UK Games Tax Relief plans may breach EU state aid rules, says Commission

The Government has set out draft legislation in the Finance Bill that would, if enacted, create a new 'Games Tax Relief' (GTR). The Bill is currently before Parliament. The relief would allow developers and technology firms involved in the UK video gaming industry to benefit from a 25% reduction on the corporation tax ordinarily owed on games that qualify for such relief. The GTR could only be claimed by companies involved in the development of culturally-British games and would apply to a portion of the production budget used or consumed in the UK only.

However, the European Commission said that the tax break may be unnecessary and has therefore questioned whether the proposed relief would be provided in line with EU state aid rules.

"The Commission considers that there is no obvious market failure in this dynamic and growing sector and that such games are produced even without state aid," the Commission said. "Consequently, at this stage, the Commission doubts that the aid is necessary."

The EU's Competition Commissioner, Joaquín Almunia added: "The market for developing video games is dynamic and commercially promising. It is not clear whether the taxpayer should be subsidising this activity. Such subsidies could even distort competition."

State aid is an advantage or incentive granted by a national or local government to certain commercial companies to the disadvantage of others, and can take a variety of forms including grants, tax reliefs, guarantees, government holdings of all or part of a company or the provision of goods and services on preferential terms. To ensure fair competition across the EU, state aid is generally prohibited unless it can be justified for general economic development reasons.

Under the Treaty on the Functioning of the European Union (TFEU), Member States are generally prohibited from providing state aid where the consequence of doing so is to affect trading conditions to an extent contrary to the common interest across the EU.

The TFEU further sets out that although state aid can be used to promote culture and heritage conservation, it is not legitimate if that aid results trading conditions and competition in the Union being impacted upon to an extent that is contrary to the common interest.

The Government has set out a 'cultural test' to ensure that only culturally-British video games would be eligible to claim the GTR, but the European Commission said that it has concerns about it and a number of other aspects related to the proposed tax break plans.

"Based on the information available at this stage, the Commission doubts whether: aid is necessary to stimulate the production of such video games; limiting expenditure for the tax relief to goods or services 'used or consumed' in the UK would not be discriminatory; offering this type of aid would not fuel a subsidy race between Member States; and the proposed cultural test ensures that the aid supports only games with cultural content without leading to undue distortions of competition," the Commission said.