Computer Games Industry

Debate between John Penrose and Jim McGovern

Wednesday 29th June 2011 Westminster Hall

[John Penrose]

I think that the hon. Gentleman is referring to the fact that a tax break is already in place for the film industry, but we do not have quite the same system for the video games industry. There is a piece of history here, which I offer as an explanation.

The film industry has an existing state aid exemption; it is an acknowledged piece of state aid that is registered with EU authorities and anyone else who needs to know. We are registering it under the next iteration of those rules, which is coming up. The reason is that it seemed at the time—we continue to agree—that it was an important piece of cultural ambassadorship as much as a business opportunity. We cannot necessarily say that for “Grand Theft Auto”, important though it may be for the UK industry and for jobs. The film industry does both jobs. It fulfils the role of cultural ambassador; the video games industry is economically important. That is the historic explanation. The shortage of money, which I intend to deal with in my response to the hon. Member for Dundee West, is why we are where we are; there is no money to extend such provision, even if we could.

[Jim McGovern]

I thank the Minister for giving way. The figures given to the Scottish Affairs Committee during its inquiry suggest that the tax breaks received by the film industry cost in the region of £110 million a year. The previous Government committed themselves to tax breaks for the computer games industry worth £55 million a year. However, the computer games industry generates more for our GDP than the film industry. Further to that, the Committee said that calling them video or computer games was rather misleading, as the industry is also involved in medical research and architectural science. It is not just people playing “Grand Theft Auto” or “APB”.

[John Penrose]

The hon. Gentleman is quite right to say that there is a broader aspect to the matter. I was using “Grand Theft Auto” as a quick example rather than a widely based covering comment.

As for the numbers cited by the hon. Gentleman, I say this. Businessmen should always face many more ideas that would produce a positive return on their investment than they can afford. That is a fact of life in any industry, and certainly in the creative industries. There might be 100 options that could increase the bottom line, but they will not be able to afford to use them; they will not have the cash, the people or resources in general. That is the case with the Government. We inherited a terrible fiscal position, and the country’s balance sheet was in a very bad state. There are all sorts of things that might create a positive return, but we physically do not have the cash for them.

One of the major points of difference between the hon. Gentleman and me in our approach to macro-economics in general and to the industry—and also on a micro-economic basis—is that I am unsure where we would find the money to do some of the things that he suggests, such as tax breaks here and there. I respectfully suggest that he will need his own Treasury Front-Bench team to sign up to what he suggests. I suspect that those Front Benchers will be leery of doing so, because they would then have to explain which bits of other budgets, such as health or education, they would cut in order to release money for this, which taxes they would raise to pay for the additional tax breaks, or how they would persuade the financial markets, on the day that Greece is voting for its austerity package, that we should be borrowing more money for this, that or the other. This is an essential piece of macro-economic prudence, and I suspect it is a fundamental difference of approach between us. I understand where he is coming from, but I am trying to explain where we are.

[John Penrose]

I can absolutely make that assurance. I would like to go back to some of the things that we are already doing, which I hope will bring a significant benefit to this industry and others.

[Jim McGovern]

The Minister said that I should ask my Front-Bench colleagues to sign up to this. Obviously, they have: they made a commitment prior to the general election that they would give tax breaks to the computer games industry. The Minister’s party also supported that, as did the Liberal Democrats and the Scottish National party. I am not looking for a U-turn; I am looking to the Government to honour their commitment. The Minister makes the point about the Labour legacy, which I think everybody is getting a bit scunnered listening to. If that is the case, why can Ireland offer tax breaks but the UK cannot? Ireland is held up as an example of a country that is economically worse off than the UK.

[John Penrose]

That brings me neatly to one of the other points made by the hon. Gentleman. He accused us of having an over-simplistic, one-size-fits-all policy. The difference between here and Ireland is that, over 13 years under the previous Government, the UK developed one of the most complicated, long, difficult, baroque and over-ornamented systems of business taxation in the developed world. We start with an incredibly complex taxation system, so moving gently towards a slightly simpler approach does not mean we are becoming over-simplistic or deciding that one size fits all. We would have to go a long way to get anywhere near the scenario the hon. Gentleman describes. Ireland is not starting from that over-complicated position. It has all sorts of other constraints. It has major macro-economic and public finance problems, as he rightly says, but it is not starting from one of the most complicated and baroque business tax systems in the world, as we are.

