The future of UK games tax relief is in doubt after the European Commission launched an in-depth investigation into the proposals.
The tax breaks had been expected to be available to developers from April 1st, but was held up by the European Commission, although it was thought at the time it was just a matter of time before proposals were ratified.
The EC has now stated however that there “is no obvious market failure” in the sector, and that such games are produced even without state aid.
It stated that as a consequence, it doubts the aid is necessary.
Although it has opened an investigation, the EC stressed that does not prejudge the outcome, and will give the UK game industry opportunity to comment on the matter.
"The market for developing video games is dynamic and commercially promising," said EC VP in charge of competition policy Joaquin Almunia.
"It is not clear whether the taxpayer should be subsidising this activity. Such subsidies could even distort competition."
Key aspects of the tax relief scheme being investigated are whether:
– aid is necessary to stimulate the production of such games;
– limiting expenditure for the tax relief to goods or services ‘used or consumed’ in the UK would be discriminatory;
– offering this type of aid would fuel a subsidy race between Member States; and
– the proposed cultural test ensures that the aid supports only games with cultural content without leading to undue distortions of competition.
In response to the news, UK trade body Ukie said it was still confident the scheme would be implemented, although expressed its disappointment in the decision to hold up the scheme.
“We are extremely disappointed that the European Commission has decided to open an in-depth investigation into production tax credits for the UK games industry," said Ukie CEO Jo Twist.
"We believe this support is crucial in opening up the opportunity for developers to make culturally British games, but also as a vital incentive for development studios and large multinationals to base their development in the UK and nurture the talent here. We are still confident of having the scheme introduced and are fully committed to having it in place as soon as possible.”
"We shall be gathering evidence to show that British games, being created by British games businesses, are not being made in significant enough numbers for the UK industry to compete globally.”
“The UK game industry needs tax breaks in place in order to be able to compete with other territories and to be able to grow to its full potential. One of the key questions that the Commission is asking is whether there is an obvious market failure in the UK games industry.
The journey for UK games tax breaks
Plans for UK games tax releif were originally announced in last year’s Budget, shocking the game industry which had previously campaigned for the measures for years without being heard.
It was later revealed that the tax relief would be set at 25 per cent of up to 80 per cent of production costs.
But before any tax relief scheme could be passed, the government had to create a video games cultural test for develoeprs to pass, to keep in line with exemptions in state aid laws, similar to that of French games tax breaks.
Revealed in December, developers were required to surpass 16 points to be eligible for tax breaks. You can see the full cultural test here.
But in March this year, it was confirmed that the tax relief would be be approved by April 1st, as the UK had to await confirmation from Europe.
Ukie said at the time that tax relief would still definitely happen, and that the Government was "100 per cent committed" to legislation.
Tiga also said at the time that tax relief was still awaiting State Aid clearance from the European Commission, but the government will still be legislating for the incentives in the current Finance Bill.