Video games industry in Scotland - Parliament (publications)

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

1

Introduction

3

Background

4 4 5 5 5 8 9 10

The video games industry in the UK The video games industry in Scotland Challenges currently facing the industry Public opinion Decline in the UK industry Government proposals to support the industry The call for financial incentives

2

A Games Tax Relief Background to the proposal for a games tax relief Cultural test Impact of tax relief in other countries Potential benefits of a games tax relief Opposition to a tax relief Government position on a tax relief UK Film tax relief Consultation The future of tax relief

3

Adapting and extending the support currently available to the industry Research and Development tax credits Taxation of Intellectual Property (IP) Measures announced in the June 2010 Budget

4

Page

Other challenges facing the industry Skills shortage The £5 million Abertay prototype scheme Livingstone/Hope review of skills Brain drain Access to Finance Marketing and representing Scotland

Conclusions and recommendations

11 11 11 12 12 13 14 15 16 16 18 18 20 21 22 22 23 24 24 25 26 28

Formal Minutes

32

Witnesses

33

List of printed written evidence

33

2


List of additional written evidence

33

List of Reports from the Committee during the current Parliament

34


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


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

Q2

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

Q2


5

The video games industry in Scotland 9. Evidence from Department for Culture, Media and Sport and Department for Business, Innovation and Skills explained that “Scotland is world renowned for excellence in computer games design. With hubs in Edinburgh, Glasgow and Dundee it is responsible for an impressive list of iconic, globally successful games.”11 The Association for UK Interactive Entertainment (UKIE) state that Scotland is home to nearly 25% of UK video games companies.12 Scotland has 46 development companies employing 651 development staff, with the games development sector supporting an additional 1,190 jobs.13 Annually, Scottish games companies are estimated to invest £30.2 million in salaries and overheads, contribute £27.5 million in direct and indirect tax revenues to the Exchequer, and make a direct and indirect contribution of £66.8 million to the UK’s Gross Domestic Product.14

Challenges currently facing the industry 10. On 16 June 2009 the Government published the Digital Britain report, “a guidepath for how Britain can sustain its position as a leading digital economy and society.”15 The report noted that the UK’s strong position in the world games market was being challenged in three key ways: •

it is competing for investment against lower-cost countries;

•

there is a shortage of skills, due to both a brain drain and lack of adequate graduates;

•

there are too few indigenous UK intellectual property [IP] owners.16

In addition, DCMS and BIS listed “difficulties in attracting finance” as a priority issue for the industry. 17

Public opinion 11. Some perceive the video games industry as having no wider benefit than in entertainment, and question both the sector’s output and whether such an industry should receive financial incentives. During the Committee’s inquiry it was noted that the term ‘video games’ embraces a larger field of activity which includes the highly positive and widely beneficial work, such as undertaken at Abertay University, which has been described as ‘pervasive technology.’ Technology such as accident simulation is but one example of the innovative nature of the industry. 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

6


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


7

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

8


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


9

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


38

Ev 52

39

Ev 45

10


•

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


11

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

Q8

46

Q 159

47

Ev 59

48

Q 83

12


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


51

Ibid.

52

TIGA, Investing in the Future: a Tax Relief for the UK Video Games Development Sector, August 2009

53

Q 67


13

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, multinational 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 microbusiness, 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

Q8

56

Q 205

57

Q 94

58

NESTA, Raise the Game, December 2008

59

Q 217

60

Q 162

14


[...] 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

16


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


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


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


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

Q6

88

Q 174

89


20


•

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


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


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 startups 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


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


100 Q 2 101 Q 21 102 Q 6 103 Q 38


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


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, cofounder 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


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


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


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


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)


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, selfpublishing 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


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


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


Formal Minutes Wednesday 19 January 2011 Members present: Mr Ian Davidson, in the Chair Fiona Bruce Mr Mike Freer Cathy Jamieson Jim McGovern David Mowat

Fiona O’Donnell Mr Alan Reid Lindsay Roy Dr Eilidh Whiteford

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.


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

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

Ev w1

34


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 Cathy Jamieson Jim McGovern Mark Menzies David Mowat

Fiona O'Donnell Mr Alan Reid Lindsay Roy Julian Smith 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 Scottish Affairs Committee and to our investigation of the video games industry and related matters. Some of us have already had visits to Dundee on an informal basis, which we found immensely useful. We have advertised for and received a number of pieces of written evidence, which, again, have been found to be very useful. Now we are down to the formal hearings. I am sorry for the delay caused by the vote in the House. It might seem to you people who deal with gee-whizzery and so on that it would be much easier just to press a button. However, the great advantage of voting in the way that we do is that you get to meet lots of people in the Lobbies. The Government Members who are here will very soon learn that the opportunity to catch a Minister without his or her civil servants, get them to agree to something, and write to them saying, “As you agreed on such-and-such a date” is immensely helpful. [Interruption.] I am afraid that we have to go away again, but we will be back. We hope to get this finished by 11 o’clock tonight. Sorry about this. Sitting suspended for a Division in the House. On resuming— Chair: I will not say everything I said before, but for the record, we have with us Dr Richard Wilson, chief executive officer of the Independent Game Developers Association; Michael Rawlinson, the Director General of the Association for UK Interactive Entertainment; and Ian Livingstone, Life President of Eidos and Chair of the Computer Games Skills Council. In the next session, we will speak to Paul Durrant, who is the Director of Business development at the University of Abertay Dundee, but rather than have him sit in the corner like a bad boy, we thought we would have him up here. If there are any really difficult questions that you don’t know the answer to, you can always palm them off on to him. Mr Livingstone He can translate for us. Q2 Chair: Sorry, we don’t have a simultaneous translation. That was a bit harsh, actually. Mark that man down as a troublemaker.

My first question is basically aimed at getting an overview of Scotland’s position in the global games industry—the industry’s strengths and weaknesses, the key factors making Scotland a successful base, and changes that might imperil the industry’s future. Respond to that, and if there are any other comments that you want to make of an opening nature, put them in there. Then we will go into the questions. I am offering each Member the opportunity to ask five minutes of questions. Then we will try to tie things up at the end. We will go through a similar process with you, Mr Durrant. Who wants to be first? Dr Wilson: I am very happy to start off. Thank you very much for inviting us here today. It is great to have an opportunity to present the case of the video games industry to this Committee. In terms of some of the key issues that we would be keen to get across, I think we would like to emphasise that the video games industry in the UK—in Scotland in particular—is important economically, culturally and in terms of education. Economically, the UK video games industry contributes about £1 billion to UK GDP and generates about £400 million in tax receipts for the Treasury. The sector is important educationally—there are many video game companies in the United Kingdom, and some in Scotland, that make educational-based games. The sector is important culturally: more than 70% of the UK population now play video games. It is important for all those key reasons. In terms of the sector in Scotland, our research shows that Scotland has 46 development companies, employing 651 development staff. Video game companies in Scotland, such as Denki and Digital Goldfish in Dundee, make entertainment games. A company called 3MRT uses games-based technology to make learning tools and devices. We also have other companies that develop software to support the games industry in Scotland. The Scottish games industry has been very successful in recent years. Scotland was, of course, responsible for “Grand Theft Auto”, which was one of the most successful entertainment products of all time. Other 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 very successful. However, the UK games industry—in Scotland in particular—has suffered over the past couple of years. Our data show that the development work force in Scotland have declined by more than 18% over the course of this year, primarily because Realtime Worlds, one of the biggest development studios in Scotland, went into administration. The sector, both in the UK and in Scotland, has declined in any case over the past 12 months. We believe that one of the key reasons for this is that the UK games industry doesn’t have a tax break against production, whereas most of our key overseas competitors—or at least some of our key overseas competitors, our critical competitors—do have tax breaks against production. So our development industry is not competing on a level field, which means that it is harder to attract investment and to create jobs. Mr Livingstone I would like to add to that, and to point out what great things Scotland has done. The Scottish embraced the games industry very early on. Obviously, the University of Abertay Dundee has been a shining example of how to do things right. It got the Skillset accreditation for computer science and for art and animation. The reason for that is that it decided to set up a games-centric ecosystem in Dundee, where the university was working very closely with local industry and local government. There was therefore a very positive symbiotic relationship, from which everyone could benefit. Industry effectively got a two-year interview process, as regards the students coming out of Abertay, and Abertay in turn helped with research projects and with giving the industry the students it actually wanted to make the games. So many courses in the UK are, frankly, not fit for purpose. They are generalist subjects—media studies, effectively, masquerading as computer games studies—whereas Abertay is absolutely doing it correctly. It is giving the hard skills that industry needs to make the games—computer science, maths, art and animation. So this has been very effective. I would hope that that model is replicated throughout the UK. Using games as a learning tool in education has also been a strong point in Scotland. I think you can even study programming now. At one point a company like Microsoft could almost effectively hijack the classroom. Children are learning IT alone—they learn about Word, PowerPoint, Excel, but they don’t learn to programme any more. It was not that many years ago that the BBC Micro and the Dragon were used in schools, so children learned basic programming. That creates a push further on in their educational profile, from primary school to secondary school to university. There is a demand put on the university to support children in studying computer science and maths. Clearly, the perception of games has been a lot better in Scotland than it has been in the rest of the UK because of the willingness of local government, universities and industries to say, “This is a great subject.” It is part of the digital economy—the knowledge economy for the UK going forward. It is

clean, green and knowledge-based—all the skills that are required in the new world of the digital economy, which is going to get the UK back on its feet again; traditional manufacturing and financial services are in decline. For me, Scotland has been a great example of promoting games with the right connotations—not just talking about the violence in a few titles, but about the games industry as a whole being a great thing. Mr Rawlinson: I would like to add that the market for video games has grown and developed. The reason why our association has changed its name so that it relates not solely to video games but covers interactive entertainment is the expansion in the market. As Ian rightly points out, Scotland has been at the forefront of the close relationship between education, development and governmental support. We are now on the cusp of a new wave of potential growth and opportunity. If we look at our industry, we have gone from hardcore video-games-playing to everybody participating in interactive entertainment. This change has been brought about by the introduction of easily accessed devices such as the Wii and the DS, and Apple iPhone applications that are touch-sensitive. The barriers to entry for people playing games have been greatly reduced, so the opportunity for companies to create, access and exploit the market is growing. We are at a point where we have got not only potential within the existing market, but a hugely growing market. Our problem is that we are competing against other countries that have recognised this growing potential, and which are setting their stall out with support that enables their businesses to take maximum advantage. This is where our strengths and weaknesses come into play. We have strengths, but we really need to exploit them and make the most of them. Q3 Chair: The point about the problems leads me on to the second point that I want to make, which is about your relationship with Government, particularly at Westminster, and whether we should be doing anything more to help you, as distinct from just keeping out of the way. In terms of comparisons with elsewhere, we would quite like to hear from you what points we should be putting to the Minister when we see him next week. That was really what triggered this inquiry off. Jim McGovern, the Member for Dundee, was very much the driver behind this inquiry, which arose from the tax cut—or the cut in the tax cut—that you experienced. It would be helpful if you could spell out for us the agenda that we ought to be pursuing with the Government to help you. Dr Wilson: I think there are three key things that we would be very keen for the Committee to advance or put to the Minister. The first is the issue of games tax relief. As you know, at the time of the general election, we were delighted because all political parties—the Scottish National party, the Labour party, the Conservative party and the Liberal Democrats— publicly said that they supported games tax relief, which we were very pleased about, as you can imagine. Unfortunately, after the election we did not have an opportunity to present our case again to



Ministers, despite making attempts to do so. We would be very grateful if the Committee could raise the issue of games tax relief and ask Ministers, particularly the Treasury team, to look at it again. Games tax relief is the major issue facing our sector. It is the key measure that we think, if implemented, would allow us to compete on a level playing field and allow the sector to flourish. The second issue— Q4 Chair: Can I just be clear about that? In the runup to the election, people were promising this. Then the position changed after the election, did it, in the sense that what was promised was not delivered? Dr Wilson: That is absolutely right. To be completely precise, the Labour party and the Scottish National party both included a commitment to games tax relief in their manifestos. The Conservative spokesman, Ed Vaizey, and the Liberal Democrat spokesman, Don Foster, both said that their parties supported games tax relief. As you can imagine, we were ecstatic at the time to have cross-party support, so it was unfortunate that, after the election, that clearly dissipated. But there was a united front before the election, with political parties supporting games tax relief. Q5 Chair: When you say “dissipated”, you mean that it was not delivered. Dr Wilson: Exactly. That is the first issue. The second issue that would be well worth raising is the research and development tax credits. That is very much a second-best measure for the video games industry. None the less, because the Government are conducting a review of R and D tax credits, it makes sense to raise with the Minister ways in which the R and D tax credits can be made more helpful to the sector and, indeed, other sectors as well. We suggest, for example, making the tax relief more generous at the very least, and making it easy to apply. Q6 Chair: Can I just clarify whether or not there is anything specific about your industry in relation to R and D? Would you require a tweaking of the scheme, or would the generality of the scheme apply equally to yourselves and anybody else? Dr Wilson: We are limited, unfortunately, in what we can do with research and development tax credits. I understand that there is an international definition of what constitutes R and D. It is called the Frascati definition. I think that all Governments around the world are constrained in what they can do with research and development tax credits. Some developers—you probably met them when you were up in Dundee—have said that they would be very glad if you could make R and D tax credits reward content innovation. At the moment, R and D tax credits very much focus on technological improvements, and they are designed to give tax relief to technological or scientific improvements. As you can imagine, many game development companies engage in R and D. They develop their own technology and their own engines to make video games, R and D tax credits having helped up to a point. But, of course, the main focus of development that takes place in a development studio is generating new content. I suppose in simple terms—bearing in

mind that we cannot really unravel an international definition of what constitutes R and D—what we would really 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 £1 of qualifying expenditure you might get £2 back in R and D tax relief. That is the second issue. I must emphasise that that is very much a second-best option for our sector. The third issue is skills. We have a skilled work force. We need to increase the supply of good quality computer science and mathematics graduates. Our trade association, TIGA, has been very concerned about the decline in IT and computer science graduates. There has been something like a 25% drop in recent years in IT and computer science graduates. We have suggested, for example, that if tuition fees are likely to rise—we saw yesterday that they probably will—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. That would at least give people an incentive to study those important courses. In the case of computer science and mathematics degrees, there would be a cross-sectoral benefit; it would benefit not just the games industry. Those would be TIGA’s three top priorities. Q7 Chair: Do the others want to add anything to that? Mr Livingstone We are certainly very much in support of production tax credits, from a practical point of view. This country often sees production tax credits as a handout, whereas a country like Canada sees them very much as an incentive. Canada offered $500 million by way of incentivising companies like Electronic Arts, Ubisoft and my own company, Eidos, to set up shop in Montreal. That in turn generated $1.5 billion of inward investment into Montreal. It has achieved in three years what it took this country 25 years to achieve. It has a highly skilled work force that creates content for global companies and publishers. We have now fallen behind Canada in the world ranking of developments, and that is a tragedy given our heritage, and our initial launch of video games way back in the ’80s. It is no surprise that games like “Grand Theft Auto” and “Tomb Raider” started life here. We very much support production tax credits, not just as an incentive, but to create a level playing field. They would be financially rewarding for the Revenue as well. Mr Rawlinson: I would just reiterate that the introduction of the tax credit scheme would enhance the ecosystem, which would generate inward investment from major multinational publishers who are looking for the centres to create those big games. That, in turn, would support and develop our own smaller local companies. Together, we would create the right ecosystem, which would be a great ground for developing skills and enhancing our work force. We stand fully behind the points that Richard has outlined.



Chair: Could I bring in Jim McGovern? He is the MP for Dundee East— Jim McGovern: West. Chair: Sorry, West. I knew it was Dundee; I got the city right. He has been the main driver behind these hearings. Jim, over to you. Q8 Jim McGovern: First, I would like to thank Paul, Michael, Richard and Ian for coming here today to give evidence to this inquiry. Richard, I recently said to you that I see more of you than I do of my wife, Norma—but for all the best reasons. How can the UK Government help support the games industry? The tax break that was offered prior to the general election has since been described as poorly targeted. Do you have a view on why it might have been poorly targeted, and do you think that it would have helped in the case of Realtime Worlds? Dr Wilson: On whether the games tax relief was poorly targeted, I think that, on the contrary, it was precisely targeted to help the UK games industry, and it was targeted to enable us to compete on a level playing field. Our calculations, or the calculations that Games Investor Consultanting did on behalf of TIGA, indicated 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 is important to emphasise that the tax relief would more than pay for itself. 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 graduatelevel jobs. We think that it was a very precisely targeted measure. It did not cost a great deal of money in the great scale of things, as far as the UK Government are concerned, and it would have been enormously beneficial for the sector itself. On the issue of whether games tax relief would have helped Realtime Worlds, it would be difficult and wrong for me to comment on its ultimate fate. I am not on the management team and I am not a non executive director, so I can only comment in general terms. I suppose the only thing that you could say is that if games tax relief had been in operation five years ago, Realtime Worlds may have had different funding options available. I would say, and this is the more important point, that with games tax relief in place we could look at the demise of particular firms with more equanimity—with regret, yes, but with more equanimity than we do now. With games tax relief in place, there are powerful incentives for overseas publishers to invest in Scotland—Dundee, Edinburgh and Glasgow—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. Games tax relief would be precisely targeted to help our sector, and it would be enormously beneficial not only to the games industry, but to the wider UK economy. Q9 Jim McGovern: I have a supplementary, Richard. You are the chief executive of TIGA, the games association. Is every organisation that is involved in the games industry a member of TIGA? Dr Wilson: In the United Kingdom?

Q10 Jim McGovern: Yes. Dr Wilson: I wish they were. I do my best to grow my organisation, as you can imagine. There are, as I said in my opening remarks, about 46 games companies in Scotland. We have 19 members—14 developers and another five education institutions. Realtime Worlds was a member of TIGA, and it was a supporter of games tax relief, but unfortunately it went out of business, as you know, and it went into administration. So, no, we do not represent every single business in the UK. Equally, if you look at the Institute of Directors, the British Chambers of Commerce or the CBI, they do not represent every business in the UK. I think that we do a pretty good job of representing our sector. Chair: Julian? Julian Smith: First, I thank our witnesses for coming. Chair: The fact that everyone is walking out of the room— Julian Smith: I won’t take it personally. Jim McGovern: They just wanted to hear me. Q11 Julian Smith: I want to start off by complimenting your industry on its success. Can I ask more specifically why, in your opinion, in these straitened financial times, your industry, as opposed to other creative industries, merits being a special case? Mr Livingstone 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. We have been particularly good at it. Traditional manufacture is in decline, financial services are in turmoil— Q12 Julian Smith: Why computer gaming, as opposed to other creative industries? Why should you get a tax break as opposed to others? Mr Livingstone The film industry has already had a tax break. It’s had a 20% cultural tax break for a number of years. It had the support of the Film Council and the BFI. The Film Council is no longer in its current state, but we never had any help. Q13 Julian Smith: Is there anything specific? I presume there are things specific to the longevity of your development process that mean that you feel there is a good argument for having this. Mr Livingstone A typical blockbuster game that runs on a high-end console—a super-intense graphic console—will cost between £20 million and £30 million to produce. Then you are going to expend another £20 million on marketing and advertising before you see a penny back in return. R and D tax credits are always given at the end of a project. If you are successful in applying, you will get a rebate through R and D. What we need is help during the production process—because these are quite large capital investments—unless you want all production to move overseas to naturally cheap labour markets such as Asia or to incentivised markets such as



Canada. You’re going to see more and more production going offshore. Q14 Julian Smith: Do you really think that it is just about tax breaks? Isn’t it about skills, really? If you look at the Abertay situation, or at Strathclyde and telecommunications, or other Scottish universities, the big opportunity seems, in my view, to come from a generally advantageous fiscal position for new business combined with skills, university spin-offs and that whole area. Are people going to come to Dundee just for tax breaks? Mr Livingstone Absolutely not. Good, high skills and low costs are absolutely joined at the hip. Canada offers great skills as well as low costs. As you quite rightly say, there is no point in going somewhere that’s cheap if the labour is no good. It’s all part of a package of things that we need. You might know I’m conducting a skills review of the computer games industry on behalf of Ed Vaizey at the moment, and we will be reporting in January. There are 81 universities in the UK offering games studies of some sort, and nine of those courses have been approved by Skillset as fit for purpose. We need good skills and production tax credits, and we need the perception of the games industry to change in a positive sense. We need Government and all MPs to put their arms around the industry and say, “Hey, this is a great industry. It’s good socially, culturally and economically for our country.” We need— Q15 Julian Smith: Hang on, Ian; I’ve got limited time. We’ve got to put our arms around a lot of people, and we’ve got limited money. What is it about your industry that means we should be giving it a tax break? Mr Livingstone We are creating IP, which is very valuable to the UK. Q16 Julian Smith: So does the TV industry and other format entertainment industries. Mr Livingstone We are knowledge-based. Jim McGovern: Could I make a point? I understand that the British film industry gets tax breaks of somewhere in the region of £110 million a year. The tax breaks that were offered by the previous Labour Government are somewhere in the region of £55 million, and the computer games industry actually generates more income in the UK than the film industry. Chair: Could Members please not enter into a dialogue? Q17 Julian Smith: Could I move on to the other fiscal measures that were announced in the Budget, specifically the NI holiday for new start-ups, the lowering of corporation tax and the abolishing of the jobs tax proposed by the previous Government? Michael, you talked about the new start-ups that your industry attracts. That has been a really positive message to those new start-ups to come to Dundee and other areas of the UK, hasn’t it? Mr Rawlinson: It has; that is absolutely true. However, what I believe the games tax relief would bring is a scale of investment that multinational

companies can bring; these other measures won’t bring that. If we look at the fiscal support that is provided to the film industry, it is identified because of the cultural benefits and output that that industry can bring. But actually, I believe that that is a front for the economic support that is coming. We absolutely produce culturally relevant products, and if we are not careful, our ability to continue to produce culturally relevant material from a UK perspective is going to be severely damaged, because we will be competing with companies that are centring their creative process in the Americas and the Asian territories. Mr Livingstone We don’t want to become a work-forhire nation. When you think of “Tomb Raider” and Lara Croft— Julian Smith: Sorry, I’ve got one minute left. Paul, Abertay seems— Chair: I was going to take Paul after this session. Julian Smith: Are we not allowed to ask him anything? Chair: Well, you can, but it’s coming off your time. There’ll be a separate time to ask him questions at the end, if you want. Q18 Julian Smith: Okay. Fine. So, just going back to skills, do you feel that the UK Government—the London Government—could be doing more on skills to help your industry? Mr Livingstone We’re very happy with Ed Vaizey’s backing of the skills review, which I am leading. It’s going to look at the whole talent pipeline—not just at existing universities, but at primary and secondary through to further and higher education—to get that push from a very early age, and to get careers advisers, teachers and parents on board with STEM subjects. Q19 Julian Smith: So you’d agree that public money is probably better put into that than tax breaks. Mr Livingstone I think that it should be a combination. You need the great skills, and you need a financial incentive for people to— Q20 Julian Smith: But on balance, in an era in which we have limited finances, would you put the money more into skills or tax breaks? Mr Livingstone I would like to see both. Mr Rawlinson: You wouldn’t necessarily have to add additional money into the skills framework in schools. As Ian said, training and the curriculum were diverted away from computer sciences and into learning IT packages. I think it is probably recognised today that that is unnecessary going forward, as young people automatically have an affinity with computers and with using packages. There is no longer a need to invest in that capability. Q21 Julian Smith: I thought you said earlier that there was a skills shortage in the industry. Mr Rawlinson: I think that what we need to do is to get young people into programming and the fundamentals of computer science and other STEM subjects—something that has been severely lacking— 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, so that when young people want to pursue a career in the video games and interactive entertainment industry, people are not saying, “Go and get a proper job,” but rather recognising that it is a proper job, and that we are a recognised industry in which there are real prospects for young people. Julian Smith: I started off by complimenting you on your industry, and I compliment you at the end. Chair: Fiona? Q22 Fiona O'Donnell: Just leading on from what Michael was saying—and Ian also talked about the industry being misunderstood—I just wanted to give you the opportunity to say why you think so few women work in the sector. Mr Livingstone If you look at this historically, I think the industry is relatively new, unlike TV, film and traditional entertainment media. Games started off as guys making games for guys—either sports games or shooting games—and it is only with the gradual acceptance of games as a genuine entertainment medium that there has been more diverse content created over more diverse platforms, both online and offline. Now you’re getting games that appeal to both men and women, and women are joining more and more to create the content that they want to consume. Girls predominantly prefer puzzle games. I think they are more mature than men; we just like doing sort of crazy stuff. But you are finding that more women are now joining the industry, which can be only a good thing. The industry is not trying to exclude women— far from it. We recognise the purchasing power of women and their enthusiasm for games, and we want them to join the industry. Q23 Fiona O'Donnell: I think that part of the perception out there of the industry concerns corporate social responsibility and the violent content of games. I think that that debate has been had for some time, but there is growing concern about the length of time that young people—adults as well—spend playing games. I wonder whether the industry has any views on that, and whether there are any health or safety concerns around it. Mr Rawlinson: As an industry association, we are very clear on our messaging through our website, and through all our communications, that interactive entertainment should be part of a leisure pursuit and a lifestyle, and that it should not be the sole preserve of people’s leisure time. We recommend very firmly that there should be regular breaks of five to 10 minutes in every hour that is played. I think, however, that the zeitgeist is that young people really enjoy playing games, that they are rewarded for that experience and that, through the interactivity, there is a benefit that perhaps people of my generation and some parents do not recognise, because it was not part of their youth experience, so I think that there is still work to be done to explain that. I am not saying that the perceptions are not true or real for people, but I am not sure that they are the reality, if that makes sense. We have work to do.

