Computer Games Industry

Lindsay Roy Excerpts

Wednesday 29th June 2011 Westminster Hall

[Jim McGovern]

I thank my hon. Friend for his intervention. I can quote from the evidence taken by the Select Committee on Scottish Affairs, which conducted an inquiry into this subject. It was said in that Committee that on 29 March—just five weeks before the general election—the then shadow Minister said that the Conservatives were

“going to support tax breaks for the video games industry…We are fully behind game tax breaks. This is my unequivocal statement. It’s been approved by George Osborne.”

However, in the very first Budget, in June 2010, they scrapped that. I have never heard a reasonable explanation of why that happened. Perhaps this afternoon we will hear one.

[Lindsay Roy (Glenrothes) (Lab)]

I, too, congratulate my hon. Friend on securing this very important debate. As I understand it, the Government tell us that the key to recovery is growth and support for small and medium-sized enterprises. Is my hon. Friend saying that we are entering this competitive field with one hand tied behind our backs?

[Jim McGovern]

I thank my hon. Friend for his intervention. The Government seem to be saying that differences in corporation tax and research and development tax credits are good enough to support the computer games industry. My view and that of TIGA, the association that represents the computer games industry, is that a one-size-fits-all policy is not good enough and there should be a specific solution for specific industries, such as the computer games industry.

The one policy difference between the UK and our competitors is a scheme of tax incentives for games developers. Canada offers tax breaks of 17.5% to 37.5% on labour expenditure. As I said, Ireland is investigating how best to implement tax breaks, and Pennsylvania is offering a 25% tax break, which is similar to that offered by the other 16 US states that offer such support. It is clear that the UK is being outdone by those tax regimes. That is why I am calling on the UK Government to introduce a tax incentive scheme that rivals those other countries’ schemes.

As the Minister will be aware, the Scottish Affairs Committee investigated the current state and benefits of the computer games industry in Scotland. Its conclusion on tax breaks was clear. It said that there were compelling reasons to introduce tax breaks and that the UK Government should begin a consultation process to see how best to achieve that. That is additional to recent calls by major international developers. Three of the largest—Activision Blizzard, THQ and Ubisoft—have publicly stated that tax breaks in the UK would make them much more likely to invest here. There are many reasons why they do so now.

--- Later in debate ---

[Jim McGovern]

I certainly do agree. We do need a long-term strategy. Everyone involved with the computer games industry—it is a big thing in my constituency of Dundee West—agrees that a long-term strategy is required, but in the short term, to prevent companies from going bust or moving to Ireland or Canada, tax breaks would be very important. They would be a big factor in helping companies to survive.

I and many others are deeply disappointed that the present Government have ignored the call for tax breaks and stubbornly remain of the view that that is a policy they choose to disregard. The Government’s one-size-fits-all approach to tax incentives simply is not working. While the UK Government remain outwitted by our international competitors, it is highly likely that inward investment will be lost. As with other major economic sectors previously, the UK will lose out because of a Government who choose to ignore the calls of industry, rather than listen.

I will move on to another way in which the UK Government can support the industry. This is a case not just of tax breaks, although they are fundamental, but of the range of measures that developers feel would support them. The Scottish Affairs Committee stated in its report that the Government must work with industry bodies to best determine how to better publicise the availability of R and D tax credits and to introduce a more targeted R and D scheme to the industry.

I welcome the recent changes to R and D tax credits, but the Government could do much more in that regard. Only some of the recommendations have been met. I call on the Government to extend that programme to make the available tax credits more generous and to work with the industry to discover how best the scheme could be tailored to its needs.

That brings me to the third way in which the Government could make the business environment more attractive to games developers. Start-up developers face serious trouble in securing loans and financing from the banks. I know that that is a wider problem experienced by small and medium-sized enterprises throughout the UK, but I ask the Government to redouble their efforts to ensure that the banks grant the finance required for start-ups to get going.

Research conducted on behalf of the Department for Business, Innovation and Skills and the Department for Culture, Media and Sport by Dr Stuart Fraser of Warwick business school and IFF Research in May highlights the worrying extent of the difficulties that creative industries face in securing financing. They are much more likely than other industries to be turned down by the banks. That was highlighted in the Scottish Affairs Committee report on this subject. According to research by the trade body TIGA, the majority of 104 surveyed games companies reported either that there was no difference in their ability to borrow from their bank or that the situation had got worse in the course of last year.

The Government have committed themselves to improving the access to finance from banks from the all-time low that we experienced due to the banking crash. Clearly that has yet to produce any results for the computer games industry. As with many creative industries, there is risk associated with games developers, as the sad demise of Realtime Worlds in my constituency illustrates. A product that fails to sell can have a dramatic impact on a company. However, without some risk being taken, industry and the economy simply will not grow. I ask the Government and the banks to work in partnership with the industry to see investment increased and jobs created.

[Lindsay Roy]

Is it not ironic that the Government have invested heavily in Abertay university to enhance the skills profile? If these jobs are not available, we will see a drain from that investment overseas.

[Jim McGovern]

I thank my hon. Friend for his intervention. He is absolutely correct. When we took evidence at Abertay university, we were told that, every day, students there who are studying the computer games industry and will graduate in that subject are receiving phone calls from France, Ireland and Canada saying that they will be offered a job there. Most of the students who study computer games do not end up employed by a company in the UK; they end up starting their own business. It is extremely galling for people in Dundee, who want to locate in Dundee, to find that it is much easier to move abroad than to stay in the UK, so I thank my hon. Friend for that point.