We need to move to a simpler system. It is difficult to argue that decisions on whether to invest in this or that part of a business will be driven effectively and productively by a system that requires encyclopaedic PhD-level knowledge and understanding of business taxation. What actually happens in business—and having been in business, I can vouch for it—is that one makes the right decision on the basis of what customers want and what is affordable and one tries to position the business in that way. One then turns to the bloke who runs the finance department and says, “Can you retro-fit any of this into some kind of useful tax break that the Government have already introduced?” That does not drive decision making, unless it is a very large and particular kind of system, of which there are few.

Therefore, that kind of over-complicated tax system is fundamentally less effective than it should be in driving investment decisions. That is why one needs to move to a simplistic system with straightforward incentives: if someone invests and does the right thing for customers, they will earn more money, it will drop through to the bottom line and investors will do well. That is the thinking behind it.

That said, as I mentioned to my hon. Friend the Member for North Swindon (Justin Tomlinson), we are trying to do a series of things that will help the industry and others. I will lay out some of those, as the hon. Member for Dundee West challenged me to do so. I want to ensure I respond, to show that we are not a “do nothing” Government. However, he is right to say that the UK faces strong competition for video games investment from overseas, particularly from Canada, which offers targeted tax incentives for games producers. I am aware, of course, of the trade association TIGA’s campaign for the introduction of a specific tax relief to support video games production in the UK. Its job is to campaign for such things; it would not be doing its job well if it did not make that argument. In someone else’s famous phrase, “They would say that, wouldn’t they?”

The Chancellor of the Exchequer, as I have mentioned before, keeps all decisions on tax policy under review. However, we believe that in general providing a low corporate tax rate with fewer reliefs and allowances, as I have explained, will provide the best incentive for business development and promoting economic growth. Many games companies in the UK will benefit from the reforms announced in Budget 2010 and Budget 2011. To remind hon. Members, the UK’s main rate of corporation tax will fall to 23% by 2014. That means we will have the lowest rate in the G7 and the fifth lowest in the G20, ensuring the UK remains a competitive place to do business.

The hon. Member for Dundee West said that businesses are leaving. It is worth pointing out that many major global games companies choose to locate their European headquarters in the UK, and continue to do so. For example, we have Sony Computer Entertainment, Sega, Disney Interactive and Activision all here in the UK.

The Government have also made major reforms to the R and D tax credit. From 1 April 2011 the rate of tax relief for small and medium-sized enterprises increased from 175% to 200% of qualifying tax relief. From 1 April 2012 that will rise further to 225%, subject to state aid approval. I know that many in the games sector have warmly welcomed those reforms as a boost to innovative video games businesses in the UK.

The Government also announced changes to the schemes that help to incentivise equity investment in small, high-growth companies. The hon. Gentleman mentioned the importance of those to this industry, and many others. Those schemes are the enterprise investment scheme and venture capital trusts. We welcome the news that consultants Olswang plan to work with others on an independent analysis considering how measures such as EIS and VCTs can be exploited by games developers and the investment community to boost levels of investment in the sector.

I should also say that it is not just a matter of tax policy, although that is important, and the hon. Gentleman rightly focused many of his remarks in that area. There are other things that can and need to be done to improve the environment for enterprise in this country. For example, the enterprise finance guarantee will provide up to £600 million of additional lending to around 6,000 viable SMEs in 2011 and, subject to demand, over £2 billion in total over the next four years. For the enterprise capital funds, the Government are increasing their commitment by £200 million over the next four years, providing more than £300 million venture capital investment into the equity gap for early stage innovative SMEs with the highest growth potential.

The regional growth fund has made £1.4 billion available over three years for projects or programmes that deliver the fund’s objectives to stimulate enterprise by providing support for projects and programmes with significant potential to drive economic growth.