Mr Livingstone Historically, parents have allowed their children to watch endless hours of television and now the game seems to be the new threat in soaking up all their leisure time. You have to strike a balance and parents have to take some control of what their children’s activities are. The good thing about games is that, because they are interactive, children are actively involved—engaged—in what they are doing. Q24 Fiona O'Donnell: They are more and more physical as well. Mr Livingstone Children are not sitting passively like a couch potato; they are learning about choice and consequence, problem-solving, puzzle-solving, intuitive learning, many social skills and technology. As a learning tool, games are helping children to learn quite a lot more. Many games, whether they are brain training or mathematics games, actually promote intelligence, I would offer. Q25 Fiona O'Donnell: That is all very helpful. I promise you that I am not anti the sector; I just wanted an opportunity to talk about that. I apologise, because I am going to cherry-pick rather than go with a theme today. There is help available to the sector at different levels of government and from Government agencies. Are there any parts that you think are or are not working well at local authority level in terms of business gateway and supporting start-ups? What are your views on the support that you get from Scottish Enterprise and the Scottish Government? In terms of accessing—I know that this is a lot to think about—the support finance that is available for SMEs from the UK Government, do you have any comments? 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 access this help. There is usually a lot of bureaucracy involved and they do not know how to go about it— who to ask, what to ask, and how to get it. There is a golden age of opportunity now for games. Traditionally they have been high-cost packaged goods that go through 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. Two-man or two-women teams can make a game for iPhone and sell many millions of units through broadband and through downloads. But they also need help and guidance—not just fiscal help, but mentoring help and business help—because they are 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 and to be told, “We are over here and we can offer you this help with setting up business and help with financial backing.” We are brilliant at making games. We just need to get that ecosystem up and running because we could be a world power again. Dr Wilson: I think that Scottish Enterprise has done a good job with regard to video games—it has a number of schemes in operation, as you know, to help small



development studios. I think I am right in saying that it has invested about £2.4 million in video game companies in Scotland since 2004, so it has been supportive of the sector. One thing that we could do throughout the UK—on the part of the Government and of Government agencies in Scotland as well—is be much more aggressive in marketing Scotland and the UK in general as a place to do games business. I have mentioned this to other MPs in different circumstances, but it is worth emphasising again: the Canadians are extremely good at doing this. They phone up and contact the chairman of TIGA and people on my board—they have no shame. They will contact major UK developers and try to get them to locate overseas. They have a very attractive package of measures with 37.5% production tax breaks. Scotland has some fantastic things about it—a great education system, a good health service and good transport links—but if we are going to market ourselves well, we have to be much more aggressive about the offering that we have available. Q26 Fiona O'Donnell: Whose job is that, do you think? Dr Wilson: I think there are a number of roles, actually. I think trade associations have a role—TIGA in the UK has a role—and Scottish Enterprise, UK Trade and Investment, the Scottish Government and the Westminster Government have a role. We all have a role to play. Fiona O'Donnell: Thank you for your patience. Q27 Fiona Bruce: In the written evidence that TIGA has submitted, you say that you expect games tax relief to have created or saved 3,550 jobs, although I think that the figure of 3,500 was said today. Could you elaborate on how you have come to that figure? Dr Wilson: There are a number of levels within games tax relief that we proposed. It was a tax break or tax credit depending on the size of the budget. For a game with a budget of more than £100,000 up to £3 million, you get 30% tax relief. If the budget of a game was between £3 million and £6 million, you get 25% tax relief, and if the game was more than £6 million, you get 20% tax break. Games Investor Consulting, which we contracted to do the mathematics, did an estimate of how much additional economic activity would be stimulated, and that was the figure it arrived at. We are confident because if you look at the experience in Canada—in Quebec, to which Ian referred earlier— typically, for £500 million of approximate investment through tax breaks, you’re getting back another £1 billion—you get two for one back. I cannot give you today the exact, precise mathematical calculations on how that figure was arrived at, although I am happy to send that to the Committee if you like, but we are confident that the figures stack up. We are also confident in the data presented to the Treasury in the run-up to the March Budget. Treasury officials looked at the data then and said to me that although their figures were slightly different from ours, the broad picture was the same. So we believe that games tax relief has a powerful stimulating effect on job creation and additional investment.

Q28 Fiona Bruce: Thank you. How many people does the industry currently employ? Dr Wilson: In game development, it is just over 9,000 at the current time. Q29 Fiona Bruce: You quoted a figure earlier. You said that in Scotland—did I hear this correctly?—you have 651 development staff in the industry. What proportion are in Scotland and what proportion of the 9,000 are elsewhere in the country? Dr Wilson: Out of approximately 9,000 development staff, according to our most recent data, 651 are based in Scotland, and the remainder are based in the rest of the UK, mainly in England. Q30 Fiona Bruce: You said that your development work force in Scotland has declined by about 18%, mainly because of Realtime Worlds, so is that 18% of 651? Dr Wilson: It is 18% of earlier on this year, back in March. Let me just check the figure—sorry. In April of this year, the game development work force was calculated in Scotland to be 798 development staff. That fell by 18.4% over the course of this year up to September, and now it is standing at 651. Q31 Fiona Bruce: So we have about 140 jobs in Scotland affected by the current climate—economic or governmental. Moving on, but on the same theme, could you describe some of the companies that you think will chiefly benefit from the tax relief? Let me quote one of your colleagues—Mr Rawlinson, I think—who said that “tax credits would enhance the ecosystem for major multinational companies”, and that “there would be a scale of investment which major multinational companies would bring”. My concern is to support our businesses and our whole industry. I have a particular concern for SMEs, which make up, I think, well over 90% of all businesses, or possibly 95%. What I am concerned about is that we ensure that the limited funds that we now have as a nation are targeted to support our businesses and our industry, and that we don’t end up subsidising multinationals. Dr Wilson: Can I reassure you on that point? When we drafted our games tax relief proposal last year, we wanted a measure that would help the—if I can use the term—entire ecosystem of video game development companies in the UK. That is why, as I mentioned a moment ago, the tax relief that we suggested should be based on different sized budgets, with proportionately a larger relief available to smaller budgets, which would help smaller game developers. So, any game developers that are, basically, producing a game with a budget of more than £100,000 stand to benefit from games tax relief, provided that they also pass the cultural test that we had to incorporate in our games tax relief proposal. We envisaged that a spectrum of companies would benefit from games tax relief. Your SMEs would benefit from games tax relief. You are right that, just as more than 90% of businesses in the UK are SME in nature, the same applies to the video games



sector—about 90% of studios would be classified as small and medium-sized enterprises. Publisher-owned studios in the UK could benefit in principle from the games tax relief, but they are an important part of the ecosystem within the United Kingdom. Many smaller developers can often spin out from publisher-owned studios. Of course, the Chancellor of the Exchequer has said that he wants the United Kingdom to be open for business, and we understand from overseas publishers that they would find games tax relief attractive. We think it would help the whole spectrum of fairness. Mr Rawlinson: Could I just illustrate that briefly? There was a studio in Canada employing 20 people that Activision purchased, having seen its capability. Today that studio now employs 200 people—those are 200 local Canadian jobs. That same model can apply in the UK and in Scotland in particular. Fiona Bruce: I have one minute left. May I ask one last question? Chair: Yes. Q32 Fiona Bruce: Thank you, Chair. This is a completely separate question that again relates to some evidence that TIGA submitted. You said that to qualify for relief, video games would need to pass a cultural test. Could you elaborate on how you would assess what to me seems like a very subjective issue? Dr Wilson: Well, the cultural test is informed— actually, I shall rewind slightly. We had to incorporate a cultural test in the games tax relief proposal because otherwise it wouldn’t get through the European Union. There had to be a cultural test. We were advised that by the Treasury that that was the best way—the only way, effectively—to get a games tax break. The cultural test that we proposed was similar to the tax break criteria that exist in the film industry, which has a cultural test, and similar to—not exactly the same as—the tax break that is available to video game developers in France, who also have a cultural tax break. So, in terms of criteria, in order to pass the cultural test and therefore benefit from 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. We think the latitude for a game getting through the cultural test for the games tax relief is pretty flexible. We ran a test involving 18 games last year, just to see how it worked out. We took 18 titles, pretty much at random—a sample of publisher-owned, studiodeveloped games and independently developed game titles. Bearing in mind that none of those studios had tried to get their games through the cultural test, because they didn’t know what it was, we found that out of those 18 titles, about 44% passed. That was pretty much the same proportion as exists in France. 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. Fiona Bruce: Thank you. If there is time at the end, I might like to come back on that. Q33 Lindsay Roy: Good afternoon, gentlemen. In making a case for investment, whether public or private, do you share my view that the industry is a catalyst for more diverse creative technological development and that we perhaps do a disservice if we focus solely on video games? I am thinking in particular about medical applications—it is about not just games, but simulations. You might have a better chance of stronger investment if what they put forward was widened. Dr Wilson: Again, the games tax relief proposal that we put forward last year would have benefited interactive products generally. At least in theory, it would be possible for a game to pass the cultural test even if it wasn’t primarily for entertainment purposes. You are right. There are obviously game companies in Scotland and in the United Kingdom more generally that create serious games—I think that about 20% of TIGA members and developers in the UK create serious or educational games. Games can obviously be used for training purposes as well. When we put forward our proposal last year, we thought it should benefit as wide a range of interactive products as possible. Q34 Lindsay Roy: We hear again and again that youngsters are digital natives and that we are digital immigrants. Is it really the case that we need to change the school curriculum? Mr Livingstone I have some opinions on that matter. The way education has been for 50 years has not really changed very much: one person talks to the many, the many copy down rote, and learning is boring. The way children engage with media has changed radically over the past 10 years. They use social media devices, they use Facebook and they work collectively together. It is the many helping the many—they are learning collaboratively. That ethos of collaborative learning should be taken into the classroom a lot more. Children should not be told to leave their media devices at the gates, rather like leaving their guns at the saloon. They should bring these devices into the classroom and use them for collaborative learning, and they can help to teach each other. Then the teacher is effectively a monitor as they all learn from each other by using things like Wikipedia, which was supposed to be a sin at first and yet is a constantly evolving encyclopaedia. Hard copies of encyclopaedias date, as do books, but Wikipedia is constantly evolving and upgrading with new knowledge constantly coming on. Those devices, and engaging with media and collaborative learning, should absolutely come into the classroom. Also, why should children make a choice between art and science? That is preposterous in a digital age of the creative industries. Computer games are the marriage of art and science. People need to know the workings between the two disciplines to be able to make the best digital content going forward. There are many ways in which the curriculum should change to



be more up to date with today’s technological thinking. Q35 Lindsay Roy: I don’t wish to sound cheeky, but when were you last in a school? In my experience, a lot of these things are happening. There is collaborative work. Mr Livingstone I said in my opening remarks that this is actually happening in Scotland, which is great. It needs to go forward throughout the rest of the UK. They also use programming in Scotland, which they do not do in the rest of the UK. Scotland has been a shining example of the way modern learning is realised. Q36 Lindsay Roy: So how do we get that continuum from schools through FE to university and link it in with businesses like your own? Dr Wilson: There is some happening already. We find that about 40% of our development studios already has a relationship with universities or further education colleges. A smaller number has a relationship with schools, but there is some interaction happening between game development and education providers. Q37 Lindsay Roy: In relation to universities, how well served are you by Dundee and Abertay Universities? Dr Wilson: We have enormously high regard for not simply Abertay University, but other Scottish universities as well. Q38 Lindsay Roy: I am not one for league tables— Abertay is not high up in league tables—but I think we need to do something about that, because they seem to be providing a more integrated collaborative approach to learning, well focused on problemsolving approaches. Mr Livingstone From my understanding, the UK average is that 6% of universities engage with local industry, which is preposterous if you want to keep up with what is happening in the real world. 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. Q39 Lindsay Roy: Would you agree that, if we are going to have league tables, there may well need to be different definitions of success criteria, for example in relation to employment and outcomes? Mr Livingstone And they should be financially incentivised to offer the skills that we certainly require: computer science, maths, art, animation and physics. It seems to be that, historically, universities have been funded on a bums-on-seats basis—excuse my language—that incentivises numbers rather than quality. So, you are stripping maths out of your curriculum to get more people on a course and to get greater income for the university, but it should be done the absolute opposite way, with less money for media studies rather than hard skills studies. Chair: Right, could we turn to Mark?

Q40 Mark Menzies: Thank you, Chairman. Richard, you talked about the £415 million benefit that you feel the tax break would bring, and the £192 million cost of that. Can you talk us through the numbers and the assumptions in the calculation that got you to that £415 million number? Dr Wilson: I’m afraid I can’t do that now. I am very happy to send our report to the Committee, which will show how the figures were arrived at. What I can say is that the Treasury adopted that figure—in fact, I think both parties did. Before the election, they used our estimate of how much the games tax relief would cost in a given year. After the games tax relief was removed in the June Budget, the saving that the coalition Government assumed would take place was again based on how much money they thought we would spend on games tax relief in a given year— about £40 million. I suppose that all I can say to you at the present time is that the figures we presented were being accepted as robust. Q41 Mark Menzies: Do you believe that the Treasury has fully bought in, more or less, to that £415 million figure? Dr Wilson: I believe that the Treasury, in the run-up to the March Budget, looked at our report. As I said a moment ago, we were told that the Treasury did its own calculations and that those calculations were slightly different to what we suggested, but not that far out. We believe that they’re pretty accurate. Q42 Mark Menzies: Bearing in mind that this is predominantly about tax relief and the costs and benefits, I think that it is quite important that we really understand how we got to that number. If you want to send it back to us at a later point that would be great. Also, it is important for us to be able to understand from the Treasury whether those numbers are robust enough, and if it is the case that is really the premise on which much of this case is built. If those numbers don’t stack up—if the Treasury doesn’t think that those numbers stack up—it really starts to bring into question much of the benefit and the return that this is all based on. If you can send that to us at a later stage it would be useful to the Committee. Dr Wilson: I would be very happy to do that, and I will send you the report. I agree with you. A strong part of our case has been that games tax relief was a net revenue generator for the Treasury. Q43 Mark Menzies: That’s fine. The other thing is that, operating in an environment where money is very limited, if a tax relief was off the table, what other things do you think could be done, either by the Government or other bodies, to bring benefit to the games industry and, for example, in Dundee in particular? Dr Wilson: I am sorry to be repetitive, but I am probably going back to what I mentioned more or less at the beginning of the session: if we couldn’t have games tax relief the next best thing would be to have very enhanced R and D tax credits. But that would, of course, incur additional costs for the Government, and R and D tax credits cannot be specialised, or focused on just the video games sector. In many ways, to use



a familiar phrase, they would be poorly targeted because we would be using the research and development tax credits not simply to help the video games industry but to try to help a swathe of other sectors as well, and that could well end up costing the Treasury more. I am sorry to be tedious and to repeat this, but our industry wants to be able to compete on a level playing field, particularly against Canada. They have very generous tax breaks—37.5% tax relief in Quebec. A dozen states of the United States—the land of the free and the laissez-faire economic attitude— have tax breaks or incentives to get video game developers to focus in particular jurisdictions. 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. If we can’t have that, the next best thing would, as I say, be R and D tax credits. But it wouldn’t be a game changer, it would not draw in those overseas publishers to invest in the United Kingdom or stimulate new investment in the UK games industry. Mr Livingstone Clearly we all want production tax credits but two other things spring to mind. One is perhaps to extend the EI scheme, so that it could be more widely used as a slave model rather than as a per-project model. Also, I hear that the proposed patent box is to be taxed at 10%. If you could extend that to IP, with IP owners paying corporation tax at 10% rather than 28%, that might incentivise IP retention as well as creation in this country, because if you tax IP at source there is a great incentive for people not to offshore their IP. Q44 Mark Menzies: I am conscious of time. When we took our informal evidence session, and were speaking to some of the companies in Dundee, it is probably fair to say that the people were not speaking with one voice when it came to the benefits of the tax changes. People were highlighting other things that could be done to help them. That was really the thinking behind that question. The other thing that I’d just like to try to understand is whether you have done any analysis of the benefits that the changes to national insurance contributions, corporation tax and so on that were announced in the Budget, would bring to companies that are essentially SMEs. Dr Wilson: I have just two points. On the issue about there not being a uniform voice when you went up to Dundee, we did a survey back in December 2009, which showed that 84% of developers supported games tax relief. I think that it would be unusual in any voluntary association to have complete unanimity on a particular tax proposal. Q45 Mark Menzies: In one particular company we spoke to, the senior person pretty much pushed it to one side, saying that there were bigger things on the table—IP ownership and various other things. It left me with great doubt as to whether this was over tax relief, or were there other things that we needed to focus on. Dr Wilson: But for every example you can find of a developer saying that they weren’t convinced by

games tax relief as being the top measure, I can name a lot of others who would be supportive of it. It is important to emphasise that. Q46 Jim McGovern: I think it is fair to say that in Canada, it is not just about tax breaks, but employee incentives. Dr Wilson: Yes. It is worth emphasising that skills are important—of course they are. But one of the reasons why there is a skills shortage, which has been important in the UK, and which has affected the development sector is again because our competitors in Canada have this enormous tax incentive, which in turn allows them to spend more money on poaching individuals from the UK to work in Canada. Q47 Mark Menzies: At what point do you think you will be able to do some analysis on the NI changes and corporation tax? Is it something that your company is looking at? Dr Wilson: We are looking at that. TIGA has set up a committee that will look into the tax changes that have been announced in the Budget. We don’t believe it will change the essence of the argument, but we intend to look at it. With regards to the corporation tax measures that were announced, we have taken informal soundings with some overseas publishers. Everybody likes to have corporation tax cut, of course, but no one is saying that the changes in corporation tax are significantly substantial enough to make them change their investment decisions. If you have a 37.5% tax break in Quebec, obviously it looks much more attractive than lowering the rate of corporation tax in the UK. It is also worth emphasising that corporation tax reductions are very useful if you are making a profit, but a lot of the smaller developers, many of whom you may have come across in Dundee, were going through a period when they were making a loss. A change in corporation tax at that point doesn’t really help them a great deal. Q48 Dr Whiteford: Thank you gentlemen for being here and for your forbearance earlier when we were running around the voting Lobbies. As Mark has just been saying, when we were in Dundee, we heard a range of views on the tax issue, from people who thought it would have a very marginal impact to others who would welcome it. But one thing that came across very strongly was that many of the games producers seemed to have problems with banks and access to sustainable finance, particularly finance for development and credit when things are in the pre-production stage. I wonder what your reflections on that issue are. That struck me, as I came away from Dundee, as being a more substantial issue that we need to address for the future of the industry than tax, but I would be interested to hear your thoughts on that. Dr Wilson: Again, our survey evidence from December 2009 seemed to show that developers had problems accessing finance. I think that probably no sector in the UK particularly loves the banks at the moment, and are able to say that they are getting stacks of cash from them. That much is probably



general in nature. Developers will fund themselves in a number of ways, such as through publishers, through their own resources—in particular smaller developers, which rely on their own resources—and of course they will look to banks to help them out. But again, one of the things that was advantageous or seemed appealing about the games tax relief proposal that we put forward was that if a developer could show that their game had approval to benefit from games tax relief—as I said in the beginning, 30% tax relief on their particular product—that could in turn attract external investors in that game, because they could see that there would be money coming; in essence, there would be money available to invest in that company. That makes the small developer a more attractive organisation or opportunity to invest in. Mr Rawlinson: I think it is fair to say that 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. Therefore, the underpinning of a tax relief will improve the opportunity for the return on investment, and make it a better investment potential for the banks, particularly with small start-ups and SMEs, which I think our industry is creating a lot of at the moment. For the normal high street bank looking at that business, it is incredibly difficult for them to assess the risk and understand the proposition. In fact, both Richard and I attended a meeting with other creative industries in the summer, and the understanding of the decision makers within the banks was one of the key issues that we were discussing across all the creative industries. Yes, banks are a problem. Mr Livingstone Not just banks though. Private equity, VCs and angels still have trouble understanding our industry, and quite right too, because it’s not just one format and one way of consuming content. There are diverse platforms and diverse ways of playing, whether it is small casual games played online, or games played on iPhones, handheld devices, mobile phones, social networks, or high-end consoles. 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. We need an educational process too, so that people understand the whole process. Q49 Dr Whiteford: The other big issue that I came away with from Dundee was this whole issue of the level playing field. It struck me that if countries such as Canada and France are creating an unfair competitive advantage by subsidising their industries, that is an issue that we should be raising at the WTO, so that the unfair subsidies are taken out of the equation. That might be a more effective way of creating the level playing field that we all want to see our industry on. Dr Wilson The previous Government looked into that, and they found that there were no grounds for appealing to the WTO. They have already been down that route. Mr Rawlinson: Canada sits outside the EU, so it is not restrained by EU competition rules. As Richard