On that subject, if we stifle young companies with a lack of finance, we cannot hope to see economic growth. We must return to rewarding those who take appropriate, but not reckless, risk in starting and running businesses. There are other proposals that the UK Government could implement to support UK games developers. TIGA has called for the creation of a creative content fund. That would allow for funding on a pound-for-pound basis up to £100,000 for companies that produce highly creative content. The UK Government must acknowledge that computer games developers and other creative industries have specific requirements that are not being addressed. The creation of a creative content fund would target funding on those industries, and show that their needs were catered for. It would encourage investment, growth and job creation. I ask the Minister to draw up plans to consult on introducing these measures, and to work with the industry and the Treasury to put in place a policy that encourages and rewards creative investment.

As for the value of higher education and of a skilled work force for the industry, I am well aware that higher education spending is a devolved matter, but the Government could do a number of things. A major requirement for developers is a highly skilled and trained work force. The industry is populated largely by graduates and, as I mentioned earlier, securing jobs for Dundee graduates has had a great effect on the city.

I welcome the Government’s decision earlier this year to award funding to Abertay university. However, it remains a small sum compared with the support that could be offered. The Scottish Affairs Committee’s report highlighted the real concern that there are too few mathematics and computer science graduates to sustain the industry. Abertay has led the way on this, and I urge the Government to work with universities and industry to ensure that we have the work force and skills base that the economy needs. Abertay has acted as an experiment on what can be done in partnership between higher education institutions and the private sector. I ask the Government to work with the Scottish Executive to develop working relationships of that sort, and to ensure that public spending cuts do not harm access to higher education or the quality of teaching and research.

The theme that runs through my speech today is a call for a more coherent and aggressive growth strategy from the Government. I well understand Ministers arguing that we need a simplified tax incentive structure. I am sure that we would all agree that unnecessary complication would be a hindrance to economic growth. However, we sometimes need an element of necessary complication. The temptation to find simple solutions to complicated problems can be far too alluring; instead, we should accept that there is a case to be made for having specific solutions to specific problems. Individual industries require tailored support to meet their needs. Whether it is tax breaks for the UK film industry or tax breaks for games developers, the Government must introduce policies that actually work for the many important industries that we have in the UK.

--- Later in debate ---

[The Parliamentary Under-Secretary of State for Culture, Olympics, Media and Sport (John Penrose)]

It is a pleasure, Mr Howarth, to see you in the Chair and looking after us this afternoon. I thank the hon. Member for Dundee West (Jim McGovern) for initiating the debate. As he says, the computer games industry is an important part of our national economy. It is responsible for many high-quality and high-skilled jobs, and it is also part of the knowledge economy. The debate is therefore most timely, and I congratulate him on securing it.

I start with a brief apology, Mr Howarth. You may have noticed that I am not the Minister who was supposed to have answered this debate. The reason is that the Under-Secretary of State for Business, Innovation and Skills, my hon. Friend the Member for Wantage (Mr Vaizey), is currently at an OECD conference in Paris—some people have all the luck, you may say—on the subject of broadband and the internet. I am therefore standing in for him. I toyed with the possibility of getting my ministerial colleague to represent himself by Skype, possibly by superfast broadband, as he is also Minister with responsibility for the digital economy, but I thought that might be a step too far even for the newly modernised House of Commons. I therefore stand in his stead.

I am not sure that the hon. Member for Dundee West and I will agree on all points of industrial strategy—I suspect not—but I shall respond to some of the points that he made. In particular, I respectfully take issue with his comment that the Government are pursuing a “do nothing” strategy. We are doing a great deal, although not necessarily precisely what he suggests. I shall say what we are doing, and then we can debate whether there is room for additional activity.

I am sure that we agree that the economic and cultural value of the UK video games industry is high. The long-term potential of the global market is exciting. PricewaterhouseCoopers suggests that the global market for video games will grow from $56 billion in 2010 to $82 billion in 2015; that is an 8.2% compound annual rate of growth. The hon. Gentleman and I have also said that games companies are typically knowledge-intensive and high value, and offer high-quality jobs. They fit well with our aim to rebalance the economy, both in terms of sectoral ability and geographical coverage, and to move away from the historic over-reliance on things such as the financial services industry and the south-east.

[Lindsay Roy]

I understand that different approaches are taken for the film industry and the video games industry, but they both have huge opportunities for creative development. Why do we have that differential?

[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.

--- Later in debate ---

[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.

[Lindsay Roy]

Is there not a criticism that there is a lack of strategic focus on the video games industry? I strongly support the investment in the Abertay graduate programme, but evidence indicates that the majority of young people who graduate from there are going abroad. They are not staying in the UK, whether they are from Dundee or south of the border.

[John Penrose]

That is a fact of life in an increasingly globalising market. This is a globalising market, not just for the product of video games, but for the staff. Many other industries are already incredibly globalised, everything from financial to medical services. This sector will be going the same way. I am sure we will all be delighted to see British brains and talent travelling the world. It is true to say that many people come back to the UK later in their career and start up businesses here or join at a senior level.

I am conscious of time so would like to draw to a close by saying that I fear the hon. Member for Dundee West and I are not going to agree on a fundamental point about macro-economic policy. I hope I have, none the less, laid out that the Government are doing a series of things. Unfortunately, they are not precisely what he recommends. However, it is not true that we are a “do nothing” Government; we are doing a great deal. I fear that he and I will have to disagree on precisely what that should be.

Question put and agreed to.