culture, Communications and Creative Industries has lead policy responsibility for the computer games industry. He is also joint Minister with the Department for Business, Innovation and Skills. As such, the Department for Culture, Media and Sport have submitted evidence to the inquiry jointly with BIS. My oYcials have worked closely with them on this and I thought it appropriate just to provide a short memorandum to you, as I do not wish to re-visit the points made in Ed Vaizey’s submission. A primary consideration for the Committee is the decision not to go ahead with the previous government’s proposed culturally-based tax relief for the video games industry. This decision, taken in the emergency budget earlier this year, falls within the remit of the Treasury, and it would be inappropriate for me to speak
50 GIC calculation for TIGA. 51 Ibid. 52 Ibid. 53 Ibid. 54 http://www.deti.ie/press/2009/20090409.htm Scottish Affairs Committee: Evidence Ev 59
on behalf of another government department. However, I know that in taking this decision Ministers gave careful consideration to the arguments made by the industry, alongside their own analysis, and concluded that the case for a special tax break was not sustainable. The Government values the economic and cultural contribution that the video games industry makes to both the Scottish and UK economies. Scotland is home to games companies of global significance with hubs in Edinburgh, Glasgow and Dundee. More than 500 highly skilled, creative people are employed in Scotland’s video games sector which generates over £20 million annually for the Scottish economy. We want this to continue and grow: that is why we have taken specific and broad measures that will increase the industry’s competitiveness in the global market. Specifically, our ongoing commitment to this sector is underlined by the £2 million fund recently launched by Ed Vaizey to help small companies develop new games prototypes. This fund will be managed by Abertay University, which is ideally located to nurture talent in this sector. The industry will also benefit from the wider package of reform to business taxation. We have confirmed our intention to cut the main rate of corporation tax—year on year—to 24% by 2014. Similarly, we will reduce the small profits rate to 20% from April 2011. The changes will reduce the corporation tax burden for nearly one million companies and will ensure that the UK will continue to have the lowest CT main rate in the G7. The video games industry in the UK is recognised as a world leader and is well placed to benefit from these changes. The Government believes that lower rates for all businesses is the fairest and most cost eVective way to support economic growth across the economy, The recent financial diYculties encountered by Dundee based games companies are of course disappointing. Like many other industries in the current economic climate, the sector is operating in a very competitive market and their business model relies on high consumer demand for its products. However, I note the view recently expressed by the Chief Executive of Cohort games studio in Dundee, who stressed that the company’s decision to make some of their workforce redundant was in response to market forces and that the issue of a special tax break for the computer games industry played no part in that decision. Indeed, it is important to bear in mind when considering the impact of the Chancellor’s decision, that this tax break has never been introduced. It was proposed only in March of this year and, given that special EU dispensation would have been required, could not have been in place even now. I recently met with TIGA and Jim McGovern to hear their views on this issue and I will again meet with them and others when I visit Dundee in the near future. I look forward to seeing at first hand the way in which the city has established itself as a world class centre of excellence in computer games design. 9 September 2010
Supplementary written evidence from HM Treasury The Committee requested additional information regarding the research presented to Government by The Independent Games Developers Association (TIGA) TIGA, an industry representative body for video games developers, commissioned research into the impacts of introducing a sector specific tax incentive for the video games industry. The research estimated that, over a five year period, providing tax relief to the value of £192 million would incentivise an additional £457 million of development expenditure than would otherwise have occurred. They estimate that this will create or save 3,550 jobs and provide an additional £415 million in tax receipts to the Exchequer than would otherwise have occurred. Based on these estimates, TIGA claim that the relief would pay for itself over the five year period. We are not in a position to assess the reliability of the sources for the figures produced. However, we do not agree with the validity of some of the assumptions underpinning these estimates, nor that they represent the full (net) benefit to the UK economy rather than just the specific benefits to the sector.
Investment Subsidising investment into a sector (such as games development) would be expected to attract additional investment into that sector. In turn, this would be expected to generate additional economic activity and employment in that sector. Economic theory would suggest that (1) any additional investment in the sector will be greater than the total (net) additional investment to the UK economy and (2) that the allocation of resources across the economy is more eVectively performed by the market, except where there is strong evidence of a market failure. Ev 60 Scottish Affairs Committee: Evidence
The research commissioned by the industry implicitly assumes that the investment incentivised by the subsidy is entirely additional to the UK economy. In reality, it is likely that the relief is displacing investment from elsewhere in the economy. Therefore the net impact on total UK investment could be limited. It is also possible that any subsidy could divert investment away from more productive sectors, to the detriment of the productivity of the UK economy as a whole.
Employment and tax receipts estimates The research assumes that the additional investment in the sector is creating additional employment and tax receipts for the UK economy. In reality, if the investment is being displaced from elsewhere in the economy then it is likely that the employment created is also being displaced. In the case of the “saved“ employment, the research assumes that individuals previously employed in the games sector would have become economically inactive or would have left the UK. It is likely that most of these individuals would have found alternative employment in the UK, generating tax receipts in the process.
Summary Therefore, it is likely that the estimates provided in the research commissioned by TIGA, at the very least, overestimate the impacts of introducing a sector specific tax incentive for the video games industry. 25 October 2010
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