pointed out earlier, the need for a cultural test enables us to overcome the state aid rules that would normally apply for providing sector-specific support. That is how France has been able to offer tax relief for its video games production. Q50 Dr Whiteford: It strikes me that the cultural test seems to be a pretty low bar, and that it might well be open to challenge. I am concerned, because what we don’t want is a race to the bottom. We do not want these proposals to create a race to the bottom and replicate the existing problem that we are complaining about in other places. Mr Rawlinson: I think that we all agree with that. You’re absolutely right. If your only selling feature is price, there is only one way and it is the bottom. That is not where we are. We are an industry and a country that has a rich heritage of excellent—indeed, the very best—games production. We look at the success in Scotland, in particular of “Grand Theft Auto”. We do not look only at that product, but it is a world beater. We have the skills and the creativity, and I think it is uniquely British that we have success across a whole range of creative industries. We can look to other countries that are successful in particular creative industries, whether that be architecture, furniture design, art, painting—whatever it might be—but we seem to have skills and expertise across a very broad range of creative industries. That enables us to move forward in our industry, where, as Ian said, we are a marriage of technology and creativity. Q51 Dr Whiteford: I was interested in what you were saying at the outset about the diversification into iPhones, Wii games and so on, not least echoing some of the questions that Fiona was asking about the move away from simply violent computer games. That has to be a very welcome development if the industry is to improve its credibility and perceptions of that. I wanted to ask you about potential growth in that sector, which perhaps echoes someone else’s question. What are the things, apart from tax relief, that will help us maximise potential? Mr Rawlinson: Growth will come through opportunity and talking up our ability in this country. 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. Underpinning that is this tax relief system that we are advocating. Although it will support the industry, and we do not want us to become a low price-based industry, it will provide an incentive for that inward investment. That is really important. Women in games is absolutely key, because then we get a diversity of content that we can create and can meet the needs of a growing market. We should recognise that the industry is growing well above the average. It is a leading growth industry, not just in terms of creative industries that are growing above the national average, but we are the leading creative industry in respect of that growth. The opportunities are exponential: marketing that, promoting that, diversification of the work force and definitely



bringing in minorities and women that will create new game formats. To echo the words of the Chancellor when he says, “Yes, we want a low-cost economy because we are going to generate new jobs.”, when asked where the jobs are coming from, we do not know. I cannot specifically say where they are going to come from, but I think the opportunity that we will create will give us new jobs and new employment. Q52 David Mowat: I want just a piece of context, first of all, in a couple of numbers that you gave. I think you said that there were 650 development employees in Scotland and 9,000 in the UK as a whole? Dr Wilson: Yes. Q53 David Mowat: What that is saying is that this industry is no more significant in a sense to Scotland than the rest of the UK, because those proportions are roughly the relative size of the countries and populations. Is that true? Dr Wilson: It depends precisely on what measurement you are looking on. I said in my evidence, which I have written down here, that Scotland has 46 development companies. That represents about 10% to 11% of development companies in the United Kingdom. In terms of head count— Q54 David Mowat: I think you said 9,000 in the UK. Dr Wilson: Yes, 9,000 in the UK. In terms of Scotland having a share of that head count, that 651 figure which is up to date is about 7.2%. Q55 David Mowat: Yes, so obviously, this is a UK issue? Dr Wilson: It is. Q56 David Mowat: We all went to Dundee. Is the structure of the industry in other bits of the UK—the other 93% of it—fairly similar to what we would have seen in Dundee or are there structural differences in other ways? Dr Wilson: In Dundee, you probably have a larger number of small independent developers. Most of the developers up there probably do not employ roughly more than about 25 people now. The big employer there, Realtime Worlds, went into administration. In other parts of the UK—for example, Brighton, Dundee, west midlands and London—you will get clusters of development studios, both overseas publisher-owned studios and independent developerowned studios. Dundee might have been a little more different in the sense that there probably is a greater proportion of small independent developers. Q57 David Mowat: Okay. I think that you used a figure of an 18% decline in Scotland over the past year. Would that be a similar number to the rest of the industry in the UK?

Dr Wilson: In the rest of the UK, the most up-to-date figure I have is a 4.4% decline in the UK as a whole this year.1 Q58 David Mowat: So Scotland has been disproportionately hit for whatever reason? Dr Wilson: That is right. Mr Rawlinson: The demise of Realtime Worlds had a disproportionate effect. Q59 David Mowat: That was in these numbers, was it? Mr Rawlinson: That was in these numbers. Q60 David Mowat: Okay. Thank you for that. Going back to your point about the size of the tax relief and what might come of it, £192 million is the figure that you have suggested and that will save and create 3,500 jobs. That is quite a lot per job. That is £60,000 a job. To echo the points made previously, it is very important that we can see other benefits than that. There are other ways that we can create jobs for £60,000 each. There has to be something else that we are going to create in terms of revenue. Mr Livingstone It is IP creating as well. We need more IP to reside in this country. The value of IP is hard to put on a balance sheet, but if you look at Lara Croft, which everyone says is quintessentially a UK digital icon, the reality is that “Lara Croft: Tomb Raider” is developed in California and it is owned by the Tokyo Stock Exchange. It is not British any more. A lot of our IP has gone offshore not just to be developed, but it is owned offshore. Q61 David Mowat: I agree, but even with IP unless you can either translate the ownership of IP into jobs or tax revenue— Mr Livingstone We don’t want to become a work-forhire nation. Q62 David Mowat: No, we don’t. The nature of the tax relief is a sort of rebate, isn’t it, so you actually get it while you’re doing a development? Is that right? Is that what the Canadians do and what you need? It’s not something that only goes to profitable games? Mr Livingstone It comes at the end of the fiscal year. They come with their 37.5% cheque. Q63 David Mowat: But you don’t have to have made money yet? Mr Livingstone Not at all. To offset the costs of production is the great problem during the time of production. Q64 David Mowat: It would be quite important for me to see the figures that show the benefit over and above the £60,000 per job, because that is a lot of money to create a single job. We have to have a case. 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 1

I now have received more recent information from Games Investor Consulting which suggests that the decline in the UK as a whole between July 2009 and September 2010 is 5%].



we put forward, which we are confident about, it is a net revenue generated for the Treasury. It is worth emphasising that point. It is also worth emphasising something about the nature of the video games industry, which others mentioned earlier. The video games development sector is extremely export-oriented. A typical development studio would generate 62% of their turnover through the export of their games. Almost all developers in the UK export their content, which is really important. Q65 David Mowat: Can I just ask about that? One of the things I took away from being in Dundee was a little bit of knowledge about the structure of the industry. You have things that they call publishers who tend to commission these guys to produce what they produce. I don’t know how typical this is, but it was a bit of an IP issue that quite often the publishers own the IP and they were using the firms in Dundee a little bit like creative software developers—nothing wrong with that; high added value and everything—but structurally it doesn’t stand up. If the publishers are somewhere else, it sounds like there could be a structural issue in the industry. Eventually you become—I think you used the phrase, Michael—jobs for hire. You do become that in that model that I saw in Dundee. Is that something you think is happening? Dr Wilson: There are some developers who, as you say, do work-for-hire work for overseas publishers. There are other developers—for example, Firebrand Games in Glasgow is independently owned, owns a lot of its own IP and exports its games. It depends on the nature of the contract between publisher and developer. A lot of developers are increasingly trying to sell their games directly to the consumer; for example, as Michael mentioned earlier, over the iPhone. It will depend on the particular game and developer. Mr Rawlinson: The market is changing very rapidly, so we turn the clock back maybe as little as two or three— Q66 David Mowat: Is it consolidating? Mr Rawlinson: It has been consolidating, or it was in a process of consolidation. Two or three years ago the global publishers who had the access to market for box products controlled the market more or less, and therefore the independent developers were under pressure to relinquish their IP. Now, as Richard has rightly said, they have the opportunity to reach the global market through online distribution—whether that be through the internet, console portals, PlayStation network, Xbox Live or the iTunes network—direct to consumers, so they can retain the ownership of their IP, they can exploit their IP, and this tax relief would enable those smaller companies to grow and blossom alongside the multinationals. Q67 David Mowat: A quick final question on scale. The UK declined by about 4% and Scotland 18%. What does the industry do globally—approximately? Not just Canada. Broadly, is that number available? Dr Wilson: I haven’t got a precise figure in front of me, but PricewaterhouseCoopers earlier this year

quoted that the global market for video games—not just software but hardware—was worth about £50 billion this year, and they predict that by 2014 it will be worth £80 billion, very approximately. Forgive me for going back to Canada very briefly. While our work force have declined over the past two years, the Canadian games industry has continued to expand in terms of head count by another 33% over the past two years. The key difference again is the tax relief. You may think it’s expensive to keep those jobs in operation, but none the less it clearly has a significant impact on growth or decline. Mr Livingstone The thing is that the industry is still growing. Software sales are increasing year on year. Q68 David Mowat: Globally? Mr Livingstone Yes. We will be reaching a tipping point—some say 2012, some say 2015—when revenues from network sales, or online delivery of games revenues, will be larger than those from box products. Q69 David Mowat: That’s over the internet? Mr Livingstone Yes. Q70 Jim McGovern: Could I put a point to David? It wasn’t just coincidence that Dundee became the hub for computer games. I also point out that it is not just about young lads sitting in front of a TV; there is a lot more to it than that. The Timex and NCR factories in Dundee started producing computers, and it was the people who worked in those factories that ended up starting businesses; that is why Dundee is the hub for the computer games industry in the UK. Obviously, Abertay University has a link to that. David Mowat: That is what I thought, but it does not appear to be wholly borne out by the numbers that Dr Wilson gave us; he said that 7% of the video games industry is in Scotland. That was all. Jim McGovern: Yes, probably in Dundee. If I sound biased there, my apologies. Mr Rawlinson: The circumstances around the growth of Dundee as a hub are as Mr McGovern pointed out, but in different hubs around the country different circumstances have prevailed. You will have found that a small company that 20 years ago had a success grew its business and had spin-offs, which then set up their own business alongside. So we do have these hubs in Brighton, Guildford, the midlands—around Leamington Spa, for instance—along the M62 corridor, including Manchester and Liverpool, and in the north-east, in Newcastle. All varied, for their own particular reasons, but nevertheless these hubs have grown and developed. Q71 Cathy Jamieson: One of the things about speaking after everyone has asked a lot of questions is that you have a bit of a job in trying to sweep up and crystallise some of these things, and that is what I hope to do. I have three quick questions to ask, so that the Committee and I are clear and can take things forward. First, in relation to IP, we have had a lot of discussion about not wanting that offshore, and all the issues around that, and of how the tax incentives would assist. I wonder whether there is anything else



that the Government need to do, and that the Committee could recommend that Government looked at, in relation to the creation and protection of IP. Mr Rawlinson: I think Ian has already outlined the extension of the patent box. I am not an IP or tax lawyer, but 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. Mr Livingstone There are also hidden benefits that people might not appreciate, especially in the online world. In the old model—the old world, where people went into shops, bought their products and walked out—the shop will have paid corporation tax, and the Revenue would have got some VAT. In the online world, which can be served from anywhere in the world, those revenues are no longer being had. If the IP was coming from the UK and serving a global audience rather than the UK consuming IP from overseas, there would be additional tax revenue, which is now lost in the online world. Mr Rawlinson: VAT receipts are a big danger. We have already seen it with online trading of physical goods being serviced from the Channel Islands, but as Ian said, the server and the registered address for an online business could be in any low-cost tax jurisdiction. Mr Livingstone Tax on IP alone would be a great help. Q72 Cathy Jamieson: I was going to ask about VAT, but you have probably answered that. One of the other issues that came up in discussion with some of the smaller companies was the issue of self-publishing. I wonder whether you have any views on what the Government could do to encourage more co-operation among the smaller companies to promote selfpublishing. Have you any specific ideas on that? Mr Durrant: Is it possible that I can come in here? That was something that I was going to mention when I gave evidence, because I had the benefit of being party to that discussion in Dundee. I think that you heard that there was some kind of emergent plan to create a consortium. I suggest that the Committee seek details from NESTA, which is acting as an honest broker to bring that project together, and the project is advancing. Essentially, NESTA is putting together a consortium of developers, which will include developers in Scotland, with the idea, in particular, of taking advantage of digital publishing. It intends to create a developer-owned publisher, which will be owned by a consortium of developers, who will share not only marketing costs, but the revenue and returns. It aims to reduce the publishing cost and the risk. It wants to create a portfolio of titles and use that as a platform for raising finance. The reason I was going to mention this when giving evidence is that we’ll be linking our prototype project with it, and I don’t want to jump ahead to that. But, essentially, there are opportunities, there is a project there and there is some public funding going into it to try to stimulate it. As I say, I recommend that the Committee seek the precise details from the National

Endowment for Science, Technology and the Arts. When I give my evidence, I’ll talk about how our prototype project would specifically relate to that project and benefit it. Q73 Chair: Is there anything anyone would like to add to that? Dr Wilson: I would just like to add that, as a trade association, we try to provide best-practice information and advice on self-publishing. We had an event up in Dundee earlier this year—it was when the volcano went off, as it happened. We had some of our experts from other parts of the United Kingdom come up and speak about self-publishing. Mr Livingstone I would add that these companies can create great content, but not everybody knows about it, so they need help with not only accessing global markets, but telling those markets that they are here. They need help with marketing, promotion and getting visibility to drive users to their content. Q74 Cathy Jamieson: I have a short question. I suppose this will put people on the spot, but we will have to produce a report with recommendations. Could each member of the panel say in one sentence what the top recommendation is that they would like us to make to the Government? Dr Wilson: I’m so sorry to be boring, but I hope that the report will say that the Government should look again at tax relief, on the basis that we are supporting an export-oriented, highly skilled industry. We are supporting a sector that really has an opportunity to take advantage of growth in world markets. So, games tax relief should be the top priority, and I hope that the Committee will be able to recommend its adoption. Mr Livingstone I think it’s a combination of things, led by production tax credits and tax relief, but that’s also matched with the skills that we need to make the games; we need hard skills, not soft skills, and we need people who know how to make a game, rather than who know the philosophy behind the games. We need the perception of games to change. We need greater careers advice at a younger age to get people into the industry. We want IP-creation incentives—not just creation, but retention. We need programming in schools. We need broadband. Feeling great about 2 megabits is misplaced; as more and more devices are used in the home, those 2 megabits will go down to a lot less. If we’ve got four or five users in a home, we will need at least 8 megabits, not only to download games, but to play them online and to serve global markets from the UK. So, broadband is another issue. Of course, there is also piracy. Chair: That was a very long sentence. Mr Livingstone I hope there will be a lot of recommendations. Mr Rawlinson: To cut it short, I would just reiterate what my colleagues have said. We have covered the points. Q75 Mr Reid: Thanks for coming along this afternoon. Perhaps you could explain how you see games tax relief working in practice and why games tax relief, rather than other incentives, is so important.



Dr Wilson: Again, the reason why we advocated games tax relief was 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, particularly Canada. Typically, if you go to a development studio, almost every person you speak to will say that they have lost staff to Canada, so there is a real brain drain. That is partly driven by Canada’s very strong tax incentives. That’s why we proposed games tax relief. I can send the Committee a copy of the proposal, but in concise terms, games tax relief would benefit a company if it had a budget of at least £100,000 a game. As I think I mentioned, there would be three different rates of relief: 30%, 25% or 20%, depending on the exact cost— Q76 Mr Reid: Per cent. of what? Dr Wilson: Of the cost of the game. A company’s game would have to pass the cultural test. As I mentioned, we had to include the cultural test in our proposal. If your company was profitable, you could use the games tax relief to reduce your corporation tax bill. If your company was making a loss and your game qualified, you could use the games tax relief as a cash rebate from HMRC. Basically, it would be increasing cash flow to the business in question. I think I mentioned that one of the reasons why we proposed games tax relief was that it would help a range of companies in the United Kingdom—small companies, independent development studios and publisher-owned studios. Q77 Mr Reid: You keep referring to Canada. Is Canada the only problem, or are there other countries? Dr Wilson: Canada is the most egregious example— shocking example—of Government intervention providing very strong rates of tax relief. Quebec offers the most generous relief, but other provinces of Canada offer very strong rates of relief as well. About a dozen states in the United States provide either tax relief for games production or similar strong incentives. France has a tax break for games production. I think that back in 2008 Singapore launched a $200 million scheme specifically to help the export of video games. It just shows the level of ambition and money that other countries are putting behind video games. Those are the main competitors I would refer to. Q78 Mr Reid: Would the level that the previous Government proposed for the tax relief be sufficient to enable us to compete with Canada? Dr Wilson: The Government informed me on the day of the Budget that they were going to adopt our proposal. As I said, we were proposing a 20%, 25% and 30% rate of relief. We think that was a proportionate response to overseas developments. We don’t think it would be a race to the bottom; we think it would be a way of making sure that the UK games industry was competing on a level playing field. We think the proposal we put forward was proportionate, sensible and would have the required effect of helping us to compete on a level playing field.

Q79 Mr Reid: I want to ask about the jobs that you think you could create if you got the tax relief. What would the people doing those jobs otherwise be doing? Would they be working in Britain in other sectors? Would they be attracted in from abroad? Would they be unemployed? Where would they come from? Dr Wilson: Obviously, that is a very difficult question to answer because you never know what a multiplicity of people would do, but we do know that a brain drain is taking place from development studios in the UK. Again, I am very happy to send the Committee a copy of our report. Back in 2009, we carried out a survey of game developers. We found that just under 25%— I think the figure was 23%—of development studios said that over the previous 12 months they had lost staff. Of those development studios that said they had lost staff, 75% said they had lost staff to Canada, and those were typically the extremely high-skilled project managers or experienced programmers. A lot of very high-skilled people were leaving to go to Canada. What would these people be doing if we didn’t have games tax relief? We don’t know precisely what they would be doing, but we can be pretty confident that some of them would push off to overseas jurisdictions. Q80 Mr Reid: So it is more a question of retaining the skills that we have? Dr Wilson: It is a question of retaining skills, absorbing some of the new, very qualified graduates, or training people in the games industry who are coming out of education. Q81 Mr Reid: From what you have been saying, the industry seems to be concentrated in certain hubs throughout the UK. Does that mean that if the Government changed their mind and granted the tax relief, all the benefits would simply go into those hubs, or would wider parts of the country benefit as well? Dr Wilson: The truth of the matter is that the game development work force that we currently have are very mobile. At the moment, they tend to be male, as we have already commented. They tend to be fairly young, so they don’t have many restrictions or ties in relation to where they are currently working. Clearly, if we had games tax relief and some of the existing studios expanded, people would go to those towns and cities—Dundee, Brighton, Guildford or wherever— but if there was a very strong university in another part of the UK and it was able to spin off new startup studios, there is no reason in principle why another hub might not emerge. One of the good things about the video games industry—this is worth emphasising—is that the majority of the work force is not concentrated in London. It is good that it is concentrated throughout the UK. I think 85% of the development work force are outside London, which is really good. We talked about this earlier. All political parties have talked about wanting to rebalance the economy and promote growth throughout the United Kingdom. The development work force can be part of that solution. It is fantastic to be able to have high-skilled jobs in Jim McGovern’s constituency, to name but one



example. It is great that we can create these jobs in different parts of the United Kingdom. Yes, you would see some existing hubs expanding, but it would also be possible to see new hubs emerging, particularly if there were a strong university in place. Chair: I should interrupt. I know, Mr Livingstone, that you have to go, and I could see you becoming more and more itchy. If you must dash, I thank you very much for coming, but if you can stay a bit longer it would be helpful; we were interrupted by the vote. I could see you getting more and more ready to go, so leave when you want to. Q82 Mr Reid: Mr Wilson, you were talking about a mobile work force, and we are dealing with intellectual property, which is slightly intangible. Traditionally, if a Government give a company a subsidy to build a factory and put in machinery, the Government who gave that grant have some sort of control, because you can write in a clause stating that the machinery cannot be taken away. Is there a risk that if the companies benefiting from tax relief get a better offer from Canada or somewhere else, the intellectual property and skilled developers may go away anyway? Dr Wilson: Our belief is that with the games tax relief in place the United Kingdom is a much more attractive place in which to do business. We have referred to the fact that we have a talented work force—and some excellent universities—in the United Kingdom games industry. With the tax relief in place, we are confident that more overseas publishers will invest in the United Kingdom. One thing in our proposal is that to benefit from the games tax relief you must obviously pay corporation tax, so it seems to be a win-win situation. More companies will invest in the games industry—overseas publishers, to name but one example—and will not only have the ability to employ skilled people in the United Kingdom, but will also pay corporation tax to the United Kingdom Government. Q83 Mr Reid: And would you see it as a relief that would have to be permanent, or could it be there for a few years, after which you would be able to compete on your own? Would it need to be a permanent feature? Dr Wilson: At the very least, we would like a pilot project. As you know, almost every Government pilot project becomes permanent, so we would be delighted with that proposal. To be serious, we would want games tax relief to be a permanent measure. We believe—I can show you the statistics behind our calculations—that it is a net revenue generator for the United Kingdom, so we believe it makes a lot of investment sense. The United Kingdom Government decided that film tax credit makes sense for the film industry because it promotes high-skilled jobs and attracts businesses to invest in the United Kingdom, and we believe that the same argument applies to games tax relief, which helps an important creative sector. Q84 Mr Reid: Would the industry change? Is the cultural test restrictive, or is it such a low bar that the

whole industry would qualify anyway? Would there be any change? Dr Wilson: No. Obviously I was struck by your remark about a low bar. When we did our test last year, we found that 44% of the titles we put forward passed for relief. We were obviously pleased that companies were able to benefit from the tax relief, but we were conscious when we made our proposal that it should be seen as a serious measure, and we knew that if something like 80% of companies were passing, the Treasury would probably show it the door, which I suppose in a way they did. We tried to frame the cultural test as a serious test. I said that 44% of titles passed our test, and that seemed to be pretty much on a par with the way the French tax credit works. I think about 40% of French games typically benefit from production tax credit. I would not say that it is a shoein, but it is an opportunity for game developers. No one has to take advantage of it, but it gives an opportunity if we can take advantage of a tax credit. You don’t have to believe me on the benefits of games tax relief, because NESTA—the National Endowment for Science, Technology and the Arts—did a survey last year of about 30 key people in the games industry. It was not a big sample, but the people who were interviewed were very important and included financiers in the City of London, overseas publishers and key independent developers. Some interesting findings came out of that research. First, game developers thought that they would be able to hold on to all the IP. Secondly, the financial institutions—the City of London—thought that the games industry had become much more attractive with games tax relief. Thirdly, everyone said that it would create more jobs. Mr Reid: Thanks very much. Q85 Chair: Now, there are a couple of observations that I would like to make. I have three questions to put to you, and then I will take the supplementary questions that anybody else has. People shouldn’t feel obliged to ask another five minutes of questions. First, could you send us some more information? We are seeing the Minister next week, so obviously it is important that we get that sooner rather than later. Similarly, if you have prepared any answers to questions that we haven’t asked, and you feel that we would benefit from hearing them, by all means tell us if you think that, on reflection, there are a couple of areas that we haven’t covered. The first point that I want to put to you relates to sex and violence. The title, “Grand Theft Auto”, does not impress, in terms of social conscience, well-being, and all the rest, does it? The industry does have this image of being somewhat bloody, gory and encouraging of antisocial behaviour. How do you overcome that? What sort of system of not censorship, but guidance, do you have that would encourage us to be supportive of the industry? Mr Rawlinson: I am very happy to answer that question. First of all, sections 40 and 41 of the Digital Economy Act 2010, which was passed in the dying breaths of the previous Parliament, amend the Video Recordings Act 1984 so that the industry’s selfregulatory system for the age-content classification of video games, which is called PEGI, is enshrined in



law. That is due to be implemented by the spring of next year, so we will have 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. Those amendments were made in response to the recommendations of the Byron review. It is very important for the Committee and Parliament to know that video games are regulated, like films, obviously, but unlike books, the content of which is totally unregulated. In comparison with other creative industries—I have cited films—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. “Grand Theft Auto” has always been classified as an 18-rated product for an adult audience. That game was, in fact, covered by the previous regulation, under which it was illegal to sell that product to a person under 18 years of age. The industry has acted, and it continues to act, very responsibly in relation to adult content. That is not to say that young children don’t play that game, but that is the responsibility of parents. 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. It shows them what it is, how it’s used and how they can use it to determine what is appropriate or inappropriate for their children. My final point is on scale. In 2009, 994 titles were produced for sale through retail shops. Of those titles, only 53 were classified at 18, so it is a very small percentage of the industry’s output that is actually targeted at adults. As I have said, I don’t think that it’s unreasonable that, as we are a mature entertainment industry, we should be permitted, with correct regulation, to supply and produce adult content. Q86 Chair: Can you just clarify that? I am not sure that you are living in the real world if you believe that regulation stating that a particular video game should not be played by people under the age of 18 has much impact on what really happens in constituencies such as mine. I think that belief is naive in the extreme. Mr Rawlinson: I am not saying that young people don’t play “Grand Theft Auto”. I am saying that there is regulation that makes it an illegal offence for that product to be sold to under-18s. Q87 Chair: In a sense, my reaction is, “So what?” You mentioned that only a small percentage of games are classified 18, but that does not relate to the number sold. Is there an equivalent percentage? Mr Rawlinson: In previous years, that percentage, in terms of sales, was higher, but in the last year for which I have figures, 18-rated products accounted for about 8% of the market. That was against units produced being about 3%. It varies year on year, depending on the titles. To be honest, we get a peak when there is a new “Grand Theft Auto” or a “Modern Warfare”.

