Following a report by The Guardian that revealed just four UK developers have claimed close to half of all video games tax relief (VGTR) since the scheme’s inception in 2014, Tax Watch UK is calling the fund “corporate welfare for multinational companies” and accuses two British studios, Rocksteady and Creative Assembly, of “playing the system”.
According to HMRC’s latest Creative Industries Statistics, over 1,000 claims have been made against VGTR since its introduction in 2014. UK trade body for the UK’s games and interactive entertainment industry, Ukie, stated 1,110 claims have received a total of £324m in tax relief to date, which has “supported £2.6bn investment in British content, highlighting the invaluable government and public support provided by the scheme”.
To qualify for relief, games must pass a British Film Institute cultural test in order to qualify for tax relief in the UK. The think tank says video games tax relief was designed to help smaller producers of “culturally British” games and believes it was not designed for the international market.
To establish a “significant contribution to British culture”, games must satisfy a number of criteria and are awarded points for elements such as British characters, or British settings. Despite being set in the fictional Los Santos, a city modelled on Los Angeles in California, for example, Grand Theft Auto V nonetheless qualified as a culturally British video game for this tax break in September 2015, reportedly after the game had already recorded more than £3bn in sales. The certification allegedly allowed the producers of the game “to claim tax relief on production costs”. When eligible, VGTR permits developers to claim back up to 20 per cent of production costs – or 25 per cent, if it’s a loss-making company.
Following an investigation, Tax Watch UK accuses Rocksteady Studios of leveraging VGTR to maximise the full 25 per cent relief. According to its publicly available tax records, the UK developer appears to have only made a profit between 2014 and 2017 because of VGTR. Without the relief, the company would’ve made a loss despite developing the fastest selling game of 2015, Batman Arkham Knight, which sold 5 million copies in its opening 12 weeks.
However, as profits go to its parent company, Warner Bros., Rockstar operates at a loss, enabling it to qualify for £10m VGTR across the period and not pay corporation tax.
“The result of this is that Rocksteady is being subsidised by the British taxpayer to produce highly lucrative games for its American parent company,” the report said. “The company pays no tax on the profits derived from the production of those games in the UK.”
Tax Watch UK also singles out Creative Assembly for operating in a similar way in relation to its parent company, Sega. While it seemingly does “not have a particularly aggressive approach”, the company did not pay to have corporate tax through VGTR, therefore increasing its post-tax profit by £3.2 million.
“The two companies which we have studied here demonstrate that the VGTR scheme is almost bound to ensure that the UK games industry will not pay corporation tax — regardless of how successful the industry becomes,” the report concluded. “In the case of Sega [Creative Assembly], the company does not appear to be engaged in any obvious profit shifting, however, video games tax relief still manages to wipe out the taxable profit of the company.
“Add in profit shifting and games companies can even claim money back. It is implausible that the games produced by Rocksteady are loss-making, and the losses in the Rocksteady accounts appear to be the result of profit shifting by the company. The perversity of the VGTR regime is that it rewards this aggressive behaviour with more subsidy.”
Responding to the report, a spokesperson for Creative Assembly said: “The amount of Corporation Tax paid by Creative Assembly is publicly available information”. Rocksteady Studios did not respond.
In related news, a recent report by the same investigative think tank recently stated Grand Theft Auto V developer, Rockstar North – which is thought to have generated around £4 billion in operating profit between 2013 and 2019 – has not paid UK corporation tax in the last ten years. The report also accuses the company of claiming more than £42 million in tax relief during that time – allegedly 19 per cent of the total tax relief paid to the entire UK video game industry since 2014.
While there are many positive aspects of VGTR, in bringing investment to the UK, many other parts of the tax system need significant work to ensure that companies are paying a fairer share of tax in the UK. Any such reform of multinational taxation though is on the back burner until the UK works out its exact relationship with Europe, something that will take many more years to play out, whatever happens on the 31st of October.