In terms of your rebuttal around 18-rated games, exactly the same regime applies to 18-rated films, so I think that it would be inappropriate for our industry to be singled out and treated differently to the film or other creative industries. I’m very happy to have a debate around adult mature content and the legal framework for its supply, but let’s do that in the round, not isolate our products. Q88 Chair: I understand why you would say that. I have heard essentially similar things from the producers of cigarettes, and I think that the fact that you indicated that there was a peak in sales of games when the new versions of “Grand Theft Auto” or “Modern Warfare” came out indicates the direction in which the majority of the market is skewed. I listen to some of the youngsters in my constituency, and they are not playing educational games; they are playing games in which you blow as many limbs off as many people as possible, or steal as many things, or sell as many drugs, as you possibly can. That is the nature of it, and the role models that these youngsters are picking up from your industry are not particularly progressive or beneficial. Mr Rawlinson: First, the average age of a gamer is now 33. It is not just a market for young people, it is a market for the whole population, and there is a broad range of products. We were asked a question about women gamers, and, historically, one barrier to them playing games was the technological barrier. A joypad with eight or 10 buttons on it was quite technically challenging—I certainly can’t master it. Nowadays, the Wii has a controller that you just hold in your hand and wave around, or a stylus that we can use to write on the screen. Or you can use your finger on a touch-screen. The technological barrier to engaging in games is falling, and so I think— Chair: I understand that, but I’m not entirely convinced, so I think I’ll stop you before you dig yourself further in. Q89 Jim McGovern: Can I make a point? Obviously, you’re involved in the entertainment side of the games industry, but Professor King, the principal of Abertay University, calls it “pervasive technology”. Chair: That’s one of the other points I was going to make, actually. To describe these as video games almost trivialises it. All of us who were in Dundee were quite impressed by the extent to which it covered a much wider range of activities. I see that you say “interactive entertainment”, but I wouldn’t necessarily describe it as entertainment; it is educational. There is an issue there. Leaving sex and violence behind for the moment, the second point I wanted to touch on, in terms of your relationship with Government, is that when we are talking to organisations, there are always two aspects. The first is whether you can access the Government, and feel that you can give them your views and that they hear them. The second is whether they accept



and act on them—distinct activities. Do you feel that you have had, and now have, appropriate access to Government, in terms of being able to communicate your views to them? Leaving aside the question of the tax break, which is ongoing, on other issues do you think that they are responding appropriately? Mr Rawlinson: If I could just finish briefly, I would say that we, as a trade association, have very good relationships with our two key sponsoring Departments—BIS and DCMS. We also have relationships with the Department for Education, and I sit on the executive committee of the UK Council for Child Internet Safety, which is co-chaired by Tim Loughton and James Brokenshire, who is from the Home Office. We’ve had contact in the past, and continue to have contact, with the Department of Health. So I would say that as a trade body on behalf of our industry, we have very good relationships with Government. They listen to our views and seek our opinion and our input on a range of issues, and I think we’re listened to. Dr Wilson: I think we have a very good relationship with all the civil servants whom Mike has just referred to in those Departments; it is a good relationship. Both the previous and current Governments have had round table meetings in the Department for Culture, Media and Sport, which both our trade associations were present at, with the relevant Ministers from that Department. As you will have seen from my evidence, I 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. We would be very keen to have meetings, even if they were for a very short duration, with Cabinet Ministers relating to our industry. The Department for Business, Innovation and Skills would be one, and a Treasury Minister would be another, as well as the Secretary of State for Culture, Media and Sport. We know that these people are enormously busy, and we don’t want to take up a huge amount of their time. But I think it would be good to be in front of them for five minutes just to highlight some of the key issues that are being faced. You rightly made a distinction by asking whether we were being listened to. If, after listening to us, they say, “We don’t want to do that,” that’s absolutely fine, but I think it is important we have engagement with Cabinet Ministers from time to time. Chair: Jim, you were bursting earlier on to make a couple of observations. Are there any other questions or points that you want to make? Q90 Jim McGovern: I would like to say to Richard that I think I said earlier, tongue in cheek, that I probably see more of you than I see of my wife. You talk about getting in touch with politicians; I am not a member of the Government, obviously, but certainly you and I are pretty regularly in touch, and I regularly visit Abertay University, and speak to Professor King on a regular basis. Just to conclude, I would like to

thank you for coming along, Paul, Michael, Richard and Ian, who has had to leave, and I hope we can stay in touch on a regular basis. Dr Wilson: Thank you very much. Chair: Any other points that anyone wants to raise? Q91 Mr Reid: I think you said earlier, when I asked you one of the questions, that without this tax relief, you were losing developers to Canada. Do you have any evidence of that? Do you have records of people who have worked and trained here and have gone to work in Canada? Dr Wilson: We have a mixture of evidence. We have survey evidence—the survey of game developers that was carried out in December. As I said, I will send the Committee a copy of that report, so that you can see the statistics. We have anecdotal evidence from studios. I know it is never as satisfactory, but none the less, there is anecdotal evidence. Also, in the run-up to the March Budget, I contacted a number of companies to ask them for examples of people who had cleared off to Canada. I was given some information, but frustratingly, I wasn’t in a position to pass it on to the Treasury at the time because of data protection requirements. Those are the three main sources of evidence. Q92 Lindsay Roy: Do you have any evidence of people from out of the UK, or out of Scotland, coming into Dundee? Dr Wilson: If I heard your question correctly, you asked about people from outside the UK coming into Dundee. Q93 Lindsay Roy: Yes, from outside the UK or elsewhere in the UK to Dundee. Dr Wilson: Absolutely. Sadly, before Realtime Worlds went into administration, about a quarter of its staff came from outside the European economic area. In fact, that is one point worth mentioning. It has been said to me by a number of developers and publishing studios that they are concerned about the possible restrictions on migration that are being planned. Some studios need to take very talented staff from their studios overseas on occasion to meet skill shortages in their companies and to complete particular projects. They would be concerned if they were to be prohibited from doing that. Although, as I mentioned earlier on, we have a skilled work force in the UK, from time to time, there will be occasions when you need very talented staff who you need to draw upon as quickly as possible. Chair: Okay. Thank you very much for coming along. We are just about to go on for another hour and a half with Paul. Can I suggest that we adjourn for five minutes for a comfort stop? If you want to stay to listen to Paul, by all means do so. If, however, you have to go off, then feel free to do so. I apologise for the delay at the start; it was because of the votes that we hadn’t anticipated. Back in five minutes.


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 apologise again for the length of time you have had to wait. Thank you for hosting us in Dundee at what all of us who were there felt was a very useful and productive meeting, which certainly illuminated our understanding of the issues. It has helped with the questioning and, indeed, has probably saved us having to make a number of points, because we understood the issues from the meetings we had with you. The advantage of your having heard the previous witnesses is that you have been able to establish whether or not you agree with it all. Would you like to tell us whether there are any points with which you disagree, or on which you would place a different emphasis than the people who spoke earlier did? Mr Durrant: I would add, as I said earlier, that I had the benefit of being part of the industry round table session that we had in Dundee, which a number of Members referred to earlier. I hope I can bring some of that perspective to the discussions. A lot of the discussion has focused around games tax relief, and we have made clear in our written submission that we continue to support the idea of a games tax relief. From that perspective, we are very much agreed with the previous witnesses. One thing, though, is that we are closely connected with the SME community. I know that is a position a number of Members have expressed interest in. We are also interested in start-ups and creating new IP. For that reason, our interests lie in trying to make sure that some of these young companies have sufficient working capital very early in their cycle, so that they are able to survive and grow. 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 microbusiness, might seek. We talked earlier about the characteristics of some of the games companies in Scotland, particularly in Dundee. They are relatively small, with some undertaking work for hire, as it is known, for publishers or other developers, either to do a whole game or certain parts of a game. While we do not see that as entirely negative, we also want to make sure that we stimulate or help those companies to create their own IP. We have had a lot of discussion about the value of original IP to Scotland and the UK, and we firmly believe that. It is essentially a numbers game. If you think about the innovation funnel, or any kind of hits-driven business, you need maybe several hundred IP opportunities to have a number of hits. We want to try and help small companies create that volume. If you can bear with me, I will contextualise that from an Abertay University perspective. We were leaders in the area of games education, being the first to offer games development degrees—actually a software engineering masters—in the mid ’90s. Now, as you

heard earlier in the evidence, there are 80-plus courses throughout the UK. We are also a university that has one third—three out of nine—of the Skillset accredited courses in the whole of the UK. So we are focused on our role as a talent pipeline, if you like, serving both the local industry and the UK, and on being a magnet for talent. I would like you to think about my evidence in the context of us trying to align our objective as a charitable education institution, creating skills that lead to economic growth, with how we can then extend that to help small companies. We have been trying to marry those two challenges so that, for example, when we help small companies it might provide work experience for students or graduates; that might then contribute to talent retention. That probably sums up our position, but I would be happy to drill down into that in more detail, in terms of the specific measures that we are undertaking to try and achieve that. Q95 Chair: The other point I wanted make, or just to seek clarification on from you, is that when we were in Dundee and met some people there, some of them were not far short of telling us that you were the greatest university in the history of the world. Not all of those were your relatives, so we have to assume that that was a generally held view. Why do you think that they felt so favourably towards you, as compared to some of the other institutions that would also see themselves as supporting this industry, or similar industries? I’ve never yet met a university or college that didn’t say it was doing things for business and all the rest of it, but we don’t always get the same enthusiastic response from the recipients of the services as we did in your case. What have you done differently that the others haven’t done? Mr Durrant: Let’s take this back a little in history. One of the grandfathers of the Scottish games industry, Dave Jones, was a student at Abertay in the ’80s, and some of the small games companies began to have quite close links with Dundee. As they grew and prospered, they began to tell us what they needed, which, particularly, at that time, was talented software engineers to be involved in programming. Memories of local Industry are long; to a certain extent we went out on a limb to create our Masters in software engineering, which is a really tough programme with a very high entry bar, and one that suddenly began to attract entrants from across the UK to a relatively small university in Dundee. As the industry grew locally and matured, people began to see how responsive we had been. Particularly initially, the university came in for a quite a lot of criticism in the media—ill-founded criticism. People didn’t understand the high entry bar and the high levels of maths and physics that are required for this industry, which you’ve heard about from other witnesses today. So, as the industry began to mature and develop, we were responsive and we involved the



industry very much in designing the programmes. You’ve heard a lot about the arts and science development. It grew very much into making sure that we created arts undergraduate degrees in computer arts. Then, around the year 2000, we recognised that unless you created this real studio-based learning experience, this kind of workplace simulation, where the arts and science students came together to work on real world projects—[Interruption.] Q96 Chair: Do you want to finish the sentence? Mr Durrant: Yes. That allowed us to create the “Dare to be Digital” competition, which has run for 10 years. It has become an international standard, and has been part of our very productive relationship with the British Academy of Film and Television Arts, in terms of recognising young talent. That programme has involved industry mentors and judges. All those factors combined—involvement in course design, the Dare competition, hiring talented graduates and seeing that the output is fit for purpose—is why industry has been strongly supportive of us. Chair: Thanks. We have always got eight minutes for the vote; the more athletic and younger Members among us can quite easily make that. We have to go and vote, I’m afraid. Sitting suspended for a Division in the House. On resuming— Q97 Chair: Maybe we will start again. We were touching on what you had done and how excellent it was, and so on. The thing that struck me as you were going through that, in terms of having links with industry, is that lots of other people would say that as well. I am not quite sure what the USP is in terms of Abertay. Lots of other people would give us the rhetoric you are giving us now and it has not quite worked. Is it about attitude of mind? It is not so much the mechanics, is it? Is the main driver of it the attitude of mind that gave you that perspective, and then you were able to deal with the unfounded criticism because you were sure you were right and you had a perspective that was directed towards the external industry, and so on? We are trying to identify what you did and whether we can bottle it and feed it to somebody else. Mr Durrant: Certainly, as is always the case with Abertay University, we carefully considered the decision whether to get involved in this area in the first place. We saw opportunities in terms of some international recognition that was happening at the time associated with our early involvement in games technology in Japan, interestingly, and that helped validate the path that we were taking with the course. Not only that, but our graduates began to speak for themselves fairly quickly, in the sense that because we were responding to industry—I take your point that all universities would say that they respond to the needs of industry, but we were responding within quite a close network of local companies who had this particular need for games programmers—and because this was initially a masters course lasting just over one year, the output was seen fairly quickly to be fit for purpose. Obviously, a good response from employers

helped validate that the course we were taking with this programme was the right one. With employers having seen that we had responded and delivered what they asked for, they then began to ask us for other things. Before we adjourned, I was speaking about how we got involved in the arts side of things, and how we brought arts and science together and created this whole idea of workplace simulation. That really is something that is particularly innovative and unique to Abertay in terms of interdisciplinary working that is really focused. If you think about taking students on arts and science degree paths and making sure they work together on project work that is industry-mentored, industryvalidated and fits industry standards, that is not something that happens everywhere. Q98 Chair: May I just come back to the question of the evidence we are receiving from everyone else? You can speak openly now, because there is nobody except us and the television cameras here. Would you have a definite emphasis on any of it? I understand that the general sweep of stuff would be common, but what were the other points that you thought they perhaps over-egged or underemphasised? Mr Durrant: Again, in my opening remarks, for various reasons—because there was a focus and a 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 to think about other financial measures that might help support this sector. I know we touched on it a few times, but as I was saying in my opening remarks, because of our close links with very small companies and because we have tried to support a lot of graduates in starting up their own companies, this challenge around having sufficiency of working capital at an early stage in the business life cycle is something that we see as a big issue. We see it as something that games tax relief does not necessarily provide all the answers for, because of the cycle. Q99 Chair: Is that, in your view, something that is unique to this industry, or is it something in general? Mr Durrant: All start-ups obviously have a working capital challenge, but as we have heard and as we have read in the other evidence, there is this quite lengthy cycle in the development process that means that working capital is required in order to get you through the development cycle and get you to market with a product. Some other start-ups in other industries are able to generate revenue far earlier. The other part of that is the challenges of finding the right route to market. For those developers who have been using the conventional model of trying to find a deal with a publisher, who perhaps would give them an advance that would supplement their working capital, there is a fragility around the company all the time that they are trying to negotiate that deal. Of course, they are not in a good negotiating position either. The other thing that was noted in our written submission, around that fragility, was that while it is good to have a mix of large and small companies in the ecosystem, what we have seen is that when very talented individuals are involved in start-ups—



particularly, talented graduates—they can easily be hired away by a local, larger company, or perhaps by companies outwith Scotland. Suddenly, that start-up fragments, because that member of the start-up was unable to pay themselves a sufficient wage to live on and the temptation, because they were highly talented, of taking a great job offer was too large. So, there is a fragility around the whole area of start-ups that we are conscious of. Q100 Chair: How is that addressed? Mr Durrant: We have begun to try and address it in a small way with our prototype project, which I’ll discuss. There are, however, a whole range of issues that still need to be addressed around having appropriate working premises for start-ups—the whole term of “business incubation” is something that often requires public sector intervention. For this particular area and this industry, having the opportunity for small companies to be in some kind of subsidised premises, or to be collocated with larger companies or whatever, would be extremely valuable. There is not really the public sector provision for that at the moment. Q101 Chair: A lot of that would be devolved, would it not? When we are meeting Ed Vaizey, the Minister, none of that is likely to be stuff that he would take any of the blame for, or have any responsibility for. On the other point about the banks, those of us who were in Edinburgh also met members of the construction industry and the road haulage industry. People there were saying, “The banks don’t understand us either.” The banks not understanding their customers is not an unusual phenomenon. What I am trying to flesh out here is whether there is anything that is unique in your industry which we ought to be picking up, as distinct from the generic problems or devolved issues that somebody else should be addressing. Mr Durrant: Let’s talk a bit about the challenges around project finance that provides working capital. That is something that, from a UK ministerial perspective, is still a challenge around start-ups for this sector. Again, it is one that straightforward equity investment and venture capital do not necessarily solve. We talked a bit about project finance during your visit to Dundee, but this is essentially a way of funding the development cost of a game, where the returns come to the investor of the project finance from shares or royalty from the sales, rather than taking an equity stake in the business. There isn’t much of a fiscal stimulus to encourage that type of project. A lot of EIS funding, for example, works around equity-based investment. Financial services companies are not an eligible definition of a company within the EIS rules. So, I don’t know—it was suggested earlier that there’s potential to extend or look at the definitions in some way, which could help or support this industry, particularly in terms of stimulating other forms of project finance. Finally, I mentioned earlier the concept of the games consortium. We see that as an extremely beneficial development, where public funding is being used as

an honest broker to bring developers together so that they can share the risk, the cost of marketing and the rewards. Our intervention in the area is the public funding that we secured from BIS and the European regional development fund and contributed, as well as contributing from the university, in order to create our prototype funding scheme. Essentially, we are providing grant funding in Scotland and across the UK to small companies so that they can create prototypes that they can use to secure funding or partnership deals of some sort which help to provide the working capital to develop their game and to get it at least to a point at which they have a commercial partnership and a route to market. In terms of your point about the Minister—Ed Vaizey launched that scheme, and obviously he is well aware of it. But the scale of it at the moment is relatively limited; from a non-Scotland perspective, for example, about 40 projects will be funded, and in Scotland about 40 projects. So, the bias is towards Scotland, just because of the way that I secured the funding. But actually the reach is relatively limited. What we need to ensure is that there are methods and measures that help some of those companies that have been in receipt of the prototyping grant to make the next stage and to begin to grow and to become sustainable. Q102 Julian Smith: Paul, may I ask you a bit about your job to begin with? Are you looking after business development for the whole of Abertay, or for this specific gaming area? Mr Durrant: Yes. I have worked at the university for 15 years and in that time have taken a number of roles, most of which have been across the whole university. At the moment I am working across the university but, because of our high interest in this area, it actually takes the majority of my time. Q103 Julian Smith: What other industries? First, I compliment your institution—it is a great university. Secondly, I want to ask a bit more about the other industries that you work with. After gaming, what are the others? Mr Durrant: We work with a lot. We have quite a high interest in environmental science, particularly areas to do with urban water, so we work with utilities, civil engineers and construction companies in that area. We have some involvement in life sciences and biotechnology, particularly from a skills development point of view, so we work with a number of the local life sciences companies. Q104 Julian Smith: If all the industries that you deal with were sitting here today, in a similar scenario, would you still feel comfortable with the fact that you are, essentially, lobbying for a tax subsidy for one industry but not for another? That tax subsidy, consequently—inevitably—would take away from the aggregate tax reductions that can be given to the commercial organisations that you work with as a whole. Would you be comfortable with that? Mr Durrant: In broad terms, yes. As I said, I support the idea of games tax relief, but I think that there are



other measures. But to answer your specific point, and the reason that I and the university would support the tax relief, is because of the unique nature of this long lead-in content development challenge, which is not necessarily supported. Now, life sciences has a massive lead-in, but it also benefits significantly from R and D tax credits, because it fits very neatly into the research definition. It also attracts a lot more straightforward investment and venture funding. Q105 Julian Smith: May I also ask about the crossfertilisation of skills? You have your gaming courses and the courses that you described earlier. What proportion of those graduates go on to work in gaming companies, versus those going and using those skills elsewhere? I know that those gaming programming skills are incredibly useful for other industries. What sense of the proportion is there? Mr Durrant: Probably about 80% to 85% of our graduates go into the games industry—pretty much core games industry—and the rest elsewhere. They have a pretty high employment rate. Q106 Julian Smith: Despite the fact that you have referred to some money that came in from the Government earlier, you would say that on balance, with limited public finance, having this tax relief rather than putting more money into your institution to develop skills and spin-offs as a whole from whatever industry is a good use of taxpayers’ money. Mr Durrant: It depends what particular uses you are thinking of putting the money to. Q107 Julian Smith: I am just looking at it from the point of view that there is not very much money at the moment. Mr Durrant: I certainly do not think that it should go on the record that there should be tax relief at the expense of further investment in Abertay University. One would need to make a much wider consideration of the cost-benefit analysis of investing in a university in certain ways compared with subsidising a particular industry through tax relief. Q108 Julian Smith: My last question is about the graduates that you have discussed. I am really excited that so many are starting up businesses, and I accept that there is a churn of those graduates out of those start-ups. In terms of those incentives to get people to start up businesses, obviously there have been changes to national insurance and corporation tax has been lowered for small businesses. What do you think are the policy decisions that need to be considered to incentivise those graduates to start up companies? Do you think that policy should be focused on subsidies, or do you think that it should be creating a more benign and attractive tax regime? You talked about people wanting the bigger salaries at the bigger companies, but surely with lower national insurance and lower corporation tax they can keep more of the money that their companies make, which is a benefit. Mr Durrant: That is assuming they make a profit early on. It is a completely different picture, particularly when you are talking about start-ups and graduates. As we have said, games tax relief does not

help those businesses early in their life cycle. Actually, many of those young people who are starting up companies are prepared to take some pain for some future gain and they do put up with a reasonable amount of hardship. Q109 Julian Smith: But I think that my point would be that reductions in employer’s national insurance and a reduction in corporation tax for small business is useful to people starting up a business from scratch. Mr Durrant: It is useful all the time that you are paying people, and when they are not working on a sweat equity basis. That often happens in these startups, and in those cases the company would not be benefiting from national insurance reductions. Also, if the company is not profitable, it is not benefiting from corporation tax reductions. Q110 Lindsay Roy: Paul, how do you gauge the value added from students who come into university, leave and go beyond that? Do you have a mechanism to do so? Mr Durrant: We do. We have a particular set of target graduate attributes that we work to, which underpin the programme design for all our courses, not only those in games. Those attributes are designed to create employable graduates who are confident thinkers, who understand complexity and who are able to drive change. We see those attributes as being really important for the graduate work force of the future. We work very hard to try to achieve that. By way of example, we have taken the concept of workplace simulation that we developed for games technology, and we are applying it across the whole university. It is a core part of our postgraduate certificate in higher education teaching. Our new academic staff from all disciplines will actually develop similar ways of workplace simulation. Q111 Lindsay Roy: How costly is the workplace simulation within the overall budgetary framework for these courses? Mr Durrant: How costly? Q112 Lindsay Roy: How costly is it overall? Is it an added dimension that you wouldn’t have with other courses? Mr Durrant: There will be resource challenges around that. It is too early to say across the whole university, but where we have worked in games we have been fortunate, because we have had a strong buy-in from, for example, the industry and practitioners, in terms of their time and involvement. A lot of it, however, has to do with realigning timing, calendars and resources to ensure that interdisciplinary projects can happen and to ensure that there is alignment between arts and sciences in the case of computer games. That is something that we have particularly focused on doing, but I do think that there are opportunities. While I know that it is not within Mr Vaizey’s remit—and we touched on the area of higher education funding—for Abertay University innovating in the whole area of workplace simulation in the way that we are, there is very little that we can tap into to try to provide development



support or finance that backfills people—backfills academic staff. We try to make things like that work. Lindsay Roy: That is very helpful. You have answered my next question. Q113 Fiona O'Donnell: I do not know if colleagues agree, but it is interesting that of the two companies we visited, one was growing and seemed to be healthy yet the other had just paid off quite a few staff. There was a different feeling. I suspected that one had a better business model than the other. How much awareness do you give your students of the importance of marketing? I do not just mean about selling the product, but the testing of it beforehand and the research as well as good product management and management skills. Is that valued in the sector? Basically, there was a creative atmosphere, but I noticed a striking difference between the two workplaces: one was succeeding, while one appeared to be struggling. Mr Durrant: Absolutely all of those things are embodied in our courses. It is difficult to comment on two specific companies. In that context, the one that had recently paid off staff was going through a shortterm pause because it had other work in the pipeline, and it would be rehiring. The other company is perhaps younger, more dynamic and on a slightly different track. Q114 Fiona O'Donnell: It was strange actually—I am sorry to interrupt—but the company that was not doing so well was saying that there was no work out there, and that no one was commissioning it, whereas the other company was saying that there was lots of work. Those two truths cannot exist alongside each other. Mr Durrant: One of the challenges that I identified early on as I began to work with the sector was that, obviously in a creative team, you need everyone to be a hands-on content creator, and that means that you do not always have an entrepreneurial leader. You might be lucky and have an entrepreneurial person who is also a content creator. I have worked for a long time trying to develop graduate enterprise support and business incubation where you can try to marry that kind of creative team with entrepreneurs to make sure that there is someone in every team who has that real go-getting market focus. But it is a real challenge 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 mean in terms of the fact that they are not making anything. Not building content means that they have to be carried, so the company needs more working capital. Q115 Fiona O'Donnell: As a follow-on from that, the other thing that I noticed from our report of Dundee was the existence of personal networks to support people. That seems just a little loose and informal. It is great in Dundee that the sector meet, share ideas and support each other and, while the market is healthy, people are probably comfortable doing that because they are working in different sectors of the market, but I just think that there is a

role for Government agencies. I am glad that Scottish Enterprise was here earlier. Do you feel that the industry is supported enough in that way? Mr Durrant: There are a number of those networks, but this is one of those industries where informal networks work the best. However, one has to be careful that they do not become too closed and everyone believes that they are doing the right thing. That is why we hope that our talent pipeline, bringing new people from other parts of the UK who become graduates and work locally, helps to have an impact on that ecosystem. There is one other thing that is still important to creating that sort of diversity in those networks. We talk quite a bit about cultural things to do with tax breaks, but there is still a big thing in the media generally about the fact that games are not fully recognised culturally. In The Sunday Times, games are with gadgets alongside Jeremy Clarkson and not in the culture section. On the BBC, they are on the technology website not on the arts and entertainment website, about which I have taken Rory Cellan-Jones to task a couple of times, without success. Because of that, the industry misses out on talented people— talented students and graduates—on the periphery of the industry, not necessarily coming through Abertay, and misses out on them in those networks. Perhaps as the industry matures and it becomes more engrained in mainstream culture, that will change. But that is a challenge, where we will see change over time. Q116 Mr Reid: We heard evidence towards the end of the earlier session that the migration cap could lead to problems recruiting people from abroad with certain specialist skills. Why can’t we train people with those skills here in the UK? Mr Durrant: I think we are doing that. But, as is always the way with business in any industry, often when there’s rapid growth, one looks for short-term fixes. As you heard, Realtime Worlds was one of the companies that had a large number of overseas hires— there were quite a few north American hires. That was partly because of the rapid growth and the difficulty of having people with sufficient experience working in significant sized companies because they weren’t available locally. That will be a challenge again for a growing industry. Q117 Mr Reid: We heard earlier that the games tax relief would be paid to companies that are up and running for the cost of producing the games. Will it help new companies to start up or is there another mechanism that can be used for that? Mr Durrant: I do not think tax relief helps start-ups, as I have said. With our prototype funding, we are at least helping a company that has started up have some funding, so that it can create a prototype and do a deal. But that company still has to have sufficient working capital on its own account because, as is the case with all public grant funding, the grant has to be incurred and defrayed before we can pay out the grant. In other words, the company has to have some money before it can actually receive the grant.



Q118 Fiona Bruce: First of all, I would like to say thank you for the visit that we made. It was most illuminating for me and really broadened my understanding of the definition of the video games industry. I was very impressed by some of the education that you were bringing forward, for example in relation to the technology and medical provision. I am not alone in my view of the value of Abertay’s work. I think that the BBC has stated that the new Government have given a “boost for Scottish games industry” by providing a £5 million prototype project over time. May I just check some facts and figures with you, which we have been given in our brief? Obviously, the project was announced in July 2010 by Ed Vaizey, the Culture Minister. Initially, £2 million will be available from the Government through, I think, your university—Abertay—to invest in new computer game prototypes, create start-ups and help new companies attract further investment. It is hoped that the project will create 30 new companies, support 80 existing smaller business and create up to 400 new jobs. Are those figures correct? Mr Durrant: Those figures are correct, yes—for the UK. Q119 Fiona Bruce: For the UK. It is very interesting to compare that with the figures quoted earlier this afternoon as a return on the investment for the games tax relief. There is quite a stark contrast in those figures, not just in terms of value for money, which I will refer to in a moment, but also because what you are offering is a much broader spectrum of assistance than tax relief alone would provide. By way of measuring this, the games tax relief at a cost of £192 million would create or save possibly 3,500 jobs. To create the same number of jobs funds via this project would I think cost under £20 million. It is a very interesting comparison, isn’t it? I wonder whether we can honestly say that the tax relief, in a time of stark economic challenge, is really something value-formoney, that we can as a new Government look to fund, when we compare it with the kind of funding for innovation that you are providing. Mr Durrant: I accept the points. One of the comments I’d make, though, is that we do need to be thinking about how we have a sustainable industry. Obviously our measure is very much to do with trying to generate more original IP—part of that innovation funnel—and really creating the volume of IP; but to have a sustainable games industry in the UK and Scotland we need measures that compete internationally as companies hit growth phases. So I’m cautious about the horses for courses kind of thing, where our measure, our grant funding, is particularly targeted at the areas at small early stage companies rather than high growth companies. Q120 Fiona Bruce: I appreciate that you are cautious, but what we have is a limited pot, so it is a matter of looking at how we can make the money go as far as possible. This is why I was very interested to make that comparison with you. May I ask you a completely separate question, but related to topics that we moved into earlier in the

afternoon? That relates really to what you might call the cultural question. One of the things I’ve noted is that you are an international centre for computer games and entertainment and that you have academic research in that field. I want to ask you whether you are looking into an issue, which concerns a number of us, regarding the kind of games that go online—we’ve got a situation where youngsters only have to type in a date of birth, which can be invented, in order to have access to games that are meant to be for a mature audience—and whether you are satisfied that there is sufficient protection where games are played online by streaming technology, or whether you think there should be further R and D into this, if we are going to invest in an industry with this kind of risk. Mr Durrant: I think the whole area of analytics around users and the audiences is a really important one, obviously for child protection issues, and broader things, and purely from a market point of view; but it does actually bring me to one of the other challenges, which is actually, as a university, it’s been very hard to secure research funding in this area, because of the interdisciplinarity of it, and because of it crossing many different areas, and because of the rather biased method of research funding that you’ll all be aware of, that operates across the UK. So yes, I accept that this would be a very interesting area. Quite where it could be funded from and how is perhaps a bit more challenging. Q121 Fiona Bruce: So at the moment you have no funding and therefore there is no direct R and D going into that? Mr Durrant: Not into that, no. We actually work very hard at almost bootstrapping our research in this area. Jim talked earlier about the pervasive technology thing, and I think you saw examples of that when you were in Dundee; and it is an area that we work very hard at to bring this kind of pervasive technology in games to support other areas. I know that doesn’t answer your question, which is a mix of a number of different disciplines again, but most of those projects have been bootstrapped from quite small amounts of money that have been secured by academic members of staff, and then the area developed, rather than being a result of significant grants. Q122 Fiona Bruce: There is a pan-European gaming information body, isn’t there? Do you think the quality of that is satisfactory, or is that something that we should be looking at if we are going to invest in this industry? Mr Durrant: Do you mean PEGI? Q123 Fiona Bruce: Yes, I do. Mr Durrant: As Michael Rawlinson described earlier, the use of that system is enshrined in law and practice now in the UK and we actually worked with PEGI even on our Dare to be Digital competition. All the games were rated by PEGI for us before we put them on show in the Edinburgh festival. So we are totally supportive of that system. Q124 Fiona Bruce: But there is more work to do in that area?



Mr Durrant: There is a difference between certifying products—we had that debate earlier—and the access issue. Those are two different things, and there is a whole mix of sociological issues around that in terms of families—issues of access to computers and all sorts of things. It is an area that is fertile ground for people to understand more. Q125 Cathy Jamieson: I want to pick up on a couple of points that have been made and to ask a version of the question asked about the recommendations. First, given what was said about one of the problems being short-term, with people having to be laid off, cash flow and the rest of it, should one of our recommendations say that it would be more costeffective to have a pot of money that funds could apply to so as to keep people on; they could be involved in some socially useful work, perhaps in conjunction with the university, rather than simply being paid off and put on the dole, with all that goes with it? Secondly, given the questions that Fiona has raised, should one of our recommendations be to look at R and D, particularly on child protection issues, and get over some of the barriers that exist? Thirdly, we heard from the other panellists earlier that tax breaks was the No. 1 priority. Would you see that as a priority, or do you think that we should be recommending something else? Mr Durrant: Okay. Three questions. What was the first? Q126 Cathy Jamieson: It was about the stop-gap funding to stop firms having to pay people off. Mr Durrant: It is an attractive proposition, but there are challenges around it in terms of state aid rules. Obviously one cannot just create funds that hand out significant chunks of public funding directly to companies, without caution on state aid, but I think there is an attraction to it. What is useful to think about is that much of what we compared in our earlier discussion on Canada related to employment subsidies. Our discussion did not touch much on the fact that a lot of the attractiveness of Canada is around employment subsidies, particularly in terms of its equivalent of employers’ national insurance contributions; some provinces offer a two-for-one opportunity for people bringing in new companies. There is no suggestion in the UK at the moment that one might be bringing in employment subsidies like that, but perhaps it should be something that could be looked at. It could be done on a regional intervention basis. In terms of your question about direct links to employment and retaining employees, although I am keen to see lots of finance coming to projects, in the context of your question employment subsidies would be a measure. Your second question? Q127 Cathy Jamieson: My second question was in relation to R and D, particularly around some of the issues that Fiona raised on child protection. Mr Durrant: Again, a very interesting area, most suited to Abertay’s interdisciplinary approach, and one that we would be very keen to be involved in

and supportive of, provided that we could access the appropriate funding. Q128 Cathy Jamieson: And the third point was in relation to what you would see as the priority. Mr Durrant: I am biased because I am working with small companies in trying to stimulate and to take our prototype funding scheme to a point where those companies that have the prototype grant are sustainable. That is why I am looking for much earlier leverage. That is why I want to align the prototype funding with the games consortium that NESTA is stimulating. I think it is an excellent opportunity to see developers working together on this kind of shared risk and reward basis. You can imagine that if a developer in that consortium was in receipt of prototype funding, there is a win-win because their route to market costs are reduced, the risk is reduced and they have a potential for returns coming from some of the other companies within that loop. So I think there is a very good win-win with that. The fact that our prototype project might help people to pick winners earlier might stimulate types of project finance to come in to some of these young companies, and that is also very important to me. The hard question that Cathy is asking is about which one I prefer. From the perspective of my direct involvement and Abertay University’s direct involvement with these companies, it is these kind of measures that will very much help companies at the early stage. Coming back to the point that Fiona made, however, we still need to see how we can have a sustainable sector, in which we can support growth. Q129 Mark Menzies: First, I would like to thank Paul for the time that he took when we came up to Dundee. I was very impressed and I learned a lot from the time we spent out at Abertay. One of the things that I went away with that day was a feeling that not only is Dundee a great centre of excellence around Abertay but there is an opportunity to do so much more. I want to touch on how we can use business rates or other forms of “subsidy”—or whatever label we want to use—to make Dundee a real centre of excellence—more so than it is at the moment—and a bit of a hot hub, so that we have a bit of vertical flow-through so that all the money that is generated in Dundee can stay in Dundee and get reinvested. I wonder what thoughts you have about what we or the Government can do to bring that about. Mr Durrant: Yes, certainly in terms of that local ecosystem that we talked about—the cluster effect— things can be done. I mentioned earlier the challenge of working premises and that really is a key area that needs to be addressed. If there were ways of providing subsidy for that, obviously that would be good. But there is a kind of shopping list and priorities. As is always the case, a joined-up series of measures that particularly focuses on the Dundee cluster would obviously be very beneficial, because of the way that it could help to start and grow that type of ecosystem and make it more robust, creating some companies with growth. The key thing that I really want to happen as a result of Abertay’s talent pipeline is for it to lead to inward



investment. We have seen some inward investment, where companies have come to the city knowing that the university and the talent pool are there. However, I think that Scotland generally—and even the UK as a whole—very rarely has a big win in this digital interactive sector from the inward investment perspective and it would be very good if we could pull that off by some kind of joined-up measure, such as the one that you just described. Q130 Mark Menzies: That is good. The other impression that I got was about the availability of finance. People have already touched on the banks’ willingness to lend, particularly in the very early stages of a company or a new game. In terms of “angels” or investors—whatever title you want to give them—how do they work when it comes to the games industry? Are there any specific people who need to be recognised in this field in the case of Dundee? Mr Durrant: Certainly there have been some successes from angel-type investors and standard plain vanilla equity investors. However, it comes back to my earlier point that there is a bit of a challenge around funding content from equity-type investments, because essentially that investment can be used up very quickly, before the product gets to market, and then suddenly a fragility creeps in around that company. It either has to raise further finance with significant dilution, or it ends up handing over its IP to a publisher to get the project finance or the advance that will take it to the next stage. Q131 Mark Menzies: Dundee is a centre of excellence, but you are not the only one in the UK. I was wondering how you share best practice with Salford or some of the other universities, for example. Mr Durrant: The prototype project is UK-wide and we intend to work with universities across the UK. We are in the bid for the funding that came from BIS. We are associated with the MediaCity initiative in Salford, and as that develops there will be ways that we work with them, and as a result small companies in those regions will benefit from the prototype funding because it is being granted on a UK basis as I described. Q132 Jim McGovern: First, thank you very much for coming along here. Hopefully the Committee is now better informed than previously, but the visit to Dundee was excellent. I suppose I should just cut to the chase and ask what the UK Government could do to support the computer games industry. When I say “computer games industry” I would reiterate a point I made earlier: it is not just about people sitting in front of a TV screen playing games. There is a lot more to it than that. As Professor King said, there is pervasive technology. What more can the UK Government do to support that? Mr Durrant: Let me pick up that last point first in terms of the pervasive technology thing. As I alluded to earlier, some of these definitions can be quite challenging from the way that research councils work and the technology strategy board works in terms of their funding and grants. Although the technology strategy board has ways of granting to the creative

industries, it tends to be technology-led rather than content-led, probably because of its title. But that does not necessarily always help the type of company that we are trying to support or the university from the perspective of trying to develop the pervasive technology of games and apply it in other disciplines. As we have all seen, there is significant opportunity in that which we have begun to scratch the surface of at Abertay University. Certainly from a research and development funding point of view, there is an opportunity there. We have talked at length about the type of measures that could help to stimulate project finance for companies that are going to help to reinforce start-ups and provide them with working capital and business premises early in their life cycle. Again, that is very important. Q133 Jim McGovern: Professor King also pointed out that the overwhelming number of graduates from Abertay University who study the computer games industry do not go on to become employees. They want to be entrepreneurs. They want to start up their own businesses. Is that a fair comment? Mr Durrant: Because of the history of our close association with previous students who have gone on to start up businesses, there is that cultural ethos. But as I said earlier, turning that into reality where you need hands-on content creators and you are expecting them to be entrepreneurial is still a big challenge and one on which across the UK we don’t match up to the US, for example. Q134 Julian Smith: Very quickly, there seemed to be a slight contradiction in your evidence because you talked about national insurance incentives in Canada, but the Government now have a national insurance holiday for regional start-ups. Mr Durrant: Yes, okay, but we have yet to see the effect of that. Q135 Julian Smith: I’m glad that you think that is possible. Secondly—this is not meant to be aggressive—£5 million in this environment is staggering. It is not my job to tell you what to do, but my biggest message is, “Go away, lever that capital that you have been given and get money from Europe and the private sector.” That is a staggering amount of money. I am not sure what the report will show, but if there is a tax break on this industry it will make “Grand Theft Auto” look a bit timid. In this environment, your university has a great boost and should make the most of it. You are doing great work, but I don’t think there will be a lot more in the kitty. Mr Durrant: I stress that that total includes a mix of sources. It already includes European regional development funding, money coming from Abertay University and from reserves, and some £2.5 million of it is from BIS. Q136 Julian Smith: But you are pleased with it? Mr Durrant: I am pleased with it, but I will be even more pleased when I have achieved the targets that Fiona has described. Chair: Thank you very much. I apologise again for holding you all so late because of the delay at the



beginning. Let me say to the members of this Committee that my understanding is that the minutes will be available from tomorrow. I thank the staff for

this long meeting, and also the one surviving member of the public, who possibly deserves a medal.


Wednesday 20 October 2010 Members present: Mr Ian Davidson (Chair) Fiona Bruce Cathy Jamieson Jim McGovern David Mowat

Mr Alan Reid Lindsay Roy Julian Smith 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 the record, could you just tell us who you are and what your position is? Edward Troup: Yes. I am Edward Troup. I am Managing Director of Budget, Tax and Welfare at the Treasury. Q138 Chair: You are aware that we are looking at the video games industry. Particularly in this session, we want to look at the question of taxation and support for the industry. Can you just start off by clarifying for us why you believe that the tax relief that was initially endorsed by all the political parties before the election was poorly targeted? Edward Troup: I am not sure I would say it was poorly targeted. It was targeted at the video games industry. The current Government, having looked at this and having looked at its overall approach to how best to support the economy and growth, has taken the approach that, actually, the best way to support growth is through stimulating the economy as a whole by not picking particular sectors but by reducing the cost of taxation. Chair: I understand that. We are going to see the Minister in a little while. Indeed, no doubt, somewhere he will be lurking and listening to this, I would have thought. Yes, we had noticed he is here. Edward Troup: I think you will find he is here. Q139 Chair: I just want to pursue with you the question I actually asked, which was whether or not this tax, as proposed and endorsed by the three parties, was poorly targeted. Can you just clarify for me who you believe the proposed tax break was targeted at and were there any disadvantages in that approach? Edward Troup: First of all there was an announcement, as you know, earlier in the year that there would be a video games tax relief but that the details of it would be consulted on with the industry in order to get the design and the targeting right. Obviously, the General Election intervened so we did not get to the point of detailed design. We had looked at the existing film tax credit as a precedent and we had obviously seen the report from the industry. I think what I can say is that in looking at any support like this there are problems with targeting simply because very few industries are completely hermetic and defining who should benefit from the relief and how they should benefit creates boundaries at which people who are just outside complain. So we were having some trouble working out exactly how to target

it, but I think it was perfectly designable if we had continued with it. Q140 Chair: Can you just clarify for me a little more about what were the difficulties exactly of targeting this on the industry? Edward Troup: I am in danger of going beyond where we actually got to, but as we have seen with the film tax relief, which has taken 30-plus years to develop in its current form, initial attempts to define qualifying expenditure for films ran into quite a lot of trouble. We ended up giving huge amounts of tax relief to people who invested in television series and television programmes, and it took about 30 years until we actually got back to the reforms in–I am sorry, I can’t remember exactly what year it was–the film tax industry three or four years ago. Obviously we learnt a lot from that but I can’t say exactly how those problems would be replicated in the video games industry. Video games have some similarities to films in its production and development techniques, but it is not exactly the same and it wasn’t just a matter of taking the film tax credit and crossing out “film” and putting “video games” in. I am sorry, because we haven’t done the work in detail I can’t actually tell you exactly what the problems would be. Q141 Chair: Can I just clarify though? Was there anything about the video games industry and its structure that makes it particularly difficult to draw up a targeted tax relief programme? Edward Troup: I don’t think so. Any targeted tax relief is difficult to design simply because one person’s view of whether they work in this industry or that may not be the same as somebody else’s view. I don’t want to try and take parallels with other businesses but— Q142 Chair: It would be helpful, actually, if you did. If you assume that we don’t know very much at all, which is always a good idea with MPs, it would probably help us understand the position. I see when I said that a couple of people behind you are nodding. Edward Troup: I am glad they are being helpful. Again, you have got to realise I do not have a very, very detailed knowledge of this industry. My responsibilities extend across the whole of the tax system, so I am aware of and have been briefed on this industry but not in the details of exactly who does what.


20 October 2010 Edward Troup

To take an example, we are interested in other industries—and we have had representations about this before—about innovation, high-tech industries promoting high-tech activities. If I say to you a “hightech industry”, you probably think as I do, of my iPhone or whatever it is but, often, what actually adds value to these things are rather odd products like the kind of glass they use in the screen or the little plastic switch or something. Whoever is working designing better plastic switches or better glasses for screens wouldn’t necessarily see themselves as being part of a high-tech industry if a minister stands up and says, “We are going to have a tax relief for high-tech industries.” As I say, I have not been into the details of exactly how the video games industries work, but there will be problems of that kind; there will be the issues of people writing little bits of code and the artists who are providing support. Do these benefit from the tax relief or not? I don’t want to overstate the problems because I am quite confident the Treasury and my colleagues in Revenue and Customs would, if given the chance and given the remit, be able to write a set of rules, as they have for the film industry, which define the relief. So I am sure we could do it. Whether everybody agreed that was well targeted I couldn’t say. Generally, what has happened with all of the reliefs that we have introduced over the years is that at the boundary the people who are just outside come back and say, “It is not very well targeted. You have over-targeted it. You have missed me out.” I am sure exactly the same thing will happen here. But this would be possible. We could do this if we wanted to. There would be issues; there would be boundary issues, but it would work. Jim McGovern: A good Scottish surname, Troup. Edward Troup: It is, indeed. There is a Troup tartan I am told, but I don’t possess any. Jim McGovern: I think it originates in Forfar. Edward Troup: Yes. Q143 Jim McGovern: With regard to the comparison that you mentioned about the British film industry, are you aware that the games industry generates as much for UK GDP as the film industry? The film industry gets some £110 million a year tax relief. Edward Troup: I don’t want to sit here and do too much of a classic Treasury thing of bandying figures around, but I am told that the video games industry, based on 2008 figures, contributed £386 million to GDP. I am told that the film industry, based on 2009 figures admittedly, contributed £4.5 billion. Q144 Jim McGovern: But you don’t want to quote figures? Edward Troup: I don’t want to bandy figures around. I am very happy to quote them. That would suggest the film industry does contribute 10 times as much to GDP as the video industry. Obviously, we would love the video games industry to contribute 10 times as much because that would be very good for the economy.

Q145 Jim McGovern: I would certainly appreciate if you would forward those figures that you didn’t want to quote to me? Edward Troup: I am happy to quote them. I don’t want to enter into a sort of, “My figures are betters than yours”. Q146 Jim McGovern: Part of the problem, certainly with TIGA, the games association representative, is that prior to the General Election the Secretary of State for Scotland visited Dundee, the Chancellor visited Dundee, a Minister from BIS and a Minister from Culture, Media and Sport. Following these visits, the then Chancellor, Alistair Darling, announced tax breaks for the computer games industry. Between March, when that was announced, and June, when we were told it wasn’t going to happen, there seemed to be no consultation whatsoever. Have you any idea? Edward Troup: I know that you met the Exchequer Secretary, David Gauke, last week and I am sorry I couldn’t be at that meeting. I think you did raise this with him and I believe that he told you that the Treasury and Treasury Ministers had to put together the June Budget obviously in less than 50 days–47 days, I think it was–and that clearly limited the time available for consultation. But there were meetings with officials during that period, I believe. Q147 Jim McGovern: Officials of? Edward Troup: Let me just check, but I believe that the games industry met with officials in BIS and DCMS. I am not sure that they met during that period with officials from the Treasury, but obviously we had had a number of meetings over an extended period with representatives of the industry. So while there wasn’t full consultation there were— Q148 Jim McGovern: Can I just clarify that between March and June meetings were held with officials from the games association? Edward Troup: Let me not go on the record and say that definitely happened, but I do recall being told there had been meetings. I am not sure that, in a sense, it really alters the point that David Gauke made to you that, actually, we had to put together the Budget for June at very short order. Q149 Jim McGovern: What David Gauke said was that there wasn’t time to have many meetings. I said, “Did you have any meetings?”, and he said, “No.” Edward Troup: No. I have just been handed a note. There were conversations with Treasury officials after the election but there were no actual meetings. Q150 Jim McGovern: Treasury officials and whom? Edward Troup: The industry—representatives of the industry. I have not got the names and details but I am told there were conversations. The industry spoke to Treasury officials, but there were no meetings. Q151 Jim McGovern: We have already heard from the Chair that both parties who are now in the coalition had said prior to the General Election, “We support tax breaks for this industry”. Why was it scrapped?



Edward Troup: What members of the current Government said before the election I think is something you must take up with them. In terms of the reasons why it didn’t go forward, again, David Gauke, I think, when you saw him last week, said the Government wasn’t keen to extend the number of reliefs in the tax system unless there was strong evidence of market failure. There had to be strong evidence to support any intervention. As I said at the beginning of these comments—

network for promulgation of the existence of tax schemes. There is quite a healthy relationship there because it doesn’t cost Government anything and, generally, the professional firms are very keen, by way of their own advertising, to go around telling their clients that this scheme or that scheme exists, to mail-shot everybody in the film industry and say, “Are you aware that this tax relief exists?” So, actually, the market is quite efficient at transmitting the details of tax schemes out to businesses when they exist.

Q152 Jim McGovern: Presumably, these decisions are made on advice from people like yourself? Edward Troup: Indeed.

Q156 Lindsay Roy: So the responsibility doesn’t lie with you in terms of advertising. What about the monitoring of uptake? Is that a role that you have? If the uptake is small, what action do you take to try and address that? Edward Troup: Let me take that in two parts. First of all, the monitoring uptake is done principally on tax schemes through Revenue and Customs, through their own data collection and obviously with, I am afraid, something of a time lag, because of the nature of the business tax return cycle. HMRC will collect data on particular schemes from the corporate tax returns of companies and the self-assessment returns for unincorporated businesses. Those are all collated together. Again, I think you will have to ask BIS how they collect data on business finance schemes, but it does happen. So far as tax schemes are concerned, yes, we do monitor them. First of all, there is what I might call the crude monitoring of just working out how much they cost each year and we do publish, on a regular basis, the cost of individual tax reliefs. It has not always been published every year but I think it has for the last few years so that we do know how many businesses benefit from any particular scheme and what the cost is. At a policy level at the Treasury, with the teams that I am responsible for, we do seek to keep all of the tax reliefs under review. Clearly, the amount of resource and effort we can put into reviewing any particular scheme does depend both on ministerial priorities and on our own resource, but we would seek to keep an eye on the schemes and see whether they were continuing fit for purpose. I suspect it is probably the case that existing schemes are not being withdrawn as quickly as perhaps they should be when they have fulfilled their purpose or failed to fulfil their purpose, but Ministers do come back and look at schemes pretty regularly on the basis of our advice, which ultimately is driven by the data from HMRC.

Q153 Jim McGovern: Do you believe this sort of one size fits all? Do you think that is appropriate? Edward Troup: Me and my colleagues’ role is to give advice. I think we set out and the question of what advice we gave is a matter between us as Ministers, but there are clearly choices between selective intervention to industries and an approach which seeks to create the conditions for growth more widely in the economy. This Government has been clear that it is more in favour of the latter than the former, but I do think this is a question of direction of choice rather than, “We are definitely only doing this and definitely not doing that.” But in this case the view, as I have said, was as expressed to you by David Gauke last week. Q154 Lindsay Roy: Good morning, Mr Troup. Can you tell us how you have made the SMEs aware of different schemes where additional finance might be forthcoming to support them? Edward Troup: Sorry, tax schemes or business finance schemes? Q155 Lindsay Roy: Tax schemes and additional finance. Edward Troup: Right. I think you probably need to ask representatives of the Business Department about business finance schemes because it is not the Treasury’s role to communicate business finance issues to individual businesses. But, obviously, there is an extensive Government network and there have been a number of bodies around the country sponsored by BIS as well as the Department itself which communicate and manage the various business finance schemes. So far as tax schemes are concerned, if we have a tax relief, again the Treasury doesn’t go out and advertise to taxpayers. But once the Government has decided that it is going to introduce a particular scheme it is obviously very keen that one way or another that is communicated to those businesses or individuals or whoever it is who may take benefit of it. In some cases that may be down to HMRC and so in a number of the reliefs that are available, the availability of—I don’t want to pick examples but HMRC have had advertising schemes which have effectively notified individuals of their entitlements. I think I am right in saying that in relation to business schemes there has been a greater degree of reliance on the tax agents and the accounting firms as a

Q157 Lindsay Roy: There is a purpose to monitoring. If the monitoring indicates a low uptake what action do you take in relation to advice to the Treasury? Edward Troup: Again, the question of our advice is between us and Ministers. But if you look back at the historical record and see what has been done with schemes, there have been two approaches generally. There has been an approach that, where there has been low uptake of a scheme and the evidence shows that actually it wasn’t fulfilling its purpose, it would just be withdrawn on the basis that it wasn’t doing what it wanted to. Generally, when that has happened–and,



again, I don’t have any specific examples in my mind—Ministers have been keen to find some other way of pursuing the policy end because the policy objective has remained good. The other approach—and there are a number of examples of this—is where the schemes have been tweaked, where if the scheme has not succeeded at first then, on the basis of advice from ourselves and HMRC, some expansion of the scope of the relief or change of the qualifying criteria has been made to increase uptake. Q158 Lindsay Roy: Finally, how do you know it is not fit for purpose, for example, just where is it advertised? Edward Troup: I think there are two points. Generally, most tax schemes people do know about one way or another for the reasons I have said, although there is evidence that there are businesses who are unaware of some reliefs. The question of whether it is fit for purpose, in a sense, probably brings us back to video games. Does the analysis show that the impact on business behaviour and activity, investment, employment, whatever it is, first of all exists, that it is material and it represents good value for money, against the criteria which Ministers may want to apply? Of course those criteria may change from time to time. Q159 Mr Reid: Before the decision was taken were any calculations done as to how much the tax relief would cost and, also, how much extra income would come into the Treasury because of people who would otherwise not be working in the industry, working in the industry and paying taxes? Edward Troup: On the first part of that question, you will have seen from the Budget book in March that we had estimated £50 million a year as the cost of the relief. I don’t have in front of me the details of how that was calculated, but I think it 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—and, obviously, I have seen the analysis which the industry has put together—is more difficult. I think we do take issue with some of the claims there. I think, without getting into numbers, this is about what happens if you create a job. Particularly if you create a job with an individual who has graduate-level skills, that person may, immediately before he or she got the job, have been sitting at home looking for a job, but if that job had not been created, you would have to say, what would have happened? Would they have spent the next two, three, four, five years sitting at home wondering where their job was going to come from? Of course the answer is generally not. They would have gone and got a job somewhere else, a different job, possibly a lower paid job, possibly a better paid job. But unless they left the country or stayed permanently unemployed they would have entered the labour market, they would have started contributing through PAYE and National Insurance and we would have had tax revenues from their activities. So it is simply not right to say that, if we introduce a tax relief or indeed give a cash subsidy

and it creates 100 jobs, the revenue which is directly attributable to those jobs is additional cash for the Exchequer. Q160 Mr Reid: That is right but in this case, as I am sure you are aware, TIGA assume or are alleging that these are trained people who are moving to Quebec because Quebec gives a very high level of tax relief. Have you done any surveys, any analysis, to work out how many people would leave the country if you don’t give the tax relief? Edward Troup: No. This is an extremely difficult question to answer. This is not the only industry or the only circumstance in which claims are made that we need to provide support because otherwise we will lose talent to the UK. The approach the Treasury takes is both looking at the micro-economics, looking at the details of industry, but obviously we have to look at the economy overall. Part of the assessment of how much revenue we are going to get in total and from individual taxes does depend on assumptions or forecasts about employment, about migration. We can’t, in a sense, start adjusting our forecasts because we say, “Oh well, we think this might keep 50 people or 100 people from leaving the country.” It is the aggregate level of employment in the UK and migration to and from the UK which ultimately drives our view on tax revenue. So, although I am perfectly prepared to believe that you could find an individual who would say that his or her choice would have been different and they would have left the country, it is extremely difficult for us. It is impossible for us, effectively, then to say, “Oh well, that makes it worthwhile because this is part of a much larger aggregate picture of employment and migration.” Chair: I wonder if I could ask if you could keep your answers a little shorter because we are obviously trying to get through. We have in the past had people—witnesses—who have tried to play with a straight bat as long as possible. I am not suggesting for a moment— Edward Troup: I am here as long as you want me for. Chair: Fine. I have got something on at 7, so we are hoping to reach the Minister before then. Edward Troup: I will need the Domino’s Pizza’s number if you are going to go on that long. Q161 Mr Reid: Have you done any studies of how many people who were working in the UK games industry have moved to other tax jurisdictions with games tax relief? Edward Troup: No, we don’t have the resource to do that. Obviously, we have seen the industry information. Q162 Mr Reid: Just a final question, on a point of principle, if another tax jurisdiction puts in a tax relief that attracts people away from the UK, should we retaliate or should we just ignore it? Edward Troup: I think that is a wider policy question. We do not think that it is efficient on either a global or a national level to enter into economic competition. The principles of free trade and good economics would say that, actually, resources should be allocated



to where they can be most efficiently used and that is in everyone’s interest. So if another country seeks, through tax or cash subsidies, to attract business, this is not something which we would favour. It is a policy issue for Ministers but, certainly, I think the Treasury orthodox advice would be not to seek to retaliate simply because you get into mutually assured destruction territory. Where do we stop? Q163 David Mowat: TIGA last week said to us— and the numbers I think are consistent with what you said—that the cost of the tax relief was £192 million and it would create 3,500 jobs, which on the face of it is quite expensive; it is £60,000 a job. They also said, though, that there would be consequential revenue of £400 million. They actually said those numbers were broadly agreed with you. I guess what I am hearing is that the revenue one is the one that is more difficult to have a view on. Edward Troup: I am afraid we don’t agree those numbers. I know that they have said in public that we have agreed those numbers. We haven’t agreed those numbers. Q164 David Mowat: Okay. So those are their numbers? Edward Troup: Those are their numbers. I recognise their numbers and I understand their methodology, but we disagree with it. Q165 David Mowat: I guess my question then is, what is it about the film industry that, in your view, means they should have a tax credit—a tax relief in this way—that does not apply to the video games industry? Edward Troup: I think that is a difficult and interesting question. First of all, the film industry, of course, has had support from Governments successively over a very extended period of time. It is an interesting question as to whether, if there were no relief for the film industry anywhere in the world, the Government would seek to introduce it. So, to a certain extent, this is something which has built up over time. Whether it leads to better outcomes for the global film industry I am not sure. It definitely does support the UK film industry in a world in which other Governments worldwide do give support for their own film industries. Q166 David Mowat: That argument cuts just the same way as for video games, doesn’t it? Your first point in respect of the film tax credit was that it has been there for a long time. That doesn’t seem a brilliant argument. Edward Troup: The UK does have critical mass of infrastructure and creative and technical expertise in the UK to support the film industry. There is a very strong cultural element in the British film industry, as there would be required to be for any video games support. So I do recognise that they are in the same space, but I think I will probably just go, again, back to my opening answer and say that the Government is making choices about new reliefs and its choice on this is that it doesn’t feel there is sufficient evidence of market failure to justify intervention.

Q167 David Mowat: You did say earlier that your group in HMRC was responsible for looking at the efficacy of tax systems, withdrawing them or adding new ones? Edward Troup: Yes. Q168 David Mowat: So, that being the case, it would seem that it is slap bang in the middle of your responsibility to understand the distinction between the video games industry and the film industry and what it is that makes one worthy of Government money and the other not. Edward Troup: I think two things. First of all, the film tax relief, which has had a long and slightly chequered history, is now only costing the Exchequer about £95 million or £100 million a year. It is supporting an industry which, as I say, contributes £4.5 billion to GDP. So in terms of what the relative cost of this relief is and therefore if Ministers asked us, “Should we get rid of it?”, we would say, “Actually, it is pretty cheap.” The second thing, as I say, is that this has been in the landscape for a very long time and the global film industry is adapted to and, in a sense, is slightly dependent on the existence of tax reliefs around the world. If you are asking me is that where we might be with the video games industry in 20 years’ time, that is an interesting question, and how Government would respond if every other country in the world in 20 years’ time was supporting a video games industry with massive tax and cash subsidies, I think would probably be quite difficult for Ministers. But at the moment both the global framework and the cost— sorry, the Chairman is trying to stop me—don’t make this worthwhile. Q169 David Mowat: Just finally then, the fact that we are discussing both of these industries, is the reason that their tax relief is even considered principally because the industries are very movable and therefore the revenue can just move, or is it because there is a cultural element here that somehow we perceive as being a good thing to have them done in our country? Edward Troup: I think what I would say is that sitting where I am, an awful lot of industries come and see my teams and argue for tax relief—really an extraordinary number of industries. I have just come from breakfast with senior representatives of the property industry who think we should reinstate empty property relief. We have had quite a lot of lobbying about that and I am sure Members here have had lobbying on all sorts of things. I think what is different about this is that this is quite visible. Whether that is a tribute to the industry and its ability to mobilise public and political opinion behind it or whether there is some intrinsic difference in this industry I don’t know. But, certainly, sitting where I sit and seeing a whole lot of papers and notes and submissions coming across my desk, actually there isn’t much to distinguish this from other industries who claim that talent is going abroad, that investment is needed here, that tax relief is the answer. This is a good report, but, to be honest, there are other



industries which if you substitute their name for video games in this report it wouldn’t look that different. Q170 David Mowat: The difference is, though, the cultural element, isn’t it? What I was just trying to get to is why films got it in the first place because it was perceived to be good to do these sorts of things, whereas property isn’t so sexy in that regard? Edward Troup: It could well be. Obviously, in a sense, the cultural thing has now got tied up with the fact that within EU rules we can’t give any tax relief for a specific sector unless it falls within one of the exceptions of which a cultural element is one. So it is difficult to say whether that has driven the claim for relief or whether the shape of the relief has been driven by the EU State Aid Rules. Q171 Dr Whiteford: Thanks very much and thanks for being with us this morning, Mr Troup. You are probably aware that Troup is part of my constituency in Banff and Buchan. Troup Head is an important nature reserve. Edward Troup: Excellent. My father has a photograph of himself at Troup Head. Q172 Dr Whiteford: I am conscious of time, so I will just try and restrict myself in my questioning. In reaching the decisions to back away from a tax relief system that was backed by all the parties prior to the election, were any direct comparisons done with the tax regimes in the countries that are direct competitors in this sector, particularly France and Canada? Edward Troup: First of all, I have to go back to the point that the advice we have given to Ministers is advice we give to Ministers. But, obviously, in doing our own analysis, hence I think you would be entitled to assume in giving our advice we have looked very carefully at the global position and we are very aware and obviously the industry has been very good at pointing out what reliefs there are in Canada, bits of the US and, to a limited extent, in France. So, yes, we have done the comparisons and I know Canada stands out. It is quite interesting in relation to Canada that they first of all have a Corporation Tax rate which, although they are bringing it down, is very much higher than ours; and they do have much more of a culture of giving certainly at a province level tax relief for all sorts of things, some of which are quite unusual, like processing pig manure and things like that. So there is a different economic approach. Again, coming back to my opening remarks, the Canadians appear to have taken more of an approach of more selective tax reliefs, rather than a broader approach to supporting growth, at least in relation to these industries. Q173 Fiona Bruce: I just wanted to tease out some further detail regarding some of the points raised earlier and, really, compare and contrast this proposal with some funding that Ed Vaizey has recently announced only this year for Abertay University to boost the Scottish video games industry and really look at whether we can honestly say that this games tax relief would be value for money when you

compare it with how we could use other public funds, say, for that scheme. I am interested that you say the figures that we were, I think, rather confidently given by TIGA are perhaps questionable. They say that the games tax relief would cost around £192 million and would create or save around 3,500 jobs. What you are saying is that to look at the creation or saving of those jobs without looking at wider economic indicators, like other jobs that they may be able to fall into, is really not something that can be confidently forecasted. That is interesting because, when we look at the figure of £60,000 per job which that scheme would create, that is a very high figure. What you are saying is that that is based on unreliable indicators in the first instance. Comparing it with the Abertay University scheme, we had a witness at our last hearing from Abertay, a very senior representative there involved in training young people in computer skills and also in the pilot projects that they undertake with small businesses in the area which they bring into the university. So they are cross-fertilising skills. They are not just providing, if you like, cash benefits. They are really building skills into our young people in the next generation. Now, the witness there said that for the £2 million which has been announced will be given to boost the Scottish games industry through the Abertay University training, they are confident—and we are looking at a professional who has been working in the field for many years, working with small businesses, so indigenous businesses—they will create 400 jobs. That is £5,000 a job. Mr Chairman, you will be very relieved to hear that actually I am only asking for a very short answer. Chair: Right. Fiona Bruce: Can we honestly say that the games tax relief is value for money when you look at how we can use funds to promote our indigenous businesses in this field in that way—£60,000 a job on unreliable indicators; £5,000 a job to the professional training? Edward Troup: I did see the evidence from last week and I thought it was very interesting. I am not an expert in these areas, but it did seem to me that this was quite an impressive return for money and Mr Vaizey may want to say something about it. But if the question is do I agree, from a Treasury perspective, that £5,000 a job is better value than £60,000 a job, even if I accepted that number, did I think that was a good thing, I would say, yes, it sounds like better value for money. Chair: That was a surprising answer. Fiona Bruce: Thank you. That is all I want to ask. Q174 Cathy Jamieson: I just wanted to pick up on a couple of points in relation to some of the cross-departmental work that is potentially going on in relation to this because the written submission came from DCMS and BIS talking about consulting around a review of taxation of intellectual property, additional support for research and development, tax credits and a whole range of things as a result of the Dyson review. I just wonder, who is actually in the lead on all of that currently? What discussions are already under way with the Treasury and when do you think



that is likely to come to a conclusion and make a report? Edward Troup: The taxation and intellectual property review, as with all tax matters, is very much a Treasury lead. We are hoping to get something out on that quite soon. I am sorry, I don’t think we have a date, and I certainly don’t have the date with me. As I think you said, certainly it is the case that we are looking at R&D tax credits as part of that. In a sense it comes once again back to my opening point of actually providing a broader stimulus to support intellectual property and intellectual development in the UK across industries. I think, 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. Cathy Jamieson: In view of time, Chair, I will leave it at that. Q175 Julian Smith: Can I ask you a bit about your calculations or the Treasury’s calculations of the three general fiscal announcements that were made for small business in the Budget, so specifically the cancellation of the previous Government’s jobs tax, reduction in Corporation Tax and the NI holiday for businesses outside London in the regions and what benefits those general fiscal decisions have made on this industry? Edward Troup: Obviously, I can tell you what the aggregate figures were for the amounts of money involved in those, but I can’t tell you how those break down for this particular industry than I am afraid I could for any other industry of comparable size. The industry is probably better able to answer that question than I am, so, no, I don’t have those figures. Q176 Julian Smith: But you would confirm that for an industry with quite a large number of new start-ups this might have some benefit? Edward Troup: I would expect them to benefit. Indeed, once again back to my opening point, there are a number of measures which the Government have taken through National Insurance, through Corporation Tax, through the NICs holiday for start-up businesses, which are generally applicable to the whole range of businesses and which this industry, along with any other growing or existing business, can benefit from. Q177 Julian Smith: Just in terms of international competition, would you confirm the information that we have had? You talked about Canada having reliefs for this industry but, actually, large gaming markets such as Japan and Korea don’t have any. Can you confirm that? Edward Troup: As far as I am aware there is no tax subsidy in either Japan or Korea, although I have read that Korea do provide cash subsidies to their industry, but I do not know if that is the case. I am not aware of any Government support given in Japan.

Q178 Julian Smith: The final question was, really, on the recent change in IP tax relief. There has been a bit of a relaxation on that for companies that aren’t owned in the UK, which I think came in the second Finance Bill. I just wondered if you had any comment on that. Edward Troup: This is getting into a level of detail I don’t have the answers for. I am aware there was some change. I don’t think it has any direct impact on this industry, but it may do. Julian Smith: Thank you. Q179 Chair: Thank you very much. Can I just ask, before I ask my colleagues if they have any other questions, if there is any information or figures that you think might assist when we are producing a report that would help illustrate some of the points that you have produced? I take the point that we don’t want to bandy figures, but if we are adding figures to a report that help make points then that would be useful. So if there is anything, upon reflection, you would like to let us have after this, could you do so? Edward Troup: Yes. I did note there was a question as to whether we wanted to put a written note in. Can I confer with my colleagues and actually have a word with David Gauke to see whether he would like to back up any of the points he has either made to Mr McGovern in meetings or I have made with a further note? Chair: That would be helpful. Jim, you wanted to make another point or ask another question? Q180 Jim McGovern: Two points actually, Chair. I have been in regular contact with Richard Wilson, who is the Chief Executive of TIGA. Although quite a few of us here have said we don’t want to bandy figures about but have then gone on to do so, is it fair for me to go back to Richard Wilson and say, “Mr Troup disagrees with your figures. They are inaccurate.”? Edward Troup: Absolutely; no, completely. Let’s be clear. I am not saying his calculations are arithmetically wrong. I am saying that the assumptions on which they are predicated we would disagree with. I have not checked it myself but I am sure the arithmetic is fine, but 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. Q181 Chair: Perhaps it would be helpful if you just let us have a note indicating which of his assumptions you believe are wrong and how, in order that we can just have a more informed debate going forward. I think that might be helpful. Edward Troup: If you are asking for a note to explain the point that I have made about displacement and dead weight costs of tax incentives, I am very happy to do that. My colleagues are probably blanching behind me because they are going to have to write it. Chair: That will teach them to nod earlier on when I was saying that Members don’t understand very much. Q182 Jim McGovern: On the second point, I take issue with what you said earlier on that if someone



doesn’t get a job in the computer games industry will they sit in the house for five years doing nothing? No, they will get another job. I am obviously an MP for Dundee. In recent years, it has been transformed. It now regularly comes in the top 10 of the knowledge economies throughout the world. I would take issue with what you have said and I would actually quite resent it. If they don’t get a job in the computer games industry they can go to McDonalds or Tescos or B&Q and get a job. Is that what you are saying? Edward Troup: No, I am not saying that. I don’t want to get too much into the details of where the graduate market is now at the moment, but the historical 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.

Q183 Jim McGovern: To Canada or somewhere? Edward Troup: The evidence is there has not been mass emigration of graduates. They have found jobs. I don’t have any evidence on internal migration. One of my sons has just graduated, was at a graduate fair yesterday and is looking rather alarmed about the prospects, but he is quite prepared to move to wherever a job is and I am confident he will find a job. I think that applies to a graduate who would otherwise have been employed in the video games industry if they didn’t get the tax relief. Chair: Okay. Can I thank you very much for coming along to see us? We have finished bang on time. Thank you.

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 a start. Can I thank you very much for coming along to the Committee today. The light isn't shining directly in your eyes, is it? Mr Vaizey: It does feel a bit like an interrogation, Mr Chairman, but I am not giving anything away. Q184 Chair: If you move that way it will shine right in your eye. That’s excellent, excellent. Thanks very for much for coming. Could I start off just by referring to various quotes that we have had from the industry. We are told that on 29 March you, then the Shadow Cabinet Minister, told Develop that the Conservatives “are going to support tax breaks for the video games industry” in the Conservatives’ first Budget. On 26 April, he added: “We are fully behind game tax breaks. This is my unequivocal statement.” He said: “It’s been approved by George Osborne.” Then we have quotes from Don Foster saying something similar. What changed between those statements being made prior to the election and the announcement that you were not going to proceed with games tax relief? Mr Vaizey: Not wishing to obfuscate right from the first off, that is a question for Treasury Ministers because obviously George Osborne, the Chancellor of the Exchequer, took a view in terms of his Budget about what was the appropriate way forward. Reading, as it were, between the lines, my view is that the Chancellor took a view that in terms of the business support package he was putting together in the Budget, which covered all business sectors in terms of reducing business taxation, the holiday on National Insurance contributions and not putting forward the increase in National Insurance contributions, he was creating an environment which was a good place to do business whether you were in the video games business or in the widget-making business or whatever and that he didn’t therefore want to proceed with a specific sector tax break. I think one Government insight perhaps into the Treasury thinking from the earlier evidence of Mr

Troup is where he said, of course, that many different industries put forward their case for a tax break and I think therefore the Treasury took a view they were looking at the bigger picture. I think, if one is talking about the politics of this, you look at how the coalition Government has approached various issues. There are certain policies that they put in place since the election and certain policies they haven’t proceeded with because of the nature of the coalition Government and the changed circumstances. Q185 Chair: I understand some of that, but the difficulty that I have is that the quotes we have been given said that you—not as the Treasury Minister but as the Shadow Cabinet Minister for this industry— said that you were going to do it and you said that George Osborne was on board for it. I am not clear, from your answer, why that was said then and then changed afterwards. Do you understand what we are searching for and why the industry is unhappy? I want to come later on to whether or not it was the right thing to say but, as my children used to say to me, “But you promised”. I think there is a feeling from the industry that this was promised and they don’t quite understand why the promise was broken, particularly since both partners in the coalition said that they supported a games tax break. Mr Vaizey: I think that is the key point. Don Foster made similar quotations and again had a similar assurance in terms of the Liberal Democrat position, although I don’t believe that a video games tax break was specifically in the Conservative election manifesto. I couldn’t speak for the Liberal Democrat election manifesto. But, 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. I think they felt that they were approaching things afresh, both in terms of the Budget deficit, what they could afford, but, also, the bigger picture in terms of


20 October 2010 Mr Edward Vaizey MP

the fiscal support they wanted to put in place for business as a whole. So the Chancellor took that decision and that was absolutely within his right to make that decision. It may be that we can revisit a video games tax break in the future. I heard Edward Troup mention a timescale of 20 years; it might be shorter than that. I am not trying to dodge the question, but I think the Chancellor is entitled to make a decision when he is putting together his Budget. I think there were things we would have liked to have done in the run-up to the General Election that just simply proved impossible after the General Election, looking at the state of the public finances but also looking at the approach the Chancellor wanted to take going forward. Q186 Chair: In your last answer and the last couple of clauses there are almost two separate things. The one I want to pursue just now is: was it badly targeted? Was it the wrong thing to do? I understand your point that financial circumstances meant there were a whole number of things junked. What I am not clear about is that the argument also seems to be being put forward that this was badly targeted. In a sense, that is almost a criticism of the promises that were made beforehand because I don’t know whether or not, once you got into office and once you found support from the Treasury and so on, things were then revealed to you that indicated that this was not such a good idea as you had previously thought. That is a different defence from the defence of saying, “The economic situation was so poor that we couldn’t possibly do it.” Can you just clarify the position for us? Mr Vaizey: 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. So I can only really extrapolate in terms of why they decided to describe it as poorly targeted and that would probably be unhelpful. Q187 Chair: So, from our perspective, the relevant Minister dealing with the cultural industries still takes the view that this was adequately targeted, but, as they were a bad boy, they did it and ran away? Mr Vaizey: No. My view on tax credits is more nuanced than that. If you start, as it were, from the beginning, do I, as a matter of principle, think that tax credits are a good thing? Not necessarily. Did I, as a shadow Minister and Don Foster as a shadow spokesman for the Liberal Democrats, take a view that we were effectively in tax competition with other jurisdictions? Yes, quite possibly. What would a tax credit bring in terms of the video games industry? I think it is very important to be clear on a number of points. First of all, it could act as a stimulus to inward investment. It wouldn’t necessarily support, as it were, the indigenous British or, indeed, Scottish video games industry. It might attract foreign investment from foreign companies. The Treasury, I think in its written evidence, has indicated that in a sense one is in a never-ending spiral at that point, that if you introduce a tax credit then

someone introduces a better one and you are under pressure to introduce even more. It was certainly never my view that we could ever match, as it were, the kind of generous financial support that the Canadians give to their industry and they have clearly made a decision that they are going to try and attract as much of the video games industry as they possibly can. The tax credit was there as a potential stimulus to inward investment but there is also a recognition that, for example, Germany, which has a growing and successful video games industry, doesn’t rely on a tax credit and that Japan and apparently Korea as well don’t. I am now in a position, given that the Chancellor has now made his decision in terms of the tax credit in the light of whatever circumstances were presenting themselves to him when he was presenting his Budget, to look at whether there are other ways in which I can support the video games industry. Q188 Jim McGovern: Obviously you heard what was said previously, so you will have heard what I said about consultation prior to Alistair Darling’s announcement to proposed tax breaks for industry. Numerous Government Ministers visited Dundee to see for themselves what the industry involved. The main gripe of TIGA was that prior to the Budget in June no consultation took place prior to the decision to withdraw any tax breaks. Could you explain why there was no consultation? Mr Vaizey: I don’t think there was time. I think that the last Government came very late to the conclusion that a tax credit was, from their perspective, the right way forward. You will have seen the statements made in various Budgets and pre-Budget reports by the last Government in the run-up to that, initially ruling it out, making sceptical noises and gradually moving towards that position. I personally find it slightly frustrating that the last Government came to that conclusion in its last Budget at a point where it seemed likely it wasn’t going to be in a position to see that through after the election. I don’t think that there was— Q189 Jim McGovern: Why did it frustrate you? Mr Vaizey: Because I felt that if they had been serious about the video games industry and the video games tax credit they would have been putting this through two or three years beforehand, rather than in a lastminute Budget before a May election. Q190 Jim McGovern: But you supported it? Mr Vaizey: You heard the quotes from me, absolutely. In terms of what was an emergency Budget of the Chancellor in June, he had 50 days to put together an emergency Budget which, from his perspective, was about stabilising the public finances and putting in place long-term measures to support British business. So in that sense he would have been superhuman, I think, to have had the chance to consult in detail on a video games tax credit. Q191 Jim McGovern: Thank you. When you say that the Government’s view is that a cut in



Corporation Tax and National Insurance etc. is the way forward, do you actually believe that there is no case to say that specific industries need specific help? Mr Vaizey: I look after a range of different industries in my position as minister for the creative industry. I always look ruefully at some of, as it were, the heavy manufacturing industries that still, I think, get a lot of political support. One looks at things like the car scrappage scheme from the last Government. I am therefore happy to go in to back what perhaps have been seen as frivolous industries like the fashion industry, which I think is absolutely incredibly important to the success of this country. So if you are asking me should the creative industries receive the same amount of attention and support from Government as perhaps manufacturing industry has in the past, then of course I absolutely agree with you. From my perspective I think that as the Minister for the video games industry my job now is to make sure that existing Government schemes are tailored or tweaked to support so that the videos games industry can have access to them. So, for example, we have been talking about R&D tax credits. There is going to be a review of R&D tax credits. So I regard it as my role to try and ensure that that consultation takes into account the needs of the video games industry. We are going to look again at the Enterprise Investment Scheme and venture capital trusts. So, again, I want to make sure that the video games industry is able to access those schemes without too much burden.

to prototype their models and development is a good way of supporting the video games industry. I think, again, what the industry wants is to see active Government investment in key areas, particularly skills, but also in, effectively, research and development. Again, we shouldn't lose sight of that and when we look at the competing jurisdictions it is not necessarily just tax breaks that are attracting companies or helping the development. It is straightforward financial assistance. I certainly think we need to look, as the landscape emerges in terms of local enterprise partnerships and so on and regional growth funds, at how we can also use that to support the video games industry.

Q192 Jim McGovern: Finally, as I said earlier, numerous Government Ministers prior to the General Election came to Dundee to see Abertay University and to see what the computer games industry involves. Unfortunately, the public perception in a lot of cases is that they think of young lads sitting in front of computers playing at APB or Grand Theft Auto but it has, actually, massive implications for medical research and medical science. So would you be prepared to come to Dundee to see for yourself and possibly go back to your Government and ask them to reconsider tax breaks? Mr Vaizey: I think I am coming on 3 February and I think I am taking David Mundell with me. Jim McGovern: Oh right. That’s bad news. Chair: Moving on. Lindsay.

Q195 Lindsay Roy: If you look at the league tables—I am not a great fan of these—Abertay doesn’t feature highly in the university league tables. Have we got the indicators wrong? Do we need to do something about re-evaluating in terms of outcomes? Mr Vaizey: I wasn’t aware of that point and I would certainly be open to a discussion about ranking universities in terms of their support for either the video games industry or creative industries as a whole. I have commissioned a skills review which you might want to talk about later on, but I hope that will highlight the importance of universities like Abertay in terms of providing the absolutely first-class education in this sector that it does. So I would certainly be open to specific league tables. That is an 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 was compensated by the project investment in Abertay? Was that a deliberate decision so to do? It has been broadly welcomed and is, I think, a recognition of the pioneering role of the university. What, in particular, secured that investment for Abertay? Mr Vaizey: I think that it was an opportunity for me. I think the grant had been considered under the last Government. It didn’t come out of the blue and it was an opportunity for me to confirm it and take it forward. It also included grants to MediaCityUK in Salford. We have also given money to Bournemouth University as well. I think direct funding of incubators and areas where video games companies get a chance

Q194 Lindsay Roy: I think all universities will say they are the greatest thing since sliced bread in terms of particular initiatives. Can I probe you further about what in particular secured the investment for Abertay and, also, how are you going to measure the impact? How are you going to monitor the impact of this investment? Mr Vaizey: I think what secured for me the investment for Abertay was that it was a scheme that was pretty far down the road and Abertay has a reputation that is unparalleled, I think, around the world. I think it was pretty clear that any investment in Abertay would be a sensible investment and a well-used investment by a university that stands absolutely at the top of the tree in terms of its educational value to the video games industry.

Q196 Lindsay Roy: Thanks very much. So you would be considering the possibility of continued differential support? Mr Vaizey: Yes. Lindsay Roy: Thank you very much. Q197 Julian Smith: Thank you, Minister, for coming. You talked a few moments ago about the IP review, the review of IP and the consultation period. Do you have a timetable for when you expect that to be completed? Mr Vaizey: No. I think that is, as far as I understand it, in the hands of the Treasury, but I would expect it to be completed in time, or my supposition is it will have been completed in time, for next year’s Budget.



Q198 Julian Smith: One concern generally on consultation is just that industries get truly consulted. Will it be possible? Will the Treasury be really reaching out to this industry as it will with other industries to the gaming industry? Mr Vaizey: I will be making sure that the industry does respond. As far as I am aware, for example, the industry didn’t respond to the initial consultation with the IS and the VCT reform, so I want to make sure that they do respond to the R&D tax credit consultation. They have got to be in there making their case and I will certainly support them in doing so. Q199 Julian Smith: I also wondered if you could talk more generally about the digital vision that your Department has for Britain, and, I guess, for Scotland more specifically, and how you see that helping the gaming industry, whether it is broadband or the other initiatives that have been taken? It will be quite interesting to see how that will benefit this industry that we are talking about today. Mr Vaizey: I’ve got a whole range of different responsibilities but, obviously, one of them is broadband rollout, so we want Britain to have the best superfast broadband in Europe by the end of 2015. That is absolutely about making Britain a good place to do business. I think that we have what I would call an element of convergence going on, so not only do you have the web but you have also got film, television and video games, I think, coming together to form a nexus, as it were, where the barriers, the silos between these different industries are rapidly breaking down. So, from a policy point of view, as a minister that covers these areas, I want to put in place structures that allow these industries to talk to each other and feed off each other. That involves support from the Regional Screen Agencies; it involves NESTA; it involves the Technology Strategy Board, which I think is a very important player in all of this. It could even involve the Arts Council, surprisingly enough, because we, I think, have a unique combination of being a series of nations that are very creative. We are known around the world for our creativity but also, actually, quite a lot of high-tech technical skills which I think come together very neatly. Q200 Julian Smith: One of the things that confuses this Committee sometimes is where London stops and the devolved Administration starts. How does your Department work with the devolved Government on these sorts of issues? Mr Vaizey: I think we work reasonably well. I think the Scottish Government, to a certain extent, could take credit for continuing to pioneer in that area. They put together, for example, Film Scotland and the Scottish Arts Council to create Creative Scotland. The Scottish Government has a broadband strategy and I think is taking the digital agenda very seriously. So I certainly feel that I, as a Minister, can learn from my Scottish colleagues but also from my Welsh colleagues as well about what they are doing, and Northern Ireland as well. I think it is interesting to see

certainly that there are clear digital agendas in each of the nations as well as in Whitehall. Q201 David Mowat: You mentioned in your last answer that you had a vision of, I think you said, film, television and video games coming together in a seamless way. I am interested, then, to explore why it is that one of those is subsidised or continues to be and the others are not, in your view? Mr Vaizey: I think it is a historic issue and it was obviously at the front of my mind when I was campaigning for a video games tax break before the election that the film tax credit is in place and supports a great deal of inward investment by the film industry into this country and the kind of skills that emerge as a result of that and the industries that emerge as a result of that. One shouldn’t get the idea that the film tax credit has been a stunning success from year zero. It has had a lot of bumps in the road. Indeed, at one point in the mid-2000s it was really a very large tax evasion scheme. But the film tax credit now is working I think very effectively. Q202 David Mowat: What I have had difficulty with right from the start of this is distinguishing what it is about the film industry which says that they should have a film tax credit and the video games industry that says, as you rightly said, the Chancellor looked at the fiscal position and said, “Okay, we can’t do that, but we continued with the film one”. I am just interested in the thinking behind that from a cultural— I guess you were an influencer in that dialogue. Mr Vaizey: I think it is politics. I think an existing tax credit is in a stronger position than one that doesn’t exist. Q203 David Mowat: So the fact that the films get it and video games don’t is a historic anomaly? Mr Vaizey: Yes. I wouldn’t want to use the words “historic anomaly” because that might give the impression that we found the film tax credit anomalous. One thing I can reassure you is that the Government is 100% behind the film tax credit, but it is a historical circumstance, yes. Q204 Jim McGovern: It is not 100% behind the games industry? Mr Vaizey: No, I said 100% behind the film tax credit. Jim McGovern: Not 100% behind the behind the games industry? Mr Vaizey: No, I said 100% behind the film tax credit. Jim McGovern: By implication then, not–okay, sorry. Q205 David Mowat: I just want to push a bit further because it does seem the best point that the video games fraternity have is that this other industry did get this tax credit over a number of years and it did apparently make a difference. Yet, I think the reason you gave for it not being given to video games was inertia, “We’ve got one; we haven’t got the other. Therefore, it is all too difficult to bring in another one but we will keep the old one going.” You see, had you got rid of both of them it would seem to me that the Government’s position was more tenable in a way?



Mr Vaizey: Yes. You can argue for intellectual coherence. If you were going to try and examine potential differences between the film tax credit and the video games tax credit I think, as we are now back on to the video games tax credit, it is worth perhaps reminding ourselves that not everyone in the video games industry necessarily thought the tax credit was a good idea and there are a number of reasons for that. First of all, the film tax credit, because it depends on European Commission approval, has to be based on a cultural test, not just on the labour force being British but also on the narrative, as it were, of the film having a British angle, which is why, for example, Harry Potter can qualify as a British film even though it is made by an American studio. So whether you can translate a cultural test to a video game like Angry Birds is an interesting philosophical discussion worth having. Obviously, given that the Prime Minister plays it a lot, it probably would pass the cultural test. The other issue is the way that video games are changing. More and more games are going online. They are multiplayer games, so, much more than in film, the publishers—as it were, if you take the parallel of the American studios, the publisher of the film—are perhaps not falling away but may play a less important role going forward. Developers will be able to put their games online and get a global audience through iPhone apps and iPads and things like that. So there was a feeling, for example, and quite a strong feeling among some elements of the video games industry when we were talking about a tax credit in the run-up to the election, to say, “Well, actually, are you simply going to put in place a system that supports an old model of making games and doesn’t actually stimulate the new model?” Which is why, for example, if one can tweak the R&D tax credit and also look at investment schemes to encourage investment into the games industry, one might actually bizarrely end up with a better result by supporting, as it were, the future of the games industry rather than what some people would characterise as the past.

industry faces in this country are similar to some of our other creative industries in terms of creating scale. Certainly a lot of businesses, when they reach a certain size, get sold either to Japanese or American publishers which have much bigger scales. So those are the kinds of structural problems in terms of creating business of scale in this country. I think there are massive opportunities for the industry in this country on a range of options. First of all, the reason I commissioned a skills review is that, if I take, for example, one conversation I had with a potential inward investor in this country, there were three legs that they were looking at, as it were, to encouragement to invest. One was skills, which is a big tick for this country; one was ease of doing business, which should and is a relatively big tick in terms of the general burdens on business and running a business, regardless of whether it is video games; and thirdly was fiscal support. I think if we get the skills review right so that we can get out there and tell the industry that this is a great place to pick up talent, that will encourage them. I think that if we continue to put in place a good business environment and a benign business environment, that will encourage investment. As I say, if we can put in place some element of financial support, either through direct support through business support schemes, or indirect support through research and development schemes or access to finance schemes then I think that will also continue to support it. But I also do think—and this is my job— that we need a clear narrative for the industry. We need to set out why this is a great place to have a video games business. I don’t want to give the impression that I am in any way criticising UK trade and investment. I am not. I think they do a very good job. But 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.

Q206 Dr Whiteford: We have obviously heard a lot of evidence over the last few weeks, but one of the things that has really troubled me is that it is clear that there is a growing and rapidly diversifying global industry, yet we are witnessing a contracting UK industry. The UK and Scotland in particular has been a significant player in this sector to date but it appears that we are losing market share to a range of competitor countries, some of which are promoting their sectors very aggressively and others which aren’t. I suppose my question is, really, how interested is the Government in retaining this sector in the UK as a significant player? If the original commitments around tax are something that the Government is now backing away from, what do you intend to do to create a conducive environment for this sector to flourish and what kind of timescales are we looking at for implementation? Mr Vaizey: I am very interested in ensuring that we have a successful video games industry. I think that, to a certain extent, the problems that the video games

Q207 Dr Whiteford: I think that is helpful, particularly in terms of the research and development side, because we did hear a lot that finance for development was a particular issue for some companies. I am concerned about the skills issues, though, because we do have the example of Abertay, but the historic problem in Scotland has been brain drain. I think moving away from an expert labour economy, which is what we have had, where we lose our highly skilled people often to Canada historically, Australia and the US, has been very bad for the country and it has resulted in a lot of people on low paid jobs rather than highly skilled people in better paid jobs, which I think has to be an aspiration. So I would strongly urge us not to be simply just skilling people up to get jobs overseas where the talent is lost. Mr Vaizey: Absolutely. Q208 Fiona Bruce: Good morning, Minister. You heard me asking earlier about the comparable cost of the investment that is proposed through this tax.



Really, the figures don’t seem to stack up. Given the severe financial constraints that we have inherited from the previous Government, you cannot, I think, do other than accept that the tax relief proposal simply isn’t value for money? Mr Vaizey: As I say, I think that George Osborne had to consider a range of factors when he was putting his Budget together. I think the Treasury had a figure in mind about how much tax relief would cost and, as a Minister who has been through the spending review, I know that Departments literally are looking at the smallest possible sums that you could imagine. So I could see that if George Osborne was considering the very difficult financial circumstances that we are in, the actual potential cost of a tax credit, which would effectively be additional public expenditure at a time when he is trying to reduce it, would be a factor that would certainly have influenced him. Q209 Fiona Bruce: Absolutely, but what, clearly, you brought out this morning is that, notwithstanding that, you are looking very constructively at how you can use the limited funds that we have to really make a difference for this industry in Scotland and elsewhere. Mr Vaizey: That is what I am very keen to do. As I say, I was keen to use what money was available to support particular centres of excellence across the country—so Bournemouth, Manchester and Dundee. Also, I am keen to use existing fiscal support mechanisms to ensure that the video games industry, as it were, gets a fair crack of those. So I don’t think, in those circumstances, I am adding to the burden of public expenditure or pushing the boat out. I am simply trying to make sure that all the mechanisms which the Government does think are the effective ones to put in place are relevant. Q210 Fiona Bruce: When I talk about value for money, I am talking about the comparable return on investment. Mr Vaizey: Yes. Q211 Fiona Bruce: I am very pleased to hear all that you have said today. Can I talk about something that is, if you like, for many people, an elephant in the room regarding the video games industry? I was very pleased to go to Abertay University because I saw there the constructive side of this industry and how much they are doing there in terms of medical development. Only last week actually I visited my local fire station and saw the technology being used there to help in fire training—exactly that kind of excellent technology. That is the kind of investment that I think everyone would want to see such funds as there are put into developing them—the small, local, indigenous businesses developing skills, keeping our expertise and our intellectual property here. What a lot of people like me, and I am a mother of two teenage boys, are very concerned about is when we use the term “video games industry” it might be perhaps worth thinking again about that very title because at the moment it encompasses so much that is positive. It is about, really, whether it is right that we should be looking even at tax relief for certain

products—and I am quoting; I checked with one of my colleagues earlier before I put this to you—where, when we went to Dundee and we talked with the video games producers and someone asked one of the developers, “Well, what sells?”, he said, “Well, basically, it is shooting and killing.” That might have been, if you like, not the whole picture but it is part of the picture. It is very concerning for mothers like me, just finally touching on one point—and this was picked up by a previous witness when I asked about it—on the streaming of online games where there might be a certification of the age range but there is, really, no effective way of prohibiting youngsters from accessing these games. I think if we are going to invest in this industry then we need to address the very real concerns that there are on the part of parents like me about support for the products which are coming on the market. Mr Vaizey: I absolutely, obviously, understand your concerns. I am not the father of teenage children but I will be, hopefully, in a few years’ time. That is, I have got two young children but they are some way off being teenagers. Obviously, violence in video games is a perennial debate. I took the view, as a shadow spokesman on this issue and I now take the view as a Minister, that my job is to support this industry as much as I can because it does tend to get some negative headlines. I feel that the negative headlines are somebody else’s responsibility. My responsibility is to get the positive headlines. I do think, in the last two or three years, the industry itself has been extremely good at getting out there and explaining the enormous range of benefits it brings not just to interactive entertainment and leisure but to support for the disabled, the kind of technology that will allow someone who is a quadriplegic to interact with people through eye movement and things like that, and, as you say, in terms of simulation for the emergency services and indeed our armed services. So there are a range of massive benefits. In terms of 18-rated games, I think they make about 3% of the total games available. There will obviously be, occasionally, questionable matters of taste and we have seen that in recent weeks in terms of some particular games focused on the war in Afghanistan. So there is no doubt that those issues arise, but what I always say is you could say the same about film and you can say the same about literature. Tastes do change and evolve. But, as I say, my job is to promote this industry and I will let others highlight its flaws. Q212 Fiona Bruce: I will just come back very briefly on this; thank you. You are absolutely right in so many respects and I wanted to ensure that I emphasised the positive side. I think the difference between, say, film or even literature, is that it is the monitoring which is the issue because we now have, obviously, a generation which has direct access to these products in a way that, with regard to the other products, they don’t have. So I simply wanted to highlight this because certainly the witnesses from Abertay University did say that they would very much like to look into and have some R&D support for looking into this area but, at present, it doesn’t perhaps seem



to be available as it could be. Perhaps that is something that you might be willing to look into. Mr Vaizey: That is something I would certainly happily look into and it might be something that, for example, I could talk to the Technology Strategy Board about because that provides a test bed platform for people to test out their games. 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. I am also a member of the Government’s UK Child Internet Safety Group of Ministers. So we sit around a table on regular occasions to discuss how to keep our children safe online, which is very important. Again, it is not a problem I would argue is specific to the video games industry. 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 that will enable them because, let’s face it, not all parents are as tech savvy as their teenage children and they do need clear guidance on how they can try and keep their children within bounds. Fiona Bruce: Thank you. Q213 Cathy Jamieson: Thanks so much and thanks for what you have told us so far. I am very pleased to hear your support for the creative industries particularly, as you have mentioned, the fashion industry which of course is very important as well to Scotland. I had the pleasure of seeing the Scottish Textiles Exhibition at the ICA last week. Interestingly, some of the points that designers and people involved in the industry there were making were similar to the points about the computer games industry. But I want to take you back, if possible, to some of the things you said right at the beginning of the evidence that you have given us. I understand the position there, you know. You said the Chancellor had to take certain decisions as he was entitled to do. But, surely, in a situation where everyone seemed to be suggesting that tax breaks were a good idea prior to the election, it would have been incumbent then on the Chancellor to seek the views of the Minister directly responsible for promoting the creative industries before he took a decision to scrap it. You seem to suggest that hadn’t happened? Mr Vaizey: I am quite low down on the food chain. Q214 Cathy Jamieson: But you have responsibility for this industry. Mr Vaizey: There is a famous anecdote about an obscure Minister under the Thatcher Government which I don’t have time to tell. But, obviously, you have the Secretary of State for Business who would have—I imagine the Chancellor would potentially consult his Cabinet colleagues on issues. But, at the same time, as we all know as politicians, the Budget is very much the province of the Chancellor and the Chancellor is perfectly able to access the information he needs. He knew that all three political parties had spoken up in support of the tax credit but he was also able to access all the information, particularly for example the information that Edward Troup was putting forward in the earlier evidence session, and

take a view. He is the Chancellor; I am not. He is perfectly entitled to reach his own conclusions for his own Budget and for his own priorities as well. I am not going to be in a position to write his Budget for him, nor would I want to be. Q215 Cathy Jamieson: With respect, Minister, you have made some play that you are the Minister responsible for the creative industries. I am now concerned that you feel that you are so far down the food chain for a very important industry that the Chancellor would not take account potentially of what you say. If you heard the questions that I asked of the previous witness, it was around what is going to happen in the future as a result of the review, for example, on R&D credits. If you didn’t get a result the last time around, what confidence can we have that the Treasury are going to listen to you next time? Mr Vaizey: All I would say in response to that is that I walked right into that one, didn’t I? That will teach me to make a flippant remark at a Select Committee hearing. It is up to me to try and deliver for this industry, so I will do my very best to do that. Q216 Cathy Jamieson: Could I ask you a question that I asked previous witnesses at earlier hearings as well, because we have to make some recommendations obviously arising out of this report. What I asked the previous witnesses was: what did they want to see as our top recommendation? I am not going to walk into anything when you tell me that that is my job, but what I would like to ask you is what recommendations could we make that would be helpful to you in making those representations to the Chancellor for the future of the games industry in Scotland? Mr Vaizey: I think you could say that the Chancellor should certainly, when he considers the review of R& D tax credits and when he considers issues such as access to finance and business support, maintain that he sees the creative industries as being central to that and that he, in particular, looks to ensure that the video games industry is not inadvertently excluded from the opportunity to participate in any future fiscal support schemes that he thinks are appropriate for British businesses on. Q217 Mr Reid: Good morning, Minister. Thanks for coming along. Here we have a situation where we have a successful British industry but another country, Canada—Quebec, in particular—gives its own industry tax breaks. It means that our successful industry is losing a brain drain to Canada. What is the Government’s reaction to that? Mr Vaizey: Again, 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. Again, looking back at the last Government, which in effect took the credit for a tax credit that it never introduced and it only said it was going to introduce it in its last Budget, one of the frustrations I found as the Opposition spokesman was that when I raised the



issue of Canada two or three years ago I was told again and again that this was a matter potentially for the World Trade Organisation to look at and that turned out, really, to be a red herring. So if I was being more robust than perhaps I have been in the last 40 minutes I would say that the last Government, to a certain extent, did sit on its hands in the face of Canadian competition. Again, I do feel pretty confident that we can continue to support this industry and continue to compete with Canada. Canada is putting a lot of direct Government support in and, again, it is at the state level rather than the federal level, so you have got states now competing against each other. But we remain, as it were, a very important jurisdiction in terms of our skills. Britain will become a very good place to do business, regardless of what business you are in. Provided we ensure that the fiscal support mechanisms and Government investment and support for industry takes into account the needs of the video games industry then I am confident about the future. Q218 Chair: I wonder if I could touch on one or two other points that have come up at various stages during our inquiries. Relationship with the banks: we have had the impression from a number of people in the industry that the banks don’t understand them, that they are risk averse and that some of the firms in the industry are having difficulty finding capital to develop. Do you see yourself as having a role in that in any way and, if so, what have you been doing and is there anything on the stocks that would make these problems of the firms in the industry ease? Mr Vaizey: I have had one roundtable with the video games industry. We are having another one to talk about inward investment and how we co-ordinate the various functions of Government to ensure that we are getting the message out to companies abroad to invest. I also want to have a roundtable on access to finance. Again, I think it is a problem that is wider than simply the video games industry. It is to do with the creative industries and it is to do, again, with why talks about tax breaks tends to enter this discussion because, to put it bluntly, I have also heard the same anecdotes where people will say they will go to a bank and be told, “Well, frankly, if you were coming to me with a proposal for a pizza delivery business of course you would get the money because I know how that works”, whereas the video games industry is inherently risky because you are depending on hits. If your game is not a hit, as Realtime Worlds saw only too tragically, that can have very, very serious consequences for the business. So I think that what I can do in particular is also use my knowledge of the film industry as well to work with the banks and investment houses that are specialists in investing in the creative industries and ensure that there is a coherent landscape for people to talk to banks that are more au fait with their sectors. Q219 Chair: The second point follows up, really, from the points that Mrs Bruce raised about the violence in films. I must say I was a bit concerned by your response, which basically seemed to indicate that you were interested in the good headlines and you

weren’t bothered so much about the bad headlines. It does seem to me, as the General Culture Minister, that you ought to be concerned about the general coarsening of cultural life that is just symbolised by the video games. I heard the argument that it was only 3%. I am not sure that amongst, particularly, youngsters in my constituency it is 3% by usage because I do get the impression that maybe they are selling only a relatively small proportion of these but they are available to a much, much wider group and they are breeding an attitude which suggests that violence is a way to solve problems. Relationships and so on and so forth are all softy things. It is chopping people’s arms off and running them over with a car or breaking and entering and all the rest of it. Grand Theft Auto is not a childcare video and it just seems to me that you ought to have a responsibility or take it more seriously than you perhaps gave us the impression that you were doing. Can you just clarify whether or not you see yourself as having any role in that sort of area? Mr Vaizey: What I was going to say was that I thought this Select Committee and the decision to hold an inquiry into video games was a great opportunity for the video games industry, because I think that one of the issues and problems has been that the games industry has not been taken as seriously by politicians as it should have been. One of my regrets about the industry has been that the only time it has featured in Parliament is when individual members of Parliament have wanted to use it as an example to pick on violent video games. So while I absolutely accept that it is possible to have a view on a particular game and whether or not it is tasteful or appropriate, what I would strongly argue back at you, Mr Chairman, is that these seem to be the only way that some politicians think that you can get headlines for the video games industry when, in fact, what this inquiry will show is that you have got a fantastically successful industry with a huge range of applications. There is a ratings system for video games. They are subject to the same kind of controls that film is. So why is it that in terms of our cultural climate we tend to celebrate the success of British film? We stay up for the BAFTAs; we stay up for the Oscars; we love looking at pictures of our film stars in the newspapers and celebrate in their success. Yet, we seem again and again only able to come back to the violent nature of video games. Obviously, we know and we could all name films we have been to where we have found the violence to be very much pushing the envelope. What I object to is that we don’t then come out and say, “The film industry is coarsening our children.” We say, “That was a violent film and I certainly want to make sure my kids don’t see it.” You can certainly take that attitude about the video games industry. You can say, “That is a violent video game and I don’t want my children to play it.” But you shouldn’t say, “That is a violent video game and the video games industry is coarsening our children.” I just don’t agree with that observation. Q220 Chair: That is something for us to report. Can I just clarify as well whether or not, in terms of



supporting the industry, the Department is involved in any way in providing support to what seems to me to be a novel suggestion of some sort of collaborative publishing? We met people in Dundee, we were discussing routes into marketing and so on and the difficulty that sometimes people developing their games had about finding somebody who was willing to undertake all the marketing. One of the suggestions was that various people involved in the industry would try and collaborate and almost have a mutual of some sort to try and access markets in a more constructive way than they have been up to now. Is that something that you would see as being your role, to help that sort of thing, or would that just simply be seen as a business problem that was passed on to BIS? Mr Vaizey: It would certainly be something that I would be interested in knowing more about. But, again, it would be something where I would regard somewhere like Abertay University or the Technology Strategy Board or NESTA—the National Endowment for Science, Technology and the Arts—having an opportunity to research that area, promote it and perhaps make it more widely known. Q221 Chair: Two final points if I could, just to get clarification. Arising from the points that were made by Mrs Jamieson, is it correct that you were not consulted before the Chancellor abandoned the manifesto commitments to introduce games tax relief? Mr Vaizey: I had a chance to put my point of view across, so I felt that I had had a chance— Q222 Chair: So you were consulted? Mr Vaizey: I felt I had a chance to make my case. Q223 Chair: Sorry, is that yes? Yes, you were consulted? Mr Vaizey MP: I felt I had a chance to make my case. Q224 Chair: Sorry, is that a “yes”? Yes, you were consulted? Mr Vaizey: I felt I had a chance to make my case. Q225 Chair: So that is a “yes” then, is it? Mr Vaizey: Yes. Q226 Chair: Fine. I wasn’t quite sure why you were phrasing it in that way. Can I just clarify? I understand that the guns in the tanks of the Chancellor are greater than yours, but can I just clarify whether or not in principle you remain in favour, if the economic situation was different, of a games tax relief, or do you take the view that it is so badly targeted that it is not actually worth supporting and that we ought to be pursuing other routes entirely? Mr Vaizey: I remain of the view that we will continue to debate a video games tax credit, that it doesn’t have universal support in the industry and that there are a whole range of other options that we can and should look at in order to support the video games industry. So I do not take the view that the fact we do not have video games tax credit means the game is up and we might as well just all pack our bags and go home. I think there is a hell of a lot to play for.

Q227 Chair: The thing that strikes me on that is that the focus of the lobbying and the views expressed by the games industry has tended to focus on a video tax relief. I must confess I am not entirely sure whether or not they have hung their hat on that because it is the peg that is available in order to raise the profile or whether or not there is a genuine conviction that that is the way to go. That is why I am just trying to clarify with you whether, given your functions now and having had the opportunity to see more and do more with the industry, you are now of the view that there are a number of other things that would achieve the same objective in a better and more targeted way, or whether or not you still think, “Yes, notwithstanding some difficulties with tax relief, it is still better than any other proposal.” Mr Vaizey: I think, Mr Chairman, one understands how these things work and that a particular policy proposal gets a certain element of momentum. I think the industry can be in danger of seeing it as the panacea and I just don’t think it is a panacea. I would never rule out potentially looking again at a tax credit or returning to the issue, as I say, as a potential option. I personally feel that if it was to come back on table it would be an inward investment vehicle, as I have said in my opening remarks, not necessarily a vehicle that would see the size of the indigenous in British industry grow significantly so there will always be that controversy. I am now focused on looking at other options to how we support the video games industry. Chair: Fine. Thanks. Jim, you had another point you wanted to make? Q228 Jim McGovern: Yes. First of all, Ed, I look forward to meeting you and David in Dundee, and my earlier remark was flippant, obviously. I would just like to ask you if you would take this thought away with you. It is a quote that was just given to me yesterday and it is from a man named Danny Bilson, who is the chief executive of a global video games publisher called THQ. He had just announced that they were investing in Quebec. In response to a question about whether a global publisher would invest in the UK Danny Bilson said, “Well, it’s all about money. The talent in the UK is extraordinary…. I got to know a lot of teams in the UK—it’s one of the greatest talent centres in the world. So there’s no issue with talent; it’s just economics—and if the Government finds subsidies there, absolutely we would build out….but I’m sorry, it’s all about money”. I don’t think you should sell yourself short. I am sure you have got the ear of the Chancellor and possibly the Prime Minister. I could forward this to you if you want? Mr Vaizey: No, I have seen it already. Q229 Jim McGovern: Have you? Were you keeping it a secret? Mr Vaizey: I read all the websites. Q230 Jim McGovern: Okay. I am sure you will take that back to the Chancellor. Mr Vaizey: THQ do have a UK investment, as you know the interview makes clear. But, obviously, that



is why I have made the point about the tax credit as an inward investment vehicle. Jim McGovern: Yes. Chair: Thank you very much for coming along. That has been very useful. Again, as with the colleague that

came before you, if, upon reflection, there is anything that you want to let us have in a written form that you think would illustrate the points that you made we would be grateful to have that.


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 2 3 4

PWC Global Entertainment and Media Outlook 2010–14, published 15 June 2010. DCMS Creative Industries Economic Estimates, February 2010 http://webarchive.nationalarchives.gov.uk/!/http:// www.culture.gov.uk/reference library/publications/6622.aspx Financing a Private Sector Recovery, BIS 26 July 2010 http://www.bis.gov.uk/Consultations/financing-private-sectorrecovery?cat%open http://www.scotland.gov.uk/Topics/Business-Industry/support


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 6 7

Tiga/Games Investor Consulting, January 2009. Raise the Game, NESTA/GIC December 2008. 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.


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 9 10

Playing for Keeps, Games Investor Consulting for UKTI and BERR, October 2007. Raise the Game, NESTA/GIC, December 2008. Playing for Keeps, Games Investor Consulting for UKTI and BERR, October 2007.


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.


— 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.


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 12 13 14 15 16 17

Technology Strategy Board, Creative Industries Technology Strategy 2009–12. Technology Strategy Board, Creative Industries Technology Strategy 2009–12. Technology Strategy Board, Creative Industries Technology Strategy 2009–12. GFK-Chart Track. Skillset, Computer Games Sector—Labour Market Intelligence Digest (2010). Ofcom, Digital Participation Metrics Bulletin (2010); Ofcom, Communications Market Report (2010). GFK-Chart Track.


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 19 20 21

NESTA, Raise the Game (2008). Ibid. Skillset, Computer Games Sector—Labour Market Intelligence Digest (2010). NESTA, Raise the Game (2008).


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 23 24 25

Technology Strategy Board, Creative Industries Technology Strategy 2009–12. NESTA, The Innovation Index (2009). GIC (2008), Raise the Game, NESTA: London. Skillset (2009), Computer Games Labour Market Intelligence Digest, London: Skillset.


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 Full name

Description

Montreal Refundable Tax Credit for the Production of Multimedia Titales— Specialised Corporations 90% of all eligible expenditures in multimedia titles are subject to a rebate of up to 37.5%

Annual Spend (last (not available) available year)

Ontario Ontario Interactive Intellectual Property Media Tax Credit Development Fund (Pilot Program)

France Le credit d’import jeu video.

80% of all labour expenditures in Ontario are subject to a rebate of up to 40%

20% rebate on qualified labour expenditures for projects that pass a cultural test

C$12.4 million (2008–09), including nongames interactive projects

30% of all expenditures to “bring a product closer to the completion of a functioning prototype or market ready stage,” including content, technlology and business model development activities (eg experimentation, prototyping, etc) C$10 million pilot program (2009–10)), with C$3.9 million remaining as of May 2010

ƒ170 million (2008)

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 27 28 29 30

PwC (2008), Global Entertainment Outlook 2008–12. PriceWaterhouseCoopers: London. GIC (2008), Raise the Game, NESTA: London. GIC (2008), Raise the Game, NESTA: London, Oxford Economics (2008), The Economic Contribution of the Games Development Industry. Oxford Economics: Oxford. Oxford Economics (2008), The Economic Contribution. 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].


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 32

NESTA (2009), It’s Time to Play, NESTA: London. 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.


— 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.


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

35 36 37 38 39

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. Gardner, P, Gibson, R and Wilson, R, Investing in the Future: a Tax Relief for the UK Video Games Development Sector (TIGA, 2009). http://www.develop-online.net/news/34341/Tories-come-clean-Well-oVer-tax-cuts-in-first-budget http://www.develop-online.net/news/34619/Vaizey-you-have-to-trust-us-on-tax-breaks http://www.tiga.org/PressReleaseDetail.aspx?id%c12d4346-17e2-47ce-bb77-12d5b8a4f298 Mateos-Garcia, J, (ed), Raise the Game (NESTA, 2008), p 18.


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 41 42 43 44 45 46 47 48 49

Investing in the Future, pp 40–41. Maple Story, Develop, November 2008. Raise the Game, p 30. http://www.develop-online.net/news/32323/Finnish-Government-devotes-10-million-to-game-development http://www.guardian.co.uk/world/2009/apr/10/japan-manga-anime-recession http://nordicgameprogram.org http://www.nfi.no/english/aboutnfi/index eng.html http://www.gamasutra.com/php-bin/news index.php?story%21368 http://www.gamasutra.com/php-bin/news index.php?story%23510 http://ec.europa.eu/culture/media/programme/producer/develop/interactive/index en.htm


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 51 52 53 54

GIC calculation for TIGA. Ibid. Ibid. Ibid. http://www.deti.ie/press/2009/20090409.htm


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.